IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

_______________________________

No. 00-60614

_______________________________

BEATRICE ELLEN JONES DUNN, Deceased, ESTATE

OF, JESSE L. DUNN III, Independent Executor,

Petitioner-Appellant,

v.

COMMISSIONER OF INTERNAL REVENUE,

Respondent-Appellee.

_________________________________________________

Appeal from the Decision of the

United States Tax Court

_________________________________________________ August 1, 2002 Before SMITH, DUHÉ, and WIENER, Circuit Judges.

WIENER, Circuit Judge.

The sole issue presented by this appeal from the United States

Tax Court (the “Tax Court”) is the fair market value of a block of

common stock in Dunn Equipment, Inc. (“Dunn Equipmen t” or the

“Corporation” ) owned by the late Beatrice Ellen Jones Dunn (the

“Decedent”) on the date of her death (the “valuation date”) for

purposes of calculating the estate tax owed by Petitioner-Appellant

Estate of Beatrice Ellen Jones Dunn, Deceased (the “Estate”). The

Tax Court valued the Decedent’s shares higher than had the Estate

on the Form 706 (the “estate tax return” or the “return”) filed by1 If need be, this figure can be fine tuned on remand to

reconcile the slight discrepancy between the Tax Court’s figure and

that of the Estate.

2 $8,278,342 according to the Tax Court; $8,268,345 according

to the Commissioner’s appellate brief.

2 Jesse L. Dunn III, the Decedent’s Independent Exe cutor (the

“Executor”) but lower than had Respondent-Appellee Commissioner of

Internal Revenue (t he “Commissioner”). We conclude that the Tax

Court erred as a matter of law in the valuation methodology that it

selected and applied to facts that are now largely uncontested by

virtue of stipulations, concessions, and non-erroneous findings of

that court. This legal error produced an incorrect valuation and

thus an erroneous final Tax Court judgment as to the Estate’s tax

deficiency, requiring remand to that court.

We hold that the correct methodology for determining the value

of Dunn Equipment as of the valuation date requires application of

an 85:15 ratio, assigning a weight of 85% to the value of the

Corporation that the Tax Court determined to be $1,321, 740 1 when

using its “earnings-based approach” and a weight of 15% to the

value that the court determines on remand using its “asset-based

approach” but only after recomputing the Corporation’s value under

this latter approach by reducing the market value of the assets 2 by

34% of their built-in taxable gain —— not by the 5% as previously

applied by that court

—— of the built-in gain (excess of net sales

value before taxes over book value) of the assets, to account for

the inherent gains tax liability of the assets.3

We therefore remand this case to the Tax Court for it to (1)

redetermine the asset-based value using a 34% reduction for builtin tax liability; (2) recalculate the fair market value of the

Corporation based on that 85:15 weighting ratio; (3) calculate the

value of the Estate’s ratable portion of the total valu e of the

Corporation as th us redetermined; (4) discount the value of that

ratable portion by 22.5% for lack o f market and lack of supermajority; (5) based on that result, redetermine the estate tax

liability of the Estate as well as any resulting overpayment of

such taxes by the Estate; and (6) render a final judgment

consistent with this opinion and our judgment.

I. Facts and Proceedings

A. Proceedings

In November, 1994, app roximately three and one-half years

after the Decedent’s death and two and one-half years after her

estate tax return was filed, the Commissioner issued a notice of

deficiency, assessing additional estate taxes of $238,515.05. This

litigatio n ensued. In an amended answer filed in the Tax Court,

the Commissioner increased the asserted estate tax deficiency to

approximately $1,100,000. This deficiency was predicated on the

Commissioner’s contention that the Decedent’s 492, 610 shares of

common stock in Dunn Equipment , a closely-held, family-operated

corporation, was undervalued in the estate tax return. The

Commissioner argued that such stock should be valued solely on the

basis of the fair market value of its assets, discounted only for3 W e do not refer here to the testimony and documents

submitted by the opposing parties’ duel ing experts as being

uncontested. The Commissioner contested the methodology of the

Estate’s expert appraisers, and the Estate took issue with the

assertions of the Commissioner’s accounting ( not appraisal) expert;

but the Tax Court was not required to credit such testimony and in

fact disregarded or disagreed with much of it from both camps.

L ike the Tax Court, we are not bound to rely on expert tes timony

proffered by the Estate or the Commissioner.

4 l a ck of a market and lack of a super-majority, and with no

reduction for built-in tax liability of those assets and no

consideration whatsoever of an earnings or cash flow-based approach

to valuation.

I n June, 1996, trial was held in the Tax Court to determine

the fair market value of Decedent’s block of stock in Dunn

Equipment. Approximately three and one-half years after trial, the

Tax Court issued its Memorandum Findings of Fact and Opinion (“the

Tax Court opinion”). The court concluded that the subject block of

stock, which constituted 62.96% of the issued and the outstanding

shares of Dunn Equipment’s capital stock, was worth $2,738,558 on

the valuation date. After the Tax Court entered its final judgment

some six months later, the Estate timely filed a notice of appeal.

B. Facts

Based in principal part on stipulations, uncontested

evidence, 3 and concessions, the T ax Court found the following

facts. Decedent, a longtime resident of Texas, died there on June

8, 1991 at the age of 81. The Executor, Decedent’s son, is also a

Texas resident, and the Estate was administered there.5

Dunn Equipment was incorporated in Texas in 1949. It had been

family owned and operated throughout its entire existence. The

Corporation actively operated its business from four locations in

Texas and, on the valuation date, employed 134 persons, three of

whom were executives and eight of whom were salesmen.

Dunn Equipment owned and rented out heavy equipment, and

provided related services, primarily in the petroleum refinery and

petrochemical industries. The personal property rented from the

Corporation by its customers consisted principally of large cranes,

air compressors, backhoes, manlifts, and sanders and grinders. The

Corporation frequently furnished operators for the equipment that

it rented to its customers, charging for both equipment and

operators on an hourly basis. For example, the Corporation’s

revenues resulted in significant part from the rentin g of large

cranes, with and without operators. For the four fiscal years

preceding the valuatio n date, equipment rented with operators

furnished by the Cor poration produced between 26.3% and 32.7% of

the Corporation’s reve nues. On the valuation date, Dunn

Equipment’s assets comprised the aforedescribed heavy equipment,

plus industrial re al estate valued at $1,442,580 and a townhouse

valued at $35,000, prepaid expense s of $52,643, and prepaid

interest of $671,260.

In addition to the shares owned by the Decedent, shares in

D unn Equipment constituting 31.12% of the issued and outst anding

common stock were owned individually by Jesse L. Dunn III (the6

Decedent’s son and executor), who also held title to an additional

2.61% as a trustee. Shares representing the remaining 3.31% of the

Corporation’s issued and outstanding stock were owned in

c ombination by other family members and employees of the

Corporation.

