T.C. Mem o. 2 01 4- 26

UNITED STAT ES TAX COURT

ESTATE O F HELEN P. RICHMOND, DECEASED, AMANDA ZERBEY, EXECUTRIX, Peti ti on er v . COMMI SSIONER OF INTERNAL REVENUE, Res po nd en t

Doc ke t No . 21 44 8- 09
. Fi le d F eb ru ary 11 , 20 14
. At the ti m e o f he r de ath, D o wne d a23 .44 % in te res t i n a fam il y -o wne d p ers on al ho ld in g c om pa ny (“ PHC”) , who se ass et s co ns is te d p rimaril y

of p ub li cl y

tra de d s to ck . D’ s es ta te tax return rep orte d t he fai r m ark etva lu e o f D’s in te res t i n P HC as $3 ,14 9,7 67 , us in g acap it al iz at io n- of

-d iv id en ds m etho d t o v al ue th e as se t. R u se d in st eada ne t as se t v al ue (“NAV”) m etho d a ndde te rm in eda de fic ie nc y

inD’ s es ta te tax as we ll as a n a ccu racy-rela te d p en al ty un de r I.R.C. s ec. 6 66 2. Held : Th e fai r m ark etva lu e o f D’s 23 .44 % in te res t i n P HC is be tt er d et erm in edby an NAV m etho d a ndis $6 ,50 3,8 04
. Held , furth er, P i s l iabl e fo r a 2 0% a ccu racy-rela te d p en al ty un de r I.R.C. s ec. 6 66 2( a), (b )(5 ), an d (g ).-2
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[* 2] Pet er Sa m

ue l Go rd on an d J oh n W. Port er, fo r pe ti ti on er. W arre n P . Sim on se n, fo r res po nd en t. CONTENTS FINDINGS OF FACT.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Pear so n Ho ld in g C om

pa ny. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 PHC’s m ax im iz in g o f di vi de nd s. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 PHC’s BIC G tax li ab il ity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 PHC s to cktra ns act io ns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Ms . Ric hm on d’s o wne rs hi p a ndbe qu es t o f PHC s to ck
. . . . . . . . . . . . . . . . . 9 Fi na nc ia l i nf

orm at io n. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 The est at e ta x re tu rn . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 The no ti ce o f de fic ie nc y

an d t he pe ti ti on . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 The Co m m is si on er’s expe rt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 The est at e’s expe rt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Ult im at e fi nd in gs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 OPINION.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 I. In tro du ct io n. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 II. Gen eral pri nc ip le s o f es ta te tax va lu at io n. . . . . . . . . . . . . . . . . . . . . 20 III. Ch oi ce o f va lu at io n m etho d.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 IV. The va lu e o f th e d eced en t’s i nt eres t i n P HC.
. . . . . . . . . . . . . . . . . . 27 A. Dis co un t fo r BIC G li ab il ity . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 1. Not ic e o f de fic ie nc y : a ze ro di sc ou nt . . . . . . . . . . . . . . 28 2. The est at e’s ex pe rt: 10 0% o f th e BIC G tax
. . . . . . . . . 29 3. The Co m

m is si on er’s ex pe rt: 43 % of t he BICG t ax . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 4. Ourco nc lu si on : pr es en t v al ue of t he BICG t ax li ab il ity . . . . . . . . . . . . . 35-3
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[* 3] B. Dis co un t fo r la ckof c on tro l.
. . . . . . . . . . . . . . . . . . . . . . . . . . 39

C. Dis co un t fo r la ckof m ark et ab il ity . . . . . . . . . . . . . . . . . . . . . . 42 D. Co nc lu si on . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 V. Accu racy-rela te d p en al ty. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 MEMORANDUM FI NDINGS OF FACT AND OPINION GUSTAFSON, Ju dg e: By a st atut ory

no ti ce o f de fic ie nc y

da te d J un e 1 2, 20 09 , th e In te rn al Rev enue Serv ic e (“ IRS” ) de te rm in eda de fic ie nc y of $ 2,8 54 ,72 9 in Fed eral est at e ta x due fro m th e Est at e o f Hel enP. Ric hm on d. Th e IRS als o de te rm in edanaccu racy-rela te d p en al ty of $1 ,14 1,8 92 du e und er s ect io n 6 66 2. 1 The est at e co m

m en cedth is su itby fili ng it s p et it io n t o c ha ll en ge th os e de te rm in at io ns . The i ss ue s fo r de ci si on are: (1 ) whe th er the 23 .44 % in te res t (c on si st in g o f 54 8 s ha res ) inPear so n Hol di ng Co . (“ PHC”) th atwas i nc lu de d i n t he va lu e o f th e g ro ss est at e fo r pu rp os es of F ed eral est at e ta x h ada fai r m ark etva lu e o f $5 ,04 6,5 00 (as th e es ta te

Unl es s o th erwi se in di cat ed , all sec ti on refe ren ces are t o t he Int ern al 1 Rev enue Co de (26 U.S.C.) ineffe ctat t he da te of t he de ced en t’s d eath, an d a ll Ru le refe ren ces are t o t he Tax C ou rt Rul es of P ract ic e an d P ro cedur e. Num eri cal am ount s ap pe ari ng inth is op in io n a re s om et im es rou nd ed
.-4
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[* 4] no w ass ert s) or any oth er am ou ntles s tha n the $7 ,33 0,0 00 th atth e Co m m is si on er n ow as se rts (we fi nditha d ava lu e o f $6 ,50 3,8 04 ); an d 2 (2 ) whe th er the re i s an un de rp aym en t o f es ta te tax att rib ut ab le to a subs tant ia l es ta te tax va lu at io n u nd ers ta te m en t fo r pu rp os es of t he 20 % accu racyrel at edpe na lty