The Corporation’s Board of Directors consisted of the

Decedent; her son and executor, Jesse; and her grandson, Peter Dunn

(Jesse’s son). Jesse was President, Peter was Vice President, and

the Decedent was Secretary- Treasurer. The Tax Court found that

compensation paid to the officers of Dunn Equipment was lower than

that paid to officers of similarly situated companies.

Over the course of its 42 years of operation preceding the

valuation date, Dunn Equipment had emerged as the largest heavy

equipment r ental business in its part of Texas, holding a

substantial share of that market. By virtue of its market

dominance and reputation for dependable se rvice, the Corporation

was historically abl e to command rates above the market average.

From 1987 through the valuation date, a decline in the worldwide

price of feed stock for the oil refining a nd petrochemical

in dustries created a favorable business climate for the

Corporation’s principal customers, and Dunn Equipment’s gross

revenues increased during that period.

During the same period, however, the heavy equipment rental

market became increasingly competitive, as equipment such as cranes

b ecame more readily available and additional rental companies7

entered the field. This in turn caused hourly rental rates to

decline and flatten. In fact, increased competition prevented Dunn

Equipment from raising its rental rates at any time during the

period of more than ten years preceding the valuation date. These

rates remained essentially flat for that 10-year period. The same

competitive factors forced the Corporation to replace its equipment

with increasing frequency, reaching an average new equipment

expenditure of $2 million per annum in the years i mmediately

preceding the valuation date.

In addition to the increased annual cost and frequency of

replacing equipment during the years of flat rental rates that

preceded the Decedent’s death, the Corporation’s operating expenses

increased significantly, beginning in 1988, and continued to do so

thereafter: The ratios of direct operating expenses to revenue

escalated from 42% in 1988 to 52% in the 12-month period that ended

a week before the Decedent’s death. The effect of the increase in

direct operating expenses on the Corporation ’s cash flow and

profitability was exacerbated by a practice that Dunn Equipment was

forced to implement in 1988: meeting its customers’ demands by

leasing equipment from third parties and renting it out to the

Corporation’s customers whenever all of its own equipment was

rented out to other customers. Although this practice, which

continued throug h the valuation date, helped Dunn Equipment keep

its customers happy and retain its customer base, the Corporation8

was only able to break even on these re-rentals, further depressing

its profit margin.

Based on the foregoing factors, the Tax Court concluded that

the Corporation had no capacity to pay dividends during the five

years preceding the death of the Decedent. In fact, it had paid

none.

As of the valuation date, no public market in the stock of

Dunn Equipment existed, and no recent private transactions in its

stock had occurred. There was no current or pending litigation

that could have had a material effect on the v alue of the stock,

but large annual capital expenditures for equipmen t replacement

co upled with shrinking profit margins resulting from the

combinatio n of increased operating expenses and flat or reduced

rental rates, essentia lly eliminated net cash flow available for

debt reduction or dividend payment. On the valuation date, the

Corporation had outstanding debt of $7,343,161, producing a debtto-equity ratio in excess of 6.5 to 1. The Corporation’s average

net annual cash flow for the 4-year period ending with the

valuation date was only $286,421. Given the Tax Court’s finding

r egarding the underpayment of compensation to its officers, the

Corporation’s cash flow —— and thus its income-based valuation ——

is actually overstated.

On the basis of these extensive factual findings and

reasonable inferences from them, the Tax Court concluded that, as

of the valuation date, Dunn Equipment was “a viable operating4 Dunn v. Comm’r , 79 T.C.M. (CCH) 1337, 1339 (2000).

5 Id. at 1340 (citing T EX

. B US

. C ORP

. A CT A NN

. art 6.03 (West

1991)).

9 company...and earned a signi ficant part of its revenues from

selling services as well as renting equipment”; that between onefourth and one-third of the Corporation’s gross operating revenue

w as produced by charges for labor, parts, and equipment rentals

with operators supplied; and that there were “significant active

operational aspects to the company as of the valuation date.” 4

The Tax Court also found that, even though the Decedent’s

62.96% of stock ownership in the Corporation gave her operational

control, under Texas law she lacked the power to compel a

liquidation, a sale of all or substantially all of its assets, or

a merger or consolidation, for each of which a “su per-majority”

equal to or greater than 66.67% of the outstanding shares is

required. 5 The Court further concluded that, in addition to

lacking a super-majority herself, the Decedent would not have been

likely to garner the votes of additional shareholders sufficient to

constitute the super-majority required to instigate liquidation or

sale of all assets because the other shareholders were determined

to continue the Corporation’s independent existence and its

operations indefinitely. The court based these findings on

evidence of the Corporation’s history, community ties, and6 Although not mentione d by the court, we speculate that the

specter of incurring a 34% tax on the multimillion dollar amount by

which the selling price of the assets in liquidation would have

ex ceeded the Corporation’s basis for tax purposes was also a

deterrent to liquidation.

7 The taxable gain on any sale of used heavy equipment

presumably would resu lt from reduction in basis produced by

substantial depreciation deductions previously taken, not from

a ppreciation in value of these assets, as age, use, and

obsolescence generally produce sales prices for such used equipment

substantially below its original cost.

10 relationship with its 134 employees, whose livelihoods depended on

Dunn Equipment’s continuing as an operating business. 6

We perceive no clear error in any of the foregoing findings or

in the inferences and conclusions that the Tax Court derived from

them.

The Tax Court found further that, for Dunn Equipment, the

process of liquidation would be expensive and time-consuming,

involving sales costs, transportation costs, reduced equipment

sales prices because of the increased short-term supply of such

equipment that would result from a liquidat ion’s flooding of the

market, and the risk of loss of customers during the course of a

lengthy liquidating process if that were to be attempted. These

findings too are free of clear error. (Again, the Court did not

list among Dunn Equ ipment’s costs of liquidation, however, the

a dverse tax results that would be incurred, particularly the 34%

federal income tax on gains to be reali zed by the Corporation on

the sale of its equipment, whether ultimately deemed ordinary

income or capital gains. 7 )8 The Estate’s expert proffered the use of a capitalizationof-earnings rather than a capitalization-of-net-cash-flow approach

to an earnings-based valuation , but the results of these two

methods produced similar results, and the Estate does not press the

issue on appeal.

9 We note in passing that the court did not include dividendpaying capacity as a factor despite its customary inclusion in

multifaceted valuation methodology for closely held corporations.

See

, e.g.

, Rev. Rul. 59-60, 1959-1 C.B. 237, § 4.01(e) (1959).

Although factoring in a “zero” dividend-paying capacity would have

further reduced the value of Dunn Equipment, the Estate has not

complained to us of that omission so we do not examine it as a

possible error in the valuation methodology employed by the Tax

Court.

11 Having painted this clear and detailed valuation-date portrait

of Dunn Equipment, the Tax Court proceeded to confect its valuation

methodology. The court selected two different approaches to value,

one being an income-based approach driven by net cash flow 8 and the

other being an asset-based approach driven by the net fair market

value of the Corporation’s assets. 9 The court calculated the

Corporation’s “earnin gs-based value” at $1,321,740 and its net

“asset-based value” at $7,922,892, as of the valuation date. The

latter value was calculated using a 5% factor for built-in gains

tax liability, not the actual rate of 34% that the Corporation

would have incurred on sale to a willing buyer.

As the next step in its methodology, the Tax Court assigned

dissimilar weights to the two valuations, expressly rejecting (1)

the Estate’s expert’s method, which assigned equal weight to each,

and (2) the Commissioner’s con tention that no weight whatsoever

should be given to earnings or cash flow and that the Corporation10 Dunn , 79 T.C.M. (CCH) at 1340.

11 For over 40 years, Rev. Rul. 59-60 has counseled against

assigning finite percentages to relative weights of the various

valuation methods employed by appraisers of stock in closely held

businesses; yet that admonition is largely honored in its breach

——

as exemplified by both the Tax Court and the Estate’s appraiser in

this case.

12 be valued entirely on asset value undiminished by any built-in tax

liability. Despite having concluded that “the hypothetical

investor would give earnings value substantial weight” and

acknowledging “ that, as a general rule, earnings are a better

criterion of value for operating companies [which Dunn Equipment

is] and net assets a better criterion of val ue for holding or

investment companies [which Dunn Equipment is not],” 10 the Tax Court

confected the weighting factor of its valuation method by assigning

a weight of 35% to earnings-based value and 65% to asset-based

value (which the court calculated by, inter alia

, reducing the

value of assets by 5% for built-in gains tax li ability). 1 1 After

applying its weighted average to the results of its two valuation

approaches to reach the fair market value of the entire

Corporation, the Tax Court calculated the Decedent’s percentage of

ownership (62.96%) to ascertain the pro rata value of her block of

stock.

The final step in the Tax Court’s methodology involved the

determination and application of discounts. In the discount step,

the court concluded that the gross pro rata value of Decedent’s

block of stock should be reduced 15% for lack of marketability and12 Neither has the Estate contested the Tax Court’s finding of

the market value of the Corporation’s assets, before discount for

built-in tax liability, of $8,278,342.

13 7.5% for lack of super-majority control, producing a total discount

of 22.5%. This is not contested on appeal.

The Executor had returned the Decedent’s block of stock at

$1,635,465. The Estate’s expert appraiser’s 50:50 weighting

approach produced a minimally lower value of $1,582,185. The

Commissioner originally contended that the value was $2,229,043 but

ultimately claimed the value to be $4,430,238. And the Tax Court

found the value to be $2,738,558.

On appeal, the Estate has stipulated that it is not contesting

the Tax Court’s determination of the value of Dunn Equipment “under

the earnings based approach, or [the Tax Court’s] application of a

15% discount for lack of marketability and a 7.5% discount for lack

of super-majority control” to the Decedent’s pro rata ownership of

the issued and outstanding stock of the Corporation. 12 This reduces

our chore to one of reviewing only the aspects of the Tax Court’s

methodology that the Estate does continue to challenge, i.e., the

method employed to determine (1) the appropriate discount to apply

to the value of the Corporation’s assets to account for built-in

tax liability in determining its asset-based value and (2) the

relative weights to assign to the two dispa rate values, incomebased and asset-based.

II. Analysis13 See, e.g.

, McIngvale v. Comm’r

, 936 F.2d 833, 836 (5th Cir.

1991).

14 In re T-H New Orleans, Ltd. P’ship

, 116 F.3d 790, 799 (5th

Cir. 1997).

15 Estate of Palmer v. Comm’r , 839 F.2d 420, 423 (8th Cir.

1988)(citing Powers v. Comm’r

, 312 U.S. 259, 260 (1941))(“The

ultimate determination of fair market value is a finding of fact.

... The question of what criteria should be used to determine

value is a question of law subject to de novo review.”).

14 A. Standard of Review

We review opinions and judgments of the Tax Court under the

same standards that we apply when reviewing those of other trial

courts: Factual determinations are reviewed for clear error, and

conclusions of law are reviewed de novo

. 13 We have held that

determination of fair market value is a mixed question of fact and

law for which “the factual premi ses [are] subject to review on a

clearly erroneous standard, and the legal conclusion[s are] subject

to de novo review.” 14 The mathematical computation of fair market

value is an issue of fact, but determination of the appropriate

valuation method is an issue of law that we review de novo

. 15

B. Burden of Proof

On the estate tax return, the Decedent’s block of stock in

Dunn Equip ment was valued at $1,635,465. The Commissioner’s

deficiency notice stated a value of $2,229,043. Subsequently, the

Commissioner’s amended answer upped the va lue to $4,430,238,

roughly doubling the deficiency notice v alue and increasing the

asserted estate tax deficiency by $861,485 for a total of16 See Dunn , 79 T.C.M. (CCH) at 1338.

15 $1,100,000. The Tax Court correctly observed that the Estate has

the burden of refutin g the value asserted in the Commissioner’s

original notice of deficiency, but that the Commissi oner has the

burden of proving any value in excess of that initial amount. 16

C. The Commissioner’s Disparate Positions: Trial Vis-à-Vis

Appeal

1. Position On Appeal

A s appellee, the Commissioner supports the Tax Court’s

treatment of each aspect of the case an d asks us to affirm the

court’s judgment. Specifically, the Commissioner urges us to

accept, inter alia

, the Tax Court’s dual approach to value; the

court’s treatment of built-in tax liability; the relative weights

assigned by the court to the results of each approach; and the

court’s discounts for lack of market and lack of supermajority

control.

2. Pre-Trial and Trial Position

The Commissioner’s posture on appeal is a stark departure from

his pre-trial and trial position: amending his answer to quadruple

the Estate’s tax deficiency as originally assessed, urging the Tax

Court to disregard totally the built-in tax liabi lity of the

Corporati on’s assets, insisting that the Corporation be valued

solely on asset values, and urging that no consideration whatsoever

be given the earnings or cash-flow based approach to valuation.