im po se d b y sec ti on 66 62 (a), (b )(5 ), an d (g ), an d, i f so , whet he r 3
an y po rti onof t he un de rp aym en t was att rib ut ab le to “ reas on ab le cau se ” und er se ct io n 6 66 4( c) (we fi nda subs tant ia l v al ua ti on un de rs ta te m en t fo r whi chth ere was no reas on ab le cau se ). FINDINGS OF FACT So m e o f th e fac ts ha ve be enst ip ul at edan d a re s o fo un d. Atth e ti m e o f he r de ath, M s. Ri ch m on d re si de d i n P en ns y lv an ia . At th e ti m e th e p et it io n was fil ed ,
The IRS’s n ot ic e o f de fic ie nc y de te rm in edth atth e as se t atis su e h ada fai r 2 m ark etva lu e n otof $ 3,1 49 ,76 7 a s the est at e h adrep orte d o n i ts return b utrathe r $9 ,22 3,6 58 --i .e., an i nc reas e o f $6 ,07 3,8 91 . The Co m m is si on er n ow co nt en ds it ha d ava lu e o f $7 ,33 0,0 00 (i.e ., abo ut20 % les s tha n o n t he no ti ce o f de fic ie nc y , an d aco nc es si on of abo ut31 % of t he ori gi na l i nc reas e). The est at e ta x re tu rn rep orte d ava lu e o f $3 ,14 9,7 67 , bu t the est at e n ow co nt en ds itha d ava lu e o f $5 ,04 6,5 00 (i.e ., abo ut60 % m or e th anonth e return)
. Inth e n ot ic e o f de fic ie nc y , th e IRS cal cu la te d t he am ou ntof the pe na lty 3 us in g t he 40 % rat e th atge ne ral ly app li es to gro ss va lu at io n m is st at em en ts . See se c. 66 62 (h ). On b rie f, ho wev er, the Co m m is si on er co nc ed es th atth e 4 0% g ro ss va lu at io n m is st at em en t p en al ty doe s n otap pl y ; an d h e as se rts in st eadth atth e un de rp aym en t i s at tri bu tabl e to a subs tant ia l v al ua ti onun de rs ta te m en t u nd er se ct io n 6 66 2( b) (5 ) an d (g ), th us in cu rri ng a 20 % pe na lty .-5
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[* 5] th e two co -ex ecu to rs of t he est at e res id edinPen ns y lv an ia(whe re the wil l was pr ob at ed ) an d New J ers ey . 4 Pear so n Ho ld in g C om

pa ny PHC was in co rp or at edinDela ware i n J anua ry 19 28 . It o rig in at edas and
co nt in ue s t o b e a fam il y -o wne d i nv es tm en t h ol di ng co m pany. PHC i s a subc hapt er C co rp or at io n. It s b us in es s p ur po se as s ta te d i n i ts cert ifi cat e o f in co rp or at io n i s “ to gu aran te e, pu rch as e, ho ld , sel l, as si gn , trans fer, m ortg ag e, pl ed ge or o th erwi se di sp os e o f sh ares of c ap it al st oc k, o r an y bo nd s, s ecu rit ie s o r ot he r ev id en ce o f in de bt edne ss crea te d b y an y on e in th e co rp or at io n o r co rp or at io ns org an iz edun de r th e la w of the st at e o f go ve rn m en t” . PHC’s ap pr oa ch , as d es cri be d b y it s cu rren t ch ai rm anan d p res id en t, i s “ to pre se rv e

Und er s ect io n 7 48 2( b) (1 )(A) thi s ca se wou ldbe rev ie wedon ap pe al by “ th e 4 Uni te d S tate s co urt o f ap pe al s fo r th e ci rcu itinwhi chis lo cat ed* * * the leg al res id en ce o f th e p et it io ne r”. To the ex te ntth e es ta te “ res id e[s ]” where i ts co ex ecu to rs res id e o r whe re the wil l was pro ba te d, thi s ca se wou ldbe rev ie wedon ap pe al by the Co urt o f App eal s fo r th e Thi rdCir cu it . Neithe r pa rty has su gg es te d an y reas on th atap pe al mig htli e in th e Co urt o f App eal s fo r th e Fi fth Cir cu itor t he Co urt o f App eal s fo r th e Ele ve nt h C irc ui t, b oth o f whi ch , see Est at e o f Je lk e v . Co m m is si on er, 5 07 F.3d13 17 (11 th Cir . 20 10 ), va cat in g a ndrem an di ng T.C. Mem o. 2 00 5- 13 1; Est at e o f Dun n v . Commis si on er, 3 01 F.3d33 9, 3 53 (5t h C ir. 20 02 ), rev ’g an d re m an di ng T.C. Mem o. 2 00 0- 12 , hav e h el d t ha t a h ol di ng co m pa ny’ s n etass etva lu e sh ou ldbe di sc ou nt edby 100 % of t he bu il t-i n c ap it al ga in s t ax forwhi chth e h ol di ng co m pa ny woul d e ve ntua ll y

be li ab le . See pa rt I V.A.2 b el ow.-6
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[* 6] cap it al , to gro w cap it al wher e p os si bl e, an d t o m ax im iz e d iv id en d i nc om e fo r th e fam il y