Indeed, at trial, the Commissioner did not favor the Tax Court with16

testimony of an expert appraiser, even though the Commissioner had

affirmatively proposed his own, geometrically higher value for the

Decedent’s block of stock

—— values that started out higher than

the ones reported on the est ate tax return and that were then

multiplied, by virtue of the Commissioner’s amended answe r, to

almost four times the Estate’s figures. Yet, instead of supporting

his own higher values (for which he had the burden of proof) by

proffering professional expert valuation testimony during the

trial, the Commissioner merely engaged in guerilla warfare,

presenting only an accounting expert to snipe at the methodology of

the Estate’s valuation expert. The use of such trial tactics might

be legitimate when merely contesting values proposed by the party

opposite, but they can never suffice as support for a higher value

affirmatively asserted by the p arty employing such a trial

strategy. This is particularly true when, as here, that party is

the Commissioner, who has the burden of proving the expanded value

asserted in his amended answer.

Using such tactics remains the prerogative of the Commissioner

and his trial counsel, at least up to a point. But when his choice

of tactics is viewed in the framework of the substantive valuation

methodology urged by the Commissioner in the Tax Court, his posture

at trial is seen to be so extreme and so far removed from reality

as to be totally lacking in probative value.

To keep this in perspective, it must be remembered that this

case had been under the scrutiny of the Commissioner for many years17 Dunn , 79 T.C.M. (CCH) at 1339.

17 before trial, during which time he had to have learned essentially

all of the discrete attributes of D unn Equipment that were

eventually stipulated by the parties or found by the Tax Court:

its operating history, its sources of income, the nature of its

assets and their use in its operations, the status of the industry,

and so on ad infinitum

. Thus, as of the commencement of trial, the

Commissioner must be held to the knowledge that Dunn Equipment was

and had always been, as the Tax Court concluded, “a viable

operating company” which “earned a significant part of its revenues

from selling services as well as renting equipment” and that there

were “significant active operational aspects to the company as of

the valuation date.” 17 When the nature of the Corporation’s assets

—— primarily heavy equipment held not for investment or production

of passive income, like interest and dividends, but for active

hourly rental (frequently with operators furnished by the

Corporation), in the heavy construction and maintenance of chemical

plants and petroleum refineries, rapidly depreciating with use and

requiring constant maintenance, repair, and replacement —— are

viewed in pari materia with the myriad specific attributes of the

Corporation, the untenability of the Commissioner’s trial position

in the Tax Court is plain.

Consequently, the Commissioner’s insistence at trial that the

value of the subject stock in Dunn Equipment be determined18

exclusively on the basis of the market value of its assets,

undiminished by their inher ent tax liability —— coupled with his

failu re to adduce affirmative testimony of a valuation expert ——

was so incongruous as to call his motivation into question. It can

only be seen as one aimed at achieving maximum revenue at any cost,

here seeking to gain leverage against the taxpayer in the hope of

garnering a split-the-difference settlement

— — or, failing that,

then a compromise judgment

—— somewhere between the value returned

by the taxpayer (which, by virtue of the Commissioner’s eleventhhour deficiency notice, could not effectively be revised downward)

and the unsupportedly excessive value eventually proposed by the

Commissioner. And, that is precisely the result that the

Commissioner obtained in the Tax Court.

Any remaining doubt that the Commissioner’s pretrial and trial

tactics in this case could conceivably evidence a bona fide

disagreement over the value of Dunn Equipment is dispelled by the

element of timing. In an estate tax situation, the statute of

limitations for assessment and collection by the IRS is generally

three years, as specified in Internal Revenue Code (“I.R.C.”) §

6501. When the IRS presents a deficiency notice in close proximity

to the expiration of I.R.C. § 6501's 3-year time bar, it creates a

tactical advantage for itself: Once the statute of limitation

expires, the taxpayer can no longer claim a refund even if he then

concludes that he was too conservative in his original valuation.

This is so because the ability of the taxpayer to claim a refund is19

controlled by I.R.C. § 6511, which provides that the taxpayer has

until the later of three years from the time the return was filed

or two years from the time the tax was paid to assert such a claim.

The tax due is normally paid with the tax return, by or before the

due date. As a result, the only amount that the taxpayer could

recover would be for taxes paid in response to the deficiency

n otice. Consequently, by holding off the filing of a notice of

deficiency until more than two years following payment of tax or

three years following the filing of the return, the IRS is able to

manufacture an advantage with no downside risk: The taxpayer is

precluded from claiming a refund except for any taxes paid with the

deficiency notice, and the Commissioner is able to assert an

excessive value and then use it for leverage in negotiations or at

trial.

The Commissioner’s abrupt change of position on appeal is so

inconsistent and unreconcilable with his pretrial and trial

positions that all of his urgings to us are rendered highly

suspect. We keep this duplicity in mind as we proceed to examine

the Tax Court’s valuation methodology.

D. Determination of Fair Market Value

The definition of fair market value is as universally

recognized as its determination is elusive: Fair market value is

“‘the price at which the property would change hands between a

willing buyer and a willing seller, neither being under any

compulsion to buy or to sell and both having reasonable knowledge18 United States v. C artwright , 411 U.S. 546, 551

(1973)(quoting Treas. Reg. § 20.2031-1(b)).

19 See S HANNON P. P RATT ET AL

., V ALUING A B USINESS : T HE A NALYSIS AND

A PPRAISAL OF C LOSELY H ELD C OMPANIES 45 (4th ed. 2000) [hereinafter V ALUING

A B USINESS ].

20 See Tre as. Reg. § 20.2031-2(f); s ee also Rev. Rul. 59-60,

1959-1 C.B. 237, § 4.01.

20 of relevant facts.’” 18 As a broad generality, appraising

corporations or blocks of corporate stock involves consideration of

three approaches: income, market, and assets-based. 1 9 When, as

here, the corporation being appraised is closely held, is not

regularly traded on an exchange, has not been traded at arm’s

length in close proximity of the valuation date, and is not

c omparable to other corporations engaged in the same or similar

businesses of which there is evidence of recent sales of stock, the

market approach is inapposite, leaving only the income and assetsbased approaches as candidates for analysis. Thus, in cases like

this, such features as net worth, prospective e arning power and

dividend-paying capacity, good will, position in the in dustry,

managem ent, economic outlook of the industry, and the degree of

control represented by the block of stock in question must be

looked to in the appraisal process. 20

As is apparent from the essentially uncontested o perative

facts and inferences of this case, most of the heavy lifting

required to reach the ultimate conclusion of fair market value of

Decedent’s block of stock had been accomplished by the time the21 Dunn , 79 T.C.M. (CCH) at 1338 (emphasis added).