sh areh ol de rs ”. As o f Decem

be r 20 05 PHC h ad2,3 38 sh ares of c omm on st oc k o ut st an di ng . Tho se sh ares were h el d b y 25 m em be rs who se in te res ts ran ge d fr om 0.1 7% t o 23 .61 %. The thr ee l arg es t s ha reh ol de rs (whi chin cl ud edth e d eced en t) o wne d a to ta l o f 59 .20 % of t he sh ares . PHC’s m ax im iz in g o f di vi de nd s Thro ug h t he da te of t he de ced en t’s d eath, PHC fol lo wedit s s tate d ph il os op hy of m ax im iz in g d iv id en d i nc om e. As a h ol di ng co m pa ny sub ject t o t ax on un di st rib ut edin co m e, se e se c. 54 1, PHC ha s a s tro ng in cen ti ve to pa y ou t m os t of th e d iv id en d i nc om e g en erat edby the sec ur it ie s h el d i n i ts po rtf ol io , andth e ul ti m at e o bjec ti ve of t he co m pa ny was to pro vi de a st eady stream of i nc om e to th e de sc en dant s o f Fred eri ckPear so n wh il e m in im iz in g t ax es an d p res erv in g c ap it al
. PHC h as pa iddi vi de nd s re li ab ly at a rat e th at , inth e y ears fro m 19 70 th ro ug h 20 05 , hadgro wn s li gh tl y m or e th an5% p er y ear. Inth e se ve n years p rece di ng th e de ced en t’s d eath, PHC pa idou t d iv id en d d is tri bu ti on s as fol lo ws:-7
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[* 7] Year Div id en d d is tri bu ti on Deced en t’s s ha re 20 05 $1 ,07 7,0 00 $2 52 ,43 6 20 04 1,0 47 ,65 8 24 5,5 59 20 03 1,0 16 ,46 9 23 8,2 48 20 02 947 ,03 0 22 1,9 73 20 01 922 ,57 5 21 6,2 41 20 00 1,18 5,9 74 277 ,97 9 19 99 835 ,57 8 19 5,8 50 The tu rn ov er o f PHC’s s ecu rit ie s h as be ensl ow- -fo r th e p eri odfro m 20 00 to 20 05 , 1.1 % pe r y ear; an d fo r th e 1 0- y ear p eri oden di ng Decem be r 31 , 20 05 , 1.4 % pe r y ear. Atth at1.4 % rat e, a co m pl et e tu rn ov er o f th e se cu rit ie s wo ul d t ak e 7 0 y ears . Howev er, i n 2 00 5 apo te nt ia l i nv es to r wou ldha ve ob se rv edth at , with t he pa ss in g d ecad es , th e o wne rs hi p o f PHC s to ckha d b eco m e m or e d iff us e--a nd
wou ldco nt in ue to be co m e m or e d iff us e--a m on g h ei rs an d l eg at ees with l es s an d le ss id en ti fic at io n wi th Fred eri ckPear so n a ndhi s p hi lo so ph y an d g oa ls , andwith le ss an d l es s kno wled ge of a ndaffi ni ty for o ne an ot he r. The m in ds etof t he sh areh ol de rs as o wni ng a fam il y co m pa ny woul d m or e an d m or e g iv e way to an at ti tu de th atreg ard s the PHC s ha res si m pl y as a n i nv es tm en t, an d t he co m pa ny-8
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[* 8] wou ldbe in crea si ng ly lik el y to fol lo w th e fi nanc ia l ad vi ce o f di ve rs ifyin g i ts ho ld in gs . W e fi ndth at , as the Co m m is si on er’s ex pe rt wi tn es s t es ti fie d, a p ot en ti al in ve st orwho co ns id eredpu rch as in g P HC wou ldli ke ly exp ectth atap pr ox im at el y 20 -3 0 years wo ul d p as s b efo re a co m pl et e tu rn ov er o f th e p ortfo li o o r a l iqui da ti on of th e co m pa ny woul d o ccu r. PHC’s BIC G tax li ab il ity Whe n s ecu rit ie s o r an y

ot he r as se ts ap pr eci at e in va lu e, th e o wne r be co m es li ab le fortax --b uton ly upo n t he oc cu rren ce o f anin co m e ta x re co gn it io n e ve nt , su chas the sal e o f th e as se ts . A ho ld in g c om pa ny tha t o wns sec ur it ie s tha t b ot h pr oduc e d iv id en ds an d app reci at e m ay pre fer t o h ol d t he sec ur it ie s, ra th er tha n s el l th em , bec au se itcanth ereb y de fer p aym en t o f th e ta x a ndaccr ue di vi de nd s fr om

a larg er p ortfo li o, und im in is he d b y pa ym en t o f ta x l iabi li ti es . This ha s b eenPHC’s ap pr oa ch . As a res ul t, the va lu e o f it s p ortfo li o h as gro wn t o c on si stm or e an d
m or e o f un ta xe d app reci at io n. As of De cem be r 20 05 , 87 .5% o f th e v al ue of PHC’s p ortfo li o c on si st edof app reci at io n o n wh ic h c ap it al ga in tax ha d n oty et be enpa idbu t wo ul d e ve ntua ll y be co m e due up on sal e o f th e ap pr eci at ed
se cu rit ie s. (Th is de ferr edli ab il ity th atin he res inap pr eci at edass et s i s re ferr edto as “bu il t-i n c ap it al ga in tax ” (“ BICG t ax ”).)-9
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[* 9] Fro m

ti m e to ti m e, W il m in gt on Trus t Co ., as PHC ’s fin an ci al advi se r, ha s su gg es te d t ha t PHC sel l s ub st an ti al am ou nt s o f it s s ecu rit ie s i n o rd er t o d iv ers ify it s p ortfo li o. Ho wev er, PHC n ev er ac te d o n t hi s ad vi ce b ecau se of the lar ge BICG ta x a ttrib ut ab le to th e ap pr eci at io n o f it s s ecu rit ie s. PHC h as pre ferr edno t t o i nc ur th attax li ab il ity , th e p aym en t o f whi chwou lddi m in is h i ts to ta l as se ts an d th eref or e it s ab il ity

to ge ne rat e d iv id en ds
. PHC s to cktra ns act io ns Fro m 19 71 th ro ug h 1 99 3, the re were ni ne tra ns act io ns in vo lv in g t he sal e o r red em pt io n o f PHC s to ckby a sha reh ol de r. It ap pe ars th atth e v al ue of t he st oc k fo r th os e tr an sa ct io ns was d et erm in edus in g t he di vi de ndm od el . In ad di ti on , whe n ano th er s ha reh ol de r di edin19 99 , th e es ta te us edth e d iv id en d m od el to va lu e h is in te res t i n P HC. Ms . Ric hm on d’s o wne rs hi p andbe qu es t o f PHC s to ck As o f Decem

be r 20 05 , Helen P. Ric hm on d o wne d 5 48 sh ares inPHC. Sh e was PHC’s se co ndlar ge stsh areh ol de r, ho ld in g a23 .44 % in te res t. As t he own er of les s than am ajor ity

of P HC’s st oc k, M s. Ri ch m on d c ou ldno t u ni la te ral ly ch an ge th e m an ag em en t o r in ve st m en t p hi lo so ph y of the co m

pa ny; no r co ul d s he
un il at eral ly gai n a cces s t o t he co rp or at e b oo ks , in crea se di st rib ut io ns fro m th e co m pa ny, or cau se th e co m

pa ny to re de em

it s s to ck . She co ul d n otfor ce PHC t o-1 0-

[* 10 ] m ak e anS el ect io n o r to di ve rs ify its ho ld in gs . She ha d n o ri gh ts to “pu t” he r st oc k t o the co m

pa ny (i.e., to for ce i t t o b uy her s ha res ), an d t he co m pa ny co ul d n ot“ cal l” he r st oc k (i .e., cou ldno t d em an d t o b uy it). On Fe brua ry

10 , 20 04 , Ms . Ric hm on d e xe cu te d aco di ci l t o h er wi ll th at na m edJo hn W . Ly le an d Am an daZerb ey as c o- ex ecu to rs of h er es ta te . Mr. Ly le gr adua te d i n t he 19 50 s fr om LaSal le Uni ve rs ity

inPh il ad el ph iaan d was a cert ifi ed publ ic acco un tant(C.P.A.) in th e St at e o f Del aware . Mr. Ly le serve d a s an acco un tantforPHC fro m 19 70 un ti l 2 00 8. Be fo re wo rk in g a t PHC , Mr. Ly le ha d be enem pl oyed as anacco un tantat Has ki n & Sel ls inth ei r Ph il ad el ph iaoff ic e. Ms . Zerbe y

att en de d b us in es s s ch oo l atth e Key st on e Sch oo l o f Bu si ne ss fro m 19 77 to 19 78 . Ms. Zerb ey ha s b eenem

pl oyed as anInt ern etop erat io ns qu al ity co nt ro l m an ag er atEast woo d C o. i n P ot ts to wn, Pe nn sylvani a, si nc e 1 99 3. Be fo re he r po si ti on at Eas two odCo ., Ms. Zerb ey was e m pl oyed fro m

19 73 to 19 93 in Mal ve rn , Pen ns y lv an ia , as abu y er fo r Co tt ag e Cra ft, wh ere s he m et Ms . Ric hm on d. Ms . Ric hm on d d ie d o n Dec em be r 10 , 20 05 . The p art ie s s ti pu la te th aton th atda te sh e st il l o wne d h er PHC s to ck , so itis no t d is pu te d t ha t the va lu e o f th at st oc k i s i nc lu de d i n h er t ax ab le est at e.-1 1-

[* 11 ] Fin an ci al in fo rm at io n The pa rti es ha ve st ip ul at edth at , as o f Decem be r 10 , 20 05 , PHC he lda po rtf ol io with ava lu e o f $5 2,1 59 ,43 0, as fol lo ws:

Ass et Fai r m ark etva lu e Gov ern m en t b on ds an d n ot es $9 76 ,93 9 Pref erre d s to ck s 18 8,4 49 Co m m on st oc ks 50 ,69 0,5 04

1 Cas h a ndequi va le nt s 29 4,1 61 Rec ei vabl es 8,86 8 Secu rity de po si t 50 9 Tot al 52 ,15 9,4 30 PHC’s co m

m onst oc ks were i nv es te d i n 1 0 m ajorin du st rie s wi th 42 .8% o f 1 th e st oc k c on cen tra te d i n fo urco m pa ni es : Ex xo n M ob il (15 .7%), M erck& Co ., In c. (1 1%) , Gene ral Elec tri c Co . (8.1 %), an d P fiz er, In c. (8 %). As i s n ot edab ov e, ap pr ox im at el y 87 .5% o f th e $ 52 ,15 9,4 30 of P HC’s to ta l
as se ts --i .e., $4 5,5 76 ,67 7- -co ns is ts of u nr eal iz edap pr eci at io n. Th e p art ie s ag ree th atth e cap it al ga intax li ab il ity “bu il t i n” to th atap pr eci at io n (b utno t yet du e)
was $1 8,1 13 ,08 3. As o f th e d at e o f th e d eced en t’s d eath, PHC ha d o ut st an di ng li ab il it ie s (ap artfro m

an y BICG t ax li ab il ity ) of

$4 5,3 89 . Accor di ng ly, PHC h ada ne t as se t va lu e (“NAV”) of

$5 2,1 14 ,04 1 (i .e., $5 2,1 59 ,43 0 i n t ot al ass et s l es s $ 45 ,38 9 i n li ab il it ie s)
.-1 2-

[* 12 ] The e st at e ta x re tu rn On Se pt em

be r 20 , 20 06 , th e co -ex ecu to rs of t he de ced en t’s es tate , Am an da Zerb ey an d J oh n W. Ly le , fil eda Fo rm 70 6, “ Uni te d S tate s Es ta te (an d 5 Gen erat io n- Sk ip pi ng Tran sf er) Tax Return” . Befo re d oi ng so , th e es tate ret ai ne d a law firm to pre pa re the est at e ta x re tu rnan d re ta in edth e certi fie d p ub li c acco un ti ng firm

of B el fin t, Ly on s & Shum an , P.A. (“ Bel fin t” ), to va lu e th e PHC st oc k fo r pu rp os es of t he est at e ta x re tu rn . The ac co un tantwho di d t he va lu at io n was Pet er Winn in gt on . Mr. Winn in gt on gra du at edwith aba ch el orof s ci en ce d eg ree i n a cco un ti ng fro m th e Uni ve rs ity

of De laware i n 1 97 1, an d h e rec ei ve d h is m as te r of sci en ce de gr ee i n t ax at io n fr om

W id en er Un iv ers ity

in19 83 . Mr. W in ni ng to n h as be en em pl oyed as anacco un tantwith B el fin t s in ce Oct ob er 1 98 6, an d h e cu rren tl y ch ai rs th e fi rm ’s cor

po rat e se rv ic e d ep art m en t an d s it s o n t he firm ’s exe cu ti ve co m m it te e. Mr. Winn in gt on ha s ex pe rie nc e in publ ic acco un ti ng in vo lv in g aud it s, m an ag em en t ad vi so ry , li ti ga ti on supp ort an d t ax pl an ni ng , andpre parat io n se rv ic es . Mr. W in ni ng to n b ecame a C.P.A. in t he Sta te of De laware i n 1 97 5 a nda cert ifi edfin an ci al pl an ne r in 19 88 , andis a m em be r of th e Am eri canIns ti tu te of
Ms . Zerbe y

is th e su rv iv in g e xe cu tri x o f th e d eced en t’s es ta te as M r. Ly le 5 di edon Jan ua ry