21 question reached us. In addition, most of the penultimate

conclusions regarding valuation methodology are conceded or

uncontested on appeal: the pre-discount value of the Corporation

under the earnings-based approach ($1,321,740); its debts

($7,343,161); the market value of its assets before adjustment for

built-in tax liability ($8,278,342); the discount for lack of

marketability (15%); and the discount for lac k of super-majority

control (7.5%). That is why only two contested questions remain,

both of which implicate valuation methodology: Did the Tax Court

err as a matter of law in the methodology that it chose for (1)

dealing with the asse ts’ built-in tax liability when determining

the Corporation’s asset-bas ed value, and (2) assigning relative

weights to the asset-based and earnings-based values? The parties

to this appeal agree with the Tax Court’s starting point that

“[t]he dispute in the instant case concerns the proper method for

valuing an interest in a company in which asset-based value and

earnings-based value are widely divergent.” 21 We therefore begin

by examining de novo the method employed by the Tax Court for

dealing with the built-in tax liability of assets in connection

with the asset-based approach to value. We then review d e novo the

method employed by the court in determining the relative weights to

be given to Dunn Equipment’s “widely divergent” asset-based and

earnings-based values.22 Id. at 1344, n.9 (referring in its analysis to I.R.C. §§

1245, 11, and 1201).

22 1. Adjustment for Built-In Tax Liability of Assets

None can dispute that i f Dunn Equipment had sold all of its

heavy equipment, industrial real estate, and townhouse on the

valuation date, the Corporation would have incurred a 34% federal

tax on the gain realized, regardless of whether that gain were

labeled as capital gain or ordinary income. 22 The question, then,

is not the rate of the built-in tax liability of the assets or the

dollar amount of the inherent gain, but the method to employ in

accounting for that inherent tax liability when valuing the

Corporation’s assets (not to be confused with the ultimate task of

valuing its stock).

The Estate’s expert took the position that, when determining

the asset-based value to be used in calculating the fair market

value of the Corporation, its assets must be treated as though they

had in fact been sold, in which event the Corporation would have

incurred federal income tax equal to 34 % of the gain realized on

the sale. This in turn would have instantly reduced the

Corporation’s fair market value, dollar for dollar, for taxes

payable. But, if the willing buyer were to purchase the Decedent’s

block of stock with the assets still owned by the Corporation, then

regardless of whether thereafter that buyer could and would cause

all or essentially all of the Corporation’s assets to be sold,

either in the ordinary course of business or globally in23

liquidation, the value to the Corporation of its assets qua assets

would still be the amount that the Corporation could realize on

disposition of those assets, net of all costs (including gains

tax). The Estate contends that, like advertising and

transportation costs, commissions, and other unavoidable expenses

of disposition of these assets accepted by the Tax Court, the

assets’ gross value must be reduced by their built-in gains tax

liability to reach their net fair market value for purposes of

calculating the asset-based value of the Corporation

.

In diametric opposition, the Commissioner arg ued to the Tax

Court that no reduction for built-in tax liability should be

allowed. He grounded this contention solely on the assertion that

liquidation was not imminent or even likely.

Although the Tax Court accepted the 34% rate and acknowledged

that the value of the Corporation had to be reduced by some factor

to account for inherent tax liability of its assets, the court

followed the Commissioner’s “no imminent liquidation” red herring

and concluded that only if the hypothetical willing buyer of the

Decedent’s block of stock intended to liquidate the Corporation in

the short term —— which the holder of that block of stock, acting

alone, could not force

—— would that buyer seek a substantial

reduction for built-in capital gain. The Tax Court then proceeded

to discuss such a postulational buyer’s alternatives to liquidation

and to calculate the present value (actually, negative value) of

future tax liabilit y. The court concluded that the asset-based24

value of Dunn Equipment should be reduced by only 5% for potential

tax costs, not by the full 34% gains tax that the Corporation would

have to pay when and if its assets were sold, whether in globo or

seriatim.

The Tax Court’s fundamental error in this regard is reflected

in its statement that

—— for purposes of an asset-based analysis of

corporate value

—— a fully-informed willing buyer of c orporate

shares (as distinguished from the Corporation’s assemblage of

assets) constituting an operational-control majority would not seek

a substantial price reduction for built-in tax liability, absent

that buyer’s intention to liquidate. This is simply wrong: It is

inconceivable that, since the abolition of the G eneral Utilitie s

doctrine and the attendant repeal of relevant I.R.C. sections, such

as §§ 333 and 337, any reasonably informed, fully taxable buyer (1)

of an operational-control majority block of stock in a corporation

(2) for the purpose of acquiring its assets

, has not insisted that

all (or essentially all) of the latent tax liability of assets held

in corporate solution be reflected in the purchase price of such

stock.

We are satisfied that the hypothetical will ing buyer of the

Decedent’s block of Dunn Equipment stock would demand a reduction

in price for the built-in gains tax liability of the Corporation’s

assets at essentially 100 cents on the dollar, regardless of his

subjective desires or intentions regarding use or dispo sition of

the assets. Here, that reduction would be 34%. This is true “in23 This is easily illustrated by a simplified example: Buyer

B wants an assembla ge of assets identical to Corporation C’s

assets. Those assets are worth $1 million on the open market but

are depreciated on C’s books to a tax basis of $500,000. B has two

options: (1) He can buy the assets from C for $1 million and

depreciate them to zero over, e.g., seven years (or buy them on the

open market and have the same cash flow and tax experience),

leaving C to pay its own 34% tax ($170,000) on its gain; or (2) he

can buy C’s stock, get no depreciation deductions other than, at

the corporate level, to the extent the assets are further

depreciabl e, and have a 34% built-in corporate tax liability at

sale of the assets. Surely a buyer of the stock rather than the

assets wou ld insist on a price reduction to account for the full

amount of the built-in gain tax and the loss of the depreciation

opportunity.

24 P RATT ET AL

., V ALUING A B USINESS

, at 47 (“[T]ax consequences of

ownership and/or transfer of stock

... usually are quite different

from those of ownership and/or transfer of direct inv estment in

underlying assets. These tax implication often have a significant

bearing on value.”).

25 spades” when, for purposes of computing the asset -based value of

the Corporation, we assume (as we must) that the willing buyer is

purchasing the stock to get the assets, 2 3 whether in or out of

corporate solution. We hold as a matter of law that the built-in

gains tax liability of th is particular business’s assets must be

con sidered as a dollar-for-dollar reduction when calculating the

asset -based value of the Corporation, just as, conversely, built-in

gains tax liability would have no place in the calculation of the

Corporation’s earnings -based value. 24

The Tax Court made a more significant mistake in the way it

factored the “likelih ood of liquidation” into its methodology, a

quintessential mixing of apples and oranges: consid ering the

likelih ood of a liquidation sale of assets when calculating the25 Id

. at 34 (“[I]f valuing a minority ownership interest, one

woul d normally adopt the premise of ‘business as usual....’”).