8, 2 01 0.-1 3-

[* 13 ] Cert ifi edPubl ic Acco un tant s (AI CPA), the Dela ware So ci ety of C ert ifi ed Publ ic Acco un tant s (DS CPA), an d t he W il m in gt onTax Gro up . Mr. W in ni ng to n ha s ap pr ai sa l ex pe rie nc e (i .e., hav in g wri tt en10 -2 0 v al ua ti on rep orts an d h av in g te st ifi edinco urt), b uthe do es no t h av e an y ap pr ai se r certi fic at io ns . The co -ex ecu to rs pro vi de d t o M r. W in ni ng to n i nf orm at io n abo utst oc k tra ns act io ns inth e 1 99 0s , as wel l as so m e v al ua ti on s fo r pr io r es ta te s tha t i nc lu de d PHC s to ck , whi chMr. Winn in gt on us edto va lu e th e d eced en t’s i nt eres t i n P HC. Usi ng th is in fo rm at io n, t og ethe r with a dd it io na l i nf orm at io n a lre ady

inBel fin t’s po ss es si on (i.e ., aud itrep orts , cor po rat e ta x re tu rn s, an d i nv es tm en t re po rts of PHC, as well as kno wled ge of t he hi st ory of t he co m

pa ny andth e p at te rnforit s sh areh ol de rs to ho ldth ei r st oc k l on g t erm ), Mr. Winn in gt on pre pa reda dr aft rep ort tha t v al ue d t he de ced en t’s i nt eres t i n P HC at$3 ,14 9,7 67 , us in g a cap it al iz at io n- of

-d iv id en ds m etho d. He p ro vi de d t he un si gn eddra ft o f th e va lu at io n re po rt t o t he ex ecu to rs an d t o t he return p rep arer , andhe was n ev er as ke d t o fi na li ze h is rep ort. With ou t fu rth er co ns ul tati on with M r. W in ni ng to n, th e es ta te rep orte d t he va lu e o f Ms . Ric hm on d’s i nt eres t i n P HC as $3 ,14 9,7 67 on th e Fed eral est at e ta x re tu rnfil edwith t he IRS.-1 4-

[* 14 ] The n ot ic e o f de fic ie nc y an d t he pe ti ti on On J un e 1 2, 2 00 9, the IRS i ss ue d ast atut ory no ti ce o f de fic ie nc y

to th e es ta te , det erm in in g a n upwardva lu at io n o f th e d eced en t’s i nt eres t i n P HC to $9 ,22 3,6 58
. Thi s ad

jus tm en t i nc reas edth e es tate tax li ab il ity by $2,8 54 ,72 9. In 6 ad di ti on , th e n ot ic e o f de fic ie nc y de te rm in eda 40 % gro ss va lu at io n m is st at em en t pe na lty of $ 1,1 41 ,89 2 p ur su an t t o s ect io n 6 66 2( h) . The n ot ic e o f de fic ie nc y m ad e no ot he r ad

jus tm en ts to th e g ro ss est at e b es id es th e v al ua ti on of t he de ced en t’s in te res t i n P HC. The est at e ti m el y

fil eda pe ti ti on with t hi s C ou rt, s eek in g ared et erm in at io n of th e d efi ci en cy

an d t he pe na lty

de te rm in edinth e n ot ic e o f de fic ie nc y . The Co m m is si on er’s expe rt At tria l the Co m

m is si on er o ffer edJo hn A. Thomson as an e xp ertinbu si ne ss va lu at io n. Th e Co urt ac cep te d M r. Tho m so n a s a b us in es s v al ua ti onex pe rt a nd
rece iv edhi s wri tt enrep ort i nt o e vi de nc e as hi s d ire cttes ti m on y . Mr. Tho m so n va lu edth e d eced en t’s i nt eres t i n P HC by the co stap pr oa ch , us in g adi sc ou nt edne t as se t m etho d. Us in g P HC’s st ip ul at edNAV of $ 52 ,11 4,0 41 , Mr. Tho m so n
The no ti ce o f de fic ie nc y

do es no t s pe ci fy

whatva lu at io n m etho d the IRS 6 au di to r us edto va lu e th e d eced en t’s i nt eres t i n P HC an d d oe s n otex pl ai n t o wh at ex te nt , if an y , hi s m etho d a ll owe d d is co un ts (fo r ta x a ttrib ut ab le to bu il t-i n g ai n, fo r la ck of c on tro l, o r fo r la ckof m ark et ab il ity ).-1 5-

[* 15 ] cal cu la te d t he de ced en t’s 2 3.4 4% i nt eres t o f PHC’s NAV to be $1 2,2 14 ,92 5 7 (i.e ., 23 .44 % of t he to ta l NAV). He th enap pl ie d adi sc ou ntof 6 % to ad jus t fo r th e factth atth e d eced en t h el d o nl y a m in or ity

in te res t, an d h e ap pl ie d adi sc ou ntof 36 % to ad jus t b oth fo r th e la ckof m ark et ab il ity of n on -p ub li cl y

tra de d s ha res an d fo r th e BIC G tax
. Over al l, Mr . Tho m so n app li eda 40 % di sc ou nt , res ul ti ng inth e 8 9
va lu e o f th e d eced en t’s 2 3.4 4% i nt eres t i n P HC be in g re du cedto $7 ,33 0,0 00
. 1 0

Altho ug h t he Co urt i nd ep en de nt ly calcu la te s the de ced en t’s 2 3.4 4% 7 in te res t t o b e $ 12 ,21 5,5 31 (i.e ., $5 2,1 14 ,04 1 t im es 0.2 34 4) in st eadof $ 12 ,21 4,9 25 , we ig no re thi s d iff

eren ce as de m in im is
. Of Mr. Th om so n’s 3 6% “ m ark et ab il ity ” d is co un t, 1 5% was a di sc ou ntfor 8 BICG t ax . In h is rep ort p rep aredbe fo re tria l, Mr . Tho m so n’s d is co un t fo r la ckof m ark et ab il ity

(in cl ud in g B ICG t ax ) was setat 3 5%, b utat t ria l h e in crea se d i t t o 36 %. Mr. Th om so n’s o ve ral l d is co un t ca n b e ex pr es se d b y th is equa ti on : 9 di sc ou ntforlac k o f co ntro l + [ (1 - di sc ountforlac k o f co nt ro l) x (di sc ountfor la ckof m ark et ab il ity )] = 0.06 + [(1 -0 .06 ) x ( 0.3 6) ] = 0 .39 84 , or 4 0%. The Co m mis si on er’s ex pe rt r ep ort as se rts a va lu e o f $7 ,45 1,1 04 , rou nd ed 1 0 to $7 ,45 0,0 00 . Howev er, the ad jus tm en t i n t he lac k o f m ark et ab il ity di sc ou nt m ad e attri al (i.e ., in crea si ng itfro m 35 % to 36 %) reduc edth e Co m m is si on er’s as se rte d v al ue of t he de ced en t’s 2 3.4 4% i nt eres t i n P HC to $7 ,33 0,0 00
.-1 6-

[* 16 ] The est at e’s ex pe rt The est at e o ffer edRo be rt S ch weih s as anexpe rt i n v al ua ti on . The Co urt 1 1
acce pt edhi m

as a n e xp ertinbu si ne ss va lu at io n a ndrece iv edhi s wri tt enrep ort in to ev id en ce as hi s d ire cttes ti m on y . Mr. Sch weih s v al ue d t he de ced en t’s i nt eres t in PHC b y

rel y in g p rimaril y

on th e cap it al iz at io n- of

-d iv id en ds m etho d, an in co m e ap pr oa ch
. In s o d oi ng , Mr. Sch weih s u se d adi vi de ndgro wthm od el , whi ch

1 2
co m pu te s a p rin ci pa l v al ue (“ PV”) as fol lo ws:

0 PV = E (1 + g) / [k- g] whe re:

0 E = Exp ect edam ou ntof e co no m ic in co m e in th e p eri od

imm ed ia te ly pas t k = Dis co un t ra te (orrequi redrat e o f return) g = Exp ect edgro wth rat e o f earn in gs , ann ua ll y co m po un de d in to pe rp etui ty

Inad di ti on to cal li ng Mr. Sch weih s as anex pe rt wi tn es s, the est at e al so 1 1 cal le d a s a f

actwitne ss Mr. Winn in gt on , th e acc ount an t wh o p rep aredPHC’s va lu at io n re po rt f

orth e es tate tax return. Al th ou gh Mr. Winn in gt on ga ve factua l te st im on y ab ou t h is va lu at io n re po rt, wh ic h fo rm edth e b as is forth e v al ue rep orte d on th e es ta te tax return, the est at e d idno t p ro ffer Mr. Winn in gt on as ava lu at io n ex pe rt andin st eadreque st s tha t we ad op t M r. Sch weih s’s ap pr ai se d v al ue . The Co m mis si on er d oe s n otdi sp ut e th atth e cap it al iz at io n- of -d iv id en ds 1 2 m etho d c anso m et im es be us edto va lu e st oc k, an d d oe s n otdi sp ut e Mr. Sc hwe ih s’s equa ti on , bu t d oe s d is pu te bo th th e ap pr op ria te ne ss of u si ng th at m etho d i n thi s i ns tanc e an d t he ap pr op ria te ne ss of s om e o f th e v al ue s Mr. Sc hwe ih s u se d. Se e p artIII b el ow.-1 7-

[* 17 ] Usi ng a di sc ountrat e (k ) of 10 .25 %, a lo ng -te rm

gro wth rat e (g ) of

5%, an d

0 th e d eced en t’s s ha re o f PHC’s d iv id en ds in20 05 , see p. 6 ab ov e, as th e E , Mr. Sc hwe ih s v al ue d t he de ced en t’s i nt eres t i n P HC as of De cem be r 10 , 20 05 , to be $5 ,04 6,5 00 , as fo ll ows :

PV = $2 52 ,43 6 (1 + 0.0 5) / [0 .10 25 -0.0 5]

= $2 65 ,05 8 / .05 25

= $5 ,04 8,7 24 1 3 The refo re, n ot withs tand in g t he est at e’s st art in g v al ua ti on of $ 3,1 49 ,76 7 (a s rep orte d o n t he est at e ta x re tu rn ) an d t he Co m m is si on er’s s tarti ng va lu at io n o f $9 ,22 3,6 58 (as de te rm in edinth e n ot ic e o f de fic ie nc y )--wi th a di ffer en ce o f m or e th an$6 m il li on --b y

th e ti m e o f tr ia l, the di ffer en ce i n v al ua ti on s h adna rro wed
co ns id erab ly: The d eced en t’s i nt eres t i n P HC was worth $ 5,0 46 ,50 0 a cco rd in g t o th e es ta te an d $ 7,3 30 ,00 0 a cco rd in g t o the Co m m is si on er-- a d iff

eren ce o f no t qu it e $ 2.3 m il li on . As an alt ern at iv e to hi s capi ta li zat io n- of -d iv id en ds va lu at io n, M r. Sch weih s al so va lu edth e d eced en t’s i nt eres t i n P HC us in g t he ne t as se t v al ua ti on m etho d (i.e ., pro po si ng co rrec ti on s t o M r. Tho m so n’s n etass etva lu at io n) an d re ach eda W e are un ab le to reco nc il e Mr. Sc hwe ih s’s v al ue of $ 5,0 46 ,50 0 wi th th e 1 3 cal cu la ti on ab ov e o f $5 ,04 8,7 24 . W e as su m e th atth e d is crep an cy is du e atlea stin pa rt t o ro un di ng , andwe do no t co ns id er i t t o b e m at eri al
.-1 8-

[* 18 ] va lu e o f on ly $4,7 21 ,96 2. St art in g wi thth e sa m e NAV as the Co m m is si on er’s ex pe rt- -$ 52 ,11 4,0 41 --M r. Sch weih s re du cedPHC’s NAV by $1 8,1 13 ,08 3- -i.e ., 10 0% o f PHC’s BIC G tax (rathe r th anth e BICG d is co un t o f $7 ,81 7,1 06 --i .e., 15 % of $ 52 ,11 4,0 41 --tha t M r. Tho m so n a ll owe d) . Mr. Sch weih s th enap pl ie d a n 8 % di sc ou ntforlac k o f co nt ro l (a s co m pa redto Mr. Tho m so n’s 6%) , as wel l as a 35 .6% d is co un t fo r la ckof m ark et ab il ity (as co m pa redto Mr. Th om so n’s 2 1%) . This m etho d v al ue d P HC’s ne t as se ts , aft er the se di sc ou nt s an d the do ll ar-f

or -d ol lar reduc ti on forBICG t ax , at $ 20 ,14 4,8 88 . The d eced en t’s 23 .44 % in te res t was th eref or e v al ue d b y

th e es ta te ’s exp ertat $ 4,7 21 ,96 2 u si ng th e ne t as se t v al ue m etho d. Ult im at e fi nd in gs W e fi ndth at , inord er t o a cco un t fo r th e cap it al ga in tax li ab il ity bu il t i n t o it s as se ts , PHC’s ne t as se t v al ue of $ 52 ,11 4,0 41 sh ou ldbe di sc ou nt edby $7 ,81 7,1 06 (i.e ., th e Co m m is si on er’s co nc es si on of 1 5% o f PHC’s NAV) to $4 4,2 96 ,93 5. We furt he r fi ndth atth e d eced en t’s 2 3.4 4% i nt eres t the rei n (i .e., $1 0,3 83 ,20 2) sh ou ldbe furth er d is co un te d b y 7.7 5% fo r la ckof c on tro l an d b y 32 .1% fo r la ckof m ark et ab il ity , so th atth e d eced en t’s i nt eres t i n P HC ha d afai r m ark etva lu e o f $6 ,50 3,8 04 at t he de ced en t’s d at e o f de ath.-1 9-