Compare id. at 443 (“[T]he asset-based approach tends to be more

appropriate when valuing a controlling ownership interest than a

noncontrolling ownership interest.”). The Decedent’s nonsupermajority interest is a hybrid, somewhere between minority and

full control, so neither approach trumps the other totally.

26 asset -based value of the Corporation. Under the factual totality

of this case, the hypothetical assumption that the assets will be

sold is a foregone conclusion

—— a given

—— for purposes of the

asset-based test. 25 The process of determining the value of the

assets for this facet of the asset-based valuation methodology must

start with the basic assumption that all assets will be sold,

e ither by Dunn Equipment to the willing buyer or by the willing

buyer of the Decedent’s block of stock after he acquires her stock.

By definition, the asset-based value of a corporation is grounded

in the fair market value of its assets (a figure found by the Tax

Court and not contested by the estate), which in turn is determined

by applying the venerable willing buyer-willing seller test. By

its very definition, this contemplate s the consummation of the

purchase and sale of the property, i.e., the asset being valued.

Otherwise the hypothetical willing parties would be called

something other than “buyer” and “seller.”

In other wo rds, when one facet of the valuation process

requires a sub-determination based on the value of the comp any’s

assets, that value must be tested in the same willing buyer/willing

seller crucible as is the stock itself, which presupposes that the27

property being valued is in fact bought and sold. It is axiomatic

that an asset-based valuation starts with the gross market (sales)

value of the underlying assets themselves, and, as observed, the

Tax Court’s finding in that regard is unchallenged on appeal: When

the starting point is the assumption of sale, the “likelihood” is

100%!

This truism is confirmed by i ts obverse in today’s dual,

polar-opposite approaches (cash flow; assets ). The fundamental

assumption in the income or cash-flow approach is that the assets

are retained by the Corporation, i.e., not globally disposed of in

liquidation or otherwise. So, just as the starting point for the

asset-based approach in this case is the assumption that the assets

are sol d, the starting point for the earnings-based approach is

that the Corporation’s assets are retained

—— are not sold, (other

than as trade-ins for new replacement assets in the ordinary course

of business)

—— and will be used as an integral part of its ongoing

business operations. This duly accounts for the value of assets ——

unsold

—— in the active operations of the Corporation as one

inextricably intertwined element of the production of income.

Bottom Line: The likelihood of liquidation has no place in

either of the two disparate approaches to valuing this particular

operating company. We hasten to add, however, that the l ikelihood

of liquidation does play a key role in appraising the Decedent’s

blo ck of stock, and that role is in the determination of the

relative weights to be given to those two approaches: The lesser26 Estate of Jameson v. Comm’r . 267 F.3d 366, 372 (5th Cir.

2001).

28 the likelihood of liquidation (or sale of essentially all assets),

the greater the weight (percentage) that must be assigned to the

earni ngs(cash flow)-based approach and, perforce, the lesser the

weight to be assigned to the asset-based approach.

Belab ored as our point might be, it illustrates the reason

why, in conducting its asset-based approach to valuing Dunn

Equipment, the Tax Court erred when it ground ed its time-use-ofmoney reduction of the 34% gains tax factor to 5% on the assumption

that the corporation’s assets would not likely b e sold in

liquidation. As explained, the likelihood of liquidation is

inapposite to the asset-based approach to valuation.

In our recent response to a similarly misguided application of

the bui lt-in gains tax factor by the Tax Court, we rejected its

treatment as based on “internally inconsistent assumptions.” 26 In

that case we reversed and remanded with instructions for the Tax

Court to reconsider its valuation of the subj ect corporation’s

timber property values by u sing a more straightforward capital

gains tax reduction. Similarly, because valuing Dunn Equipment’s

underlying corporate assets is not th e equivalent of valuing the

Company’s capital stock on the basis of its assets, but is merely

one preliminary exercise in that process, the threshold assumption

in conducting the asset-based valuation approach as to this company

must be that the underlying assets would indeed be sold. And to27 We observe a slight discrepancy between the amou nt of the

built-in gain mentioned by the Tax Court in its opinion

($7,109,000) and the gain referred to in the Estate’s appellate

brief ($7,117,638) to which a 34% tax should be applie d. We are

satisfied that this minor difference can be resolved by the court

and the parties on remand or, alternatively, ignored on the maxim

de minimis non curat lex , the net difference to the taxable value

of the subject block of stock being roughly $1,200.

28 The likelihood of liquidation is also taken into account in

another way, albeit indirectly and implicitly: in the court’s

assignment of a 7.5% discount to the Decedent’s block of Dunn

Equipment stock for lack of supermajority control. For it is

liquidation that, absent supermajority, the operational majority

stockholder alone cannot force. Thus this discount is grounded in

inter alia , the block’s inability to make liquidation happen.

29 whom? To a fully informed, non-compelled, willing buyer. That is

always the starting point for a fair market value determination of

assets qua assets. That determination becomes the basis for the

company’s asset-based value, which must include consideration of

the tax implications of those assets as owned by that company.

We must reject as legal error, then, the Tax Court’s treatment

of built-in gains tax liability and hold that

—— under the court’s

asset-based approach

—— determina tion of the value of Dunn

Equipment must include a reduction equal to 34% of the taxable gain

inherent in those assets as of the valuation date. 27 Moreover, the

factually determined, “real world” likelihood of liquidation is not

a factor affecting built-in tax liability when conducting the

asset-based approach to valuing Dunn Equipment stock. 28 Rather, the

probability of a liquidation’s occurring affects only (but

significantly) the relative weights to be assigned to each of the

two values once they have been determined under the asset-based and29 Dunn , 79 T.C.M. (CCH) at 1339 (emphasis added).

30 income-based approaches, respectively

——which brings us to the

second methodology issue presented in this appeal.

2. Assignment of Weight to Values

a. Cash Flow Vis-à-Vis Earnings

Prior to determining the appropriate method of valuing Dunn

Equipment, the Tax Court reviewed the factors that bear on the fair

market value of a block of stock in a closely-held, non-traded,

operating corporation and concluded that

the value of Dunn Equipment is best

represented by a combination of an earningsbased value using capitalization of net cashflow and an asset-based value using fair

market value of assets, with an appropriate

discount for a lack of marketability and lack

of super-majority control. 29

In so doing, the Tax Court rejected the a pproach of the Estate’s

expert, who used capitalized net earnings to determine the incomebased value of the Corporation, and went instead with a capitalized

net cash-flow method. As the Estate is not contesting the Tax

C ourt’s choice of the cash-flow approach over the earnings

approach, we too accept the court’s choice.

b. The Tax Court’s Determination of Value

To its credit, the Tax Court flatly rejected the

Commissioner’s legally and factually absurd contention at trial

that no weight should be given to the Corporation’s earnings-based

value and that its value should be based entirely in an asset-based30 Id.