[* 19 ] OPINION I. In tro du ct io n W e m us t d et erm in e th e fai r m ark etva lu e o f th e d eced en t’s i nt eres t i n P HC
as of t he da te of h er d eath. Th e v al ue of t he de ced en t’s i nt eres t was in cl ud edin th e v al ue of h er g ro ss est at e an d was rep orte d o n the est at e ta x re tu rnat $3 ,14 9,7 67 . Relyin g o n M r. Sch weih s’ tes ti m on y , th e es ta te no w con ced es a hi gh er am ou ntan d arg ue s tha t the co rrec t fa ir m ark etva lu e is $5 ,04 6,5 00 (al m os t $2 m il li on m or e). Inhi s n ot ic e o f de fic ie nc y , th e Co m m is si on er v al ue d t he de ced en t’s i nt eres t in PHC at$9 ,22 3,6 58 . Relyin g o n M r. Tho m so n’s ex pe rt t es ti m on y , th e Co m m is si on er n ow ar gu es th atth e fai r m ark etva lu e is $7 ,33 0,0 00 (al m os t $2 m il li on les s) , whi chwe reg ardas apa rti al co nc es si on . See Est at e o f Hin z v . Co m m is si on er, T.C. Mem o. 2 00 0- 6 (f in di ng th atth e Co m

m is si on er co nc ed edhi s va lu at io n p os it io n a s d et erm in edinth e n ot ic e o f de fic ie nc y by argu in g fo r a l owe r fai r m ark etva lu e o n b rie f). Inge ne ral , th e IRS ’s no ti ce o f de fic ie nc y is pre su m edco rrec t, “ an d t he pe ti ti on er h as th e b ur de n o f pr ov in g i t t o b e wro ng ”, W el chv. Hel ve rin g, 2 90 U.S. 11 1, 1 15 (19 33 ); s ee al so Ru le 14 2( a); Cri sp in v. Co m m is si on er, 7 08 F.3d50 7, 51 4 (3 d C ir. 2 01 3) , aff’g T.C. Mem o. 2 01 2- 70 ; b utinth is cas e th e es ta te arg ue s-2 0-

[* 20 ] th atth e b ur de n o f pr oo f ha s s hi fte d. Ho wev er, b ot h s id es pu t o n e xp ert te st im on y as t o t he va lu e o f th e p ro pe rty at is su e, an d we a re ab le to de ci de th at va lu e o n t he pre po nd eran ce o f th e ev id en ce. We the refo re n eedno t ad dr es s the al lo cat io n o f th e b ur de n o f pr oo f with re sp ectto th e v al ua ti on is su e. II. Gen eral pri nc ip le s o f es tate tax va lu at io n Sect io n 2 00 1( a) i m

po se s a t ax on “ th e tr an sf er o f” a d eced en t’s t ax ab le
es ta te , andsec ti on 20 01 (b ) pr ov id es th atth e ta x i s i m po se d o n “ th e am ou ntof t he ta xabl e es ta te ”. The v al ue of t he gro ss est at e in cl ud es th e v al ue “ atth e ti m e o f hi s de ath o f al l [the de ced en t’s] pro pe rty, real o r pe rs on al , tan gi bl e o r in tang ib le , whe rev er s itua te d.” Sec. 2 03 1( a); Uni te d S ta te s v . Cartwrig ht , 41 1 U.S. 5 46 , 55 0- 55 1 (1 97 3) . For t hi s p ur

po se , “ va lu e” m ean s “ fai r m ark etva lu e”, wh ic h i s d efi ne d
as “ th e p ric e atwhi chth e p ro pe rty woul d c ha ng e h an ds be twee n awil li ng bu y er an d awil li ng sel le r, ne ithe r be in g u nd er an y co m pu ls io n t o b uy or to sel l an d b ot h ha vi ng reas on ab le kn owl ed ge of r el ev an t fa ct s.” 2 6 C .F.R. se c. 20 .20 31 -1 (b ), Est at e Tax Reg s. Valu at io n i s u lt im at el y

a qu es ti on of f

act . Esta te of Ne who us e v . Co m m is si on er, 9 4 T.C. 1 93 , 21 7 (1 99 0) . If th e p ro pe rty to b e v al ue d i s s to ckof a cl os el y he ldco rp or at io n, “ actua l arm ’s-le ng th sal es of s uc h s to ckinth e n orm al
co ur se of b us in es s wi th in a reas on ab le ti m e b efo re o r aft er the va lu at io n d at e are-2 1-

[* 21 ] th e b es t cr it eri a o f m ark etva lu e.” Est at e o f Andrews v. Co m m is si on er, 7 9 T.C. 93 8, 9 40 (19 82 ); s ee al so 26 C.F.R. s ec. 2 0.2 03 1- 2( a) thr ou gh (c). If i t i s n ot po ss ib le to va lu e th e st oc k b y su chsal es , “ th enth e fai r m ark etva lu e is to be de te rm in edby tak in g * * * in to co ns id erat io n * * * th e co m pa ny’ s n etwort h, pr os pe ct iv e earni ng po wer an d d iv id en d- pa y in g c ap aci ty, an d o th er re le va nt fact or s” ; an d “ th e wei gh t t o b e acc or de d s uc h * * * ev id en ti ary fact or s * * * de pe nd s upo n t he fact s o f eac h c as e.” Id . par a. (f)( 2) . “ [I]n g en eral , an as se t-b as edm etho d o f va lu at io n app li es inth e cas e o f co rp or at io ns th atare es se nt ia ll y

ho ld in g c or

po rat io ns , whi le anearn in gs -b as edm etho d app li es for
co rp or at io ns th atare g oi ng co nc ern s.” Es ta te of S m ith v . Comm is si on er, T.C. Mem o. 1 99 9- 36 8; see als o R ev . Rul . 59 -6 0, s ec. 5 (a), 1 95 9- 1 C .B. 23 7, 2 42 . The pa rti es di sa gr ee ab ou t wh ethe r th atge ne ral ity is co rrec t i n t hi s ca se . The pa rti es rel y

pri nc ip al ly on e xp erttes ti m on y to est ab li sh th e fai r m ark et va lu e o f th e d eced en t’s i nt eres t i n P HC. Co urts rou ti ne ly con si de r ex pe rt witne ss es ’ op in io ns inde ci di ng su chis su es ; h owe ve r, we are n otbo un d b y th e op in io n o f an y

ex pe rt wi tn es s an d m ay

acce ptor r ejectsu chtes ti m on y inth e ex erci se of o urso un d ju dg m en t. Hel ve rin g v . Nat’l Gro cery Co., 30 4 U.S. 2 82 , 29 5 (1 93 8) ; Es ta te of Ne who us e v . Comm is si on er, 9 4 T.C. at21 7. Al th ou gh we m ay acce ptanex pe rt’s o pi ni oninit s en ti rety , we m ay in st eadsel ectwhatpo rti on s-2 2-

[* 22 ] of t he op in io n, i f an y , to acce pt . Park er v . Comm is si on er, 8 6 T.C. 5 47 , 56 2 (1 98 6) ; Bu ffal o To ol & Die Mfg . Co. v . Comm is si on er, 7 4 T.C. 4 41 , 45 2 (1 98 0)
. Bec au se va lu at io n i nv ol ve s an ap pr ox im at io n, “ th e fi gu re atwhi chwe arri ve ne ed
no t b e d ire ct ly trace ab le to sp eci fic tes ti m on y if i t i s wi th in th e ran ge of v al ue s tha t
m ay be pro pe rly deri ve d fr om co ns id erat io n o f al l the ev id en ce.” Es ta te of He ck v. Co m m is si on er, T.C. Mem o. 2 00 2- 34
. The pa rti es di sa gr ee o ve r: (1 ) th e ap pr op ria te va lu at io n m etho d t o b e u se d-
- ei th er the cap it al iz at io n- of -d iv id en ds ap pr oa chor t he NAV app ro ach --an d (2 ) th e ap pr op ria te di sc ou nt s i f th e NAV app ro achis us ed . W e n ow ad dr es s tho se is su es . III. Ch oi ce o f va lu at io n m etho d To v al ue th e d eced en t’s i nt eres t i n P HC, th e Co m m is si on er u se d t he ne tas se t-v al ue ap pr oa chan d t he est at e u se d t he cap it al iz at io n- of -d iv id en ds ap pr oa ch
. W e b el ie ve th atth e NAV app ro ach be tt er d et erm in es PHC’s va lu e. The th eo ry

be hi ndth e in co m e cap it al iz at io n v al ua ti on m etho d i s tha t i f an
as se t p ro du ces a pr ed ic tabl e in co m e st ream , th e m ark etva lu e o f th e as se t ca n b e as cert ai ne d b y

cal cu la ti ng th e p res en t v al ue of t ha t fu tu re i nc om e st ream . PHC di d ha ve a hi st ory

of r el iabl y

pa y in g o utdi vi de nd s, an d o ve r th e p rece di ng 35 y ears it s di st rib ut io ns ha d i nc reas edby abo ut5% p er y ear. Pre di ct ab le an nu al di vi de nd pa ym en ts were PHC’s s ta te d g oa l (a ndwou ldpre su m ab ly be th e subjec ti ve-2 3-

[* 23 ] pri m ary in ve stm en t g oa l o f so m eo ne pu rch as in g amin or ity in te res t i n P HC),
so th e es ta te us edth is m etho d. Th e es ta te ’s exp ertass um edth atth at5% an nu al in crea se indi vi de ndpa ym en ts wou ldco nt inue in de fin it el y . He det erm in edth at th e m ark etrat e o f return fo r a co m pa ny with a co m

pa rab le ris k p ro fil e was 10 .27 % (ro un de d t o 1 0.2 5%) , andhe ass um edth atPHC wou ldreal iz e th atrat e o f return in de fin it el y . The es ta te ’s exp ertcal cu la te d t he cap it al iz at io n ra te of 5 .25 % by
subt ract in g t he 5% an nu al di vi de ndgro wthrat e fro m th e 1 0.2 5% m ark etrat e o f return fo r a co m

pa rab le ris k i nv es tm en t. The est at e’s ex pe rt t he n d iv id edth e de ced en t’s ex pe ct eddi vi de ndreturn fo r th e fo ll owi ng y ear ( i.e., $ 26 5,0 00 ($ 25 2,4 00 x 1 .05 )) b y

th e cap it al iz at io n ra te (i.e ., 5.2 5%) , to cal cu la te , forth os e fu tu re d iv id en ds , a pr es en t v al ue of $ 5,0 46 ,50 0. Div id en d c ap it al iz at io n i s o ne m etho d fo r va lu in g abu si ne ss ; an d t hi s m etho d m ay

be en ti rel y

ap pr op ria te wher e a co m pa ny’ s as se ts are d iff

ic ul t t o va lu e. Fo r ex am

pl e, a co m

pany tha t d oe s n otho lda po rtf ol io of p ub li cl y

tra de d
se cu rit ie s b utin st eadop erat es a bu si ne ss m ay ha ve ass et s- -i.e ., a con gl om erat io n of tan gi bl e as se ts acqui redan d d ep reci at edov er a p eri odof years an d i nt an gi bl e as se ts (cu st om er l is ts , ass em bl edworkfor ce, kno w-h ow, et c.)--tha t ar e d iff ic ul t t o va lu e. The b us in es s m ay see m to be m or e th anth e su m

of i ts pa rts . In s uc h a-2 4-

[* 24 ] cas e, th e v al ue of t he bu si ne ss m ay be be tt er d et erm in edby pro jecti ng it s in co m e stream

(an d d is co un ti ng itto pre se ntva lu e). Howev er, b y

de fin it io n, the cap it al iz at io n- of -d iv id en ds va lu at io n m etho d i s ba se d e nt ire