31 Id. at 1340 (boldface ours).

31 approach, with no consideration of built-in tax liability. In so

doing, the Tax Court concluded that the Commissioner “puts too much

emphasis on the fair market value of assets” 30 —— to us, a classic

understatement

—— and stated correctly that “because Dunn Equipment

was an operating company, the better question is not whether we

should disr egard the earnings-based value, but whether we should

disregard the asset-based value .” 31 The Tax Court went on to voice

agreement with the basic position urged by the Estate’s valuation

expert that substantial weight should be given to both the assetbased value and the earnings-based va lue of the Corporation.

Although we wholehearte dly endorse the point made by the Tax

Court’s rhetorical question whether any weigh t at all should be

given to the asset-based value

—— and see little hyperbole in it

——

we ar e constrained to proceed, as proposed by the Estate and as

done by the Tax Court, with a methodology that assigns some weight

to each of the values generated by those two disparate approaches.

The final determination required to complete the pre-discount

valuation methodology in this case, then, is the selection of the

respective weights (percentages) to be assigned to each of the

Corporation’s theoretical values, asset-based and earnings-based.

As observed in our discussion of the potential effects (or lack

thereof) of the likelihood of liquidation and latent gains tax32 See T EX

. B US

. C ORP

. A CT A NN . art. 6.03 (Vernon 1991).

32 liability on the value of the Corporation’s asset s , it is in the

exercise conducted to determine the relative weights to be accorded

to each of the two differently calculated values of the Corporation

—— and only in that exercise

—— that the likelihood of liquidation

vis-à-vis the likelihood of indefinitely retaining and using the

assets, comes into play.

The Tax Court was of the opinion —— and we agree —— that the

hypothetical willing buyer of the Decedent’s block of stock would

be unlikely to provoke liquidation of the company, even if he

could. The Tax Court bolstered that conclusion with the

recognition that even though the Estate’s block of stock represents

day-to-day control, the buyer of that block would lack the power to

compel liquidation, merger, or consolidation. 32 In this regard, the

court cogently emphasized that Dunn Equipment’s history, community

ties, and relationship with its employees would make it difficult

if not virtually impossible for the holder of the Estate’s block of

stock to secure the votes of additional s hares sufficient to

institute liquidation. After concluding that the likelihood of

liquidation was slight, the Tax Court added:

A rapid liquidation would have flooded the market

with equipment, reducing the value obtained for

each piece. A lengthy, drawn-out liquidation (also

called a “creeping liquidation”) would have risked

th e loss of customers who, at some point, would

have realized that Dunn Equipment no longer meant33 Dunn

, 79 T .C.M. (CCH) at 1340. The Tax Court nevertheless

opined that the earnings value of the company appeared to be

understated because the earnings projections are b ased on a low

period in a cyclical business. We see this observation as clearly

erroneous: Dunn Equipment’s business and earnings had been flat

for over 10 years

—— hardly a cycle —— and nothing known to the

Corporation or any hypothetical buyer as of the valuation date

predicted any kind of sustained upturn in the foreseeable future.

The Tax Court’s belief, grounded in that erroneous analysis of the

business cycle, that a hypothetical buyer a nd seller would give

asset value added weight, is likewise clearly erroneous.

33 to stay in bu siness and who would therefore have

sought other suppliers of equipment. 33

Despite having asked rhetorically

—— but, in our opinion,

i nsightfully

—— whether the asset-based value of the Corpo ration

should not be disregarded altogether, the Tax Court simply

reiterated the fact ors that should be considered (largely

paraphrasing Rev. Rul. 59-60), then conclusionally compl eted its

pre-discount valuation methodology by assigning unequal percentages

of weight to the results of its two approaches to valuation.

Given the stipulat ed or agreed facts, the additional facts

found by the Tax Court, and the correct determination by that court

that the likelihood of liquidation wa s minimal, our expectation

would be that if the court elected to assign unequal weight to the

two approaches, it would accord a minority (or even a nominal)

weight to the asset-based value of the Corporation, and a majority

(or even a super-majority) weight to the net cash flow or earningsbased value. Without explanation, however, the Tax Court baldly ——

and, to us, astonishingly

—— did just the opposite, assigning a

substantial majority of the weight to the asset -based value. The34

court allocated almost tw o-thirds of the weight (65%) to the

results of the asset-based approach an d only slightly more than

one-third (35%) to the results of the earnings-based approach. We

view this as a legal, logical, and economic non sequitur,

inconsistent with all findings and expressions of the court leading

up to its announcement of this step in its methodology. We also

note that the Tax Court’s ratio roughly s plits the difference

between the 50:50 ratio advanced by the Estate and the 100:0 ratio

advocated by the Commissioner.

Irrespective of whether the crucial step in t he Tax Court’s

methodology, the assignment of relative weights to the results of

the different valuation approaches, is deemed to be an issue of law

or a mi xed question of fact and law, we review it d e novo

. Our

plenary review leads us inescapably to the conclusion that the Tax

Court’s 65:35 ratio in favor of its asset-based value constitutes

reversible error. How, we must ask, can the value of a corporation

tha t possesses all the attributes verbalized by the Tax Court

conceivably be governed essential ly twice as much by its assetbased value as by its earnings or cash flow-based value, when its

assets (1) are not susceptible of appreciation (except, possibly,

de minimis by the condo and the plant sites), (2) are phy sically

depreciated and depreciating as a result of their being used as

intended, (3) are being replaced constantly with newer models at

great cost, and (4) are virtually certain not to be put up for sale35

because indefinite operation

—— not liquidation

—— is all that can

be predicted as the Corporation’s future, both long-term and short?

At this point we must emphasize the fact that the lion’s share

of the Corporation’s assets comprised heavy equipment which, to

such an operating company, is virtually indistinguishable from

consumable supplies

—— and likely would be so regarded were it not

for the administratively necessary but economically unrealistic

artificiality of 12-month tax years. Those assets are constantly

depreciating from heavy use and o bsolescence; they are being

replaced to the tune of $2 million annually; their highest and best

use is short-term rental, frequently i m possible to accomplish

without the furnishing of operators by the Corporation; and the tax

effect s of their unlikely sale to third parties would greatly

diminish their value to the Corporation. Indeed, it takes eight

s alesmen and 123 common-law employees, working full time in t his

highly competitive industry, to make these heavy-equipment assets

produce even moderately acceptable levels of profitability.

Throughout its comprehensive and logical background analysis,

the Tax Court recognized that Dunn Equipment is an o perating

company, a going business concern, the Decedent’s shares in which

would almost certai nly be purchased by a willing buyer for

continued operation and not for liquidation or other asset

disposition. For purposes of valuation, Dunn Equipment is easily

distinguishable from true asset-holding investment companies, which

own properties for their own intrinsic, passive yield and34 See e.g.

, B. F. Sturtevant Co. v. Comm’r , 75 F.2d 316, 324

(1st Cir. 1935)(holding that good business judgment must prevail,

“and a failure or refusal to exercise that judgment constitutes an

error of law”).

36 appreciation

—— securities, timberland, mineral royalties,

collectibles, and the like. For the Tax Court here to employ a

valuation method that, in its penultimate step of crafting a

weighting ratio assigns only one-third weight to this operating

company’s income-based value, defies reason and makes no economic

sense. 34 Our conclusion is all the more unavoidable when viewed in

the light of the Tax Court’s disregard of the ubiquitous factor of

dividend paying capacity

—— in this case, zero

—— which, if applied

under customarily employed weighting methods, would further dilute

the weight of the asset-value factor and reduce the overall value

of the Corporation as well. The same can be said for the effect on

cash flow of the underpayment of officers’ compensation.

When we review the objective, factual record in this case ——

which is all that r emained for the Tax Court to rely on after it

disregarded most expert testimony

—— we are left with the definite

impression that an error was committed at the weighting step of the

method employed here. This review also mandates that something

between zero and a small percentage of weight be assigned to the

Corporation’s asset-based value, and that the remaind er of the

weight be assig ned to its earnings-based value. Under different

circumstances, we might be inclined to remand for the Tax Court to

make another try at assigning relative weights and constructing a35 Cohan v. Comm’r , 39 F.2d 540, 544 (2d Cir. 1930) (L. Hand,

J.) (“But to allow nothing at all appears to us inconsistent....The

amount may be trivial and unsatisfactory, but there was a basis

for some allowance, and it was wrong to refuse any....”).

36 Fomented in significant part by myriad valuation challenges

instituted by the IRS over the past decades, a full-fledged

profession of business appraisers, such as the American Society of

Appraisers, has emerged, generating its own methodology and lexicon

in the process; which in turn have contributed to the profession’s

37 reasonable ratio. Given the state of the record and the seven-plus

years that this case has languished in the courts (over a year now

in ours), such a remand, coupled with its potential for yet another

appeal, militates against sending this particular issue back to the

Tax Court. After all, the record of this case, free as it is of

credibility calls and genuine disputes of material fact between the

parties (other than as to their experts) places us in exactly the

same methodological vantage point as the Tax Court when it comes to

assigning relative weig hts to the results of the valuation

approaches employed. This is true regardless of whether that

assignment be labeled a question of law or a mixed question of fact

and law.

Tempting as it is to follow the implication of the Tax Court’s

rhetorical question and disregard the asset-based value altogether,

we remain cognizant of the ve nerable C ohan 35 rule, which counsels

against assigning a zero value or probability to anything under any

circumstances, and therefore resist that temptation. Recognizing

the impossibility of ever making an absolutely pr ecise and

universally accepted determination of weighting percentages, 36 werespect and mystique. Because —— absent an actual purchase and

sale

—— valuing businesses, particularly closely held corporations,

is not a pure science replete with precise formulae and susceptible

of mechanical calculation but depends instead largely on subjective

opinions, the writings and public pronouncements (including expert

testimony) of these learned practitioners necessarily contain some

vagaries, ambiguities, inexactitudes, caveats, and qualifications.

It is not surprising therefore that from time to time disagreements

of diamet ric proportion arise among these practitioners. As the

methodology we employ today may well be viewed by some of these

professionals as unsophisticated, dogmatic, overly simplistic, or

just plain wrong, we consciously assume the risk of incurring such

criticism from the business appraisal community. In particular, we

anticipate that some may find fault with (1) our insistence (like

that of the Estate’s expert) that, in the asset-based approach, the

valuing of the Corporation’s assets proceed on the assumption that

the assets are sold; and (2) our determination that, in this case,

the likelihood of liquidation or sale of essentially all assets be

factored into the weighting of the results of the two valuation

approaches and not be considered as an integral factor in valuing

the Corporation under either of those approaches. In this regard,

we observe that on the end of the methodology spectrum opposite

oversimplification lies over-engineering

.

38 nevertheless hold that the proper method of valuing the stock of

Dunn Equipment, under all the relevant circumstances and discrete

facts of this case (not the least of which is the “unlikelihood” of

liquidation of its assets), requires assigning a weight to its

earnings-based value somewhere between 75% and 90%, and to its

asset-based value somewhere between 10% and 25%. Within these

ranges we select 85% for the earnings-based weight and 15% for the

asset-based weight, producing a 85:15 weighting ratio.

III. Conclusion

The Tax Court calculated Dunn Equipment’s earnings-based value

before discount at $1,321,740, and the Estate does not appeal that

determination. Therefore, on remand the Tax Court shall give the39

results of that approach a weight of 85% in computing the

Corporation’s value. In contrast, the asset-based value, to which

a weight of 15% shall be given, must be recalculated by the Tax

Court by applying to the previously determined market value of the

Corporation’s assets, a reduction equal t o 34% of those assets’

built-in taxable gains. After thus recalculating the Corporation’s

asset-based value and computing the pre-discount value of the

Corporation by application of this 85:15 ratio, the Tax Court shall

then reduce the Estate’s 62.96% ratable portion of that value by

22.5% for lack of marketability and lack of super-majority control,

pursuant to the unappealed discount methodology originally selected

by the Tax Court.

With the correct value of the Estate’s block of stock in Dunn

Equipment thus dete rmined, the court shall recalculate (or the

parties shall stipulate) the correct estate tax liability for

Decedent’s Estate. This will enable the court to enter an

appropriate final judgment to account for the Estate’s overpayment

of taxes as well as interest and any other relevant factors.

Finally, given the Commissioner’s delays in issuing his notice

of deficiency and his extreme and unjustifiable trial position in

advocating a valuation based entirely on asset value (with no

reduction for built-in tax liability and no weight given to incomebased value), exacerbated by his failure to adduce expert appraisal

testimony in support of his own exorbitant proposed value, the Tax

Court shall entertain any claim that the Estate might elect to37 See 28 U.S.C. § 2412(d)(1)(B); I.R.C. § 7430(c)(4)(ii).

40 assert under I.R.C. § 7430, if perchance the re-valuation of the

Decedent’s block of Dunn Eq uipment’s stock should reduce the net

worth of the Estate to a sum below the $2 million cap on

entitlement to relief under that section. 37

REVERSED and REMANDED, with instructions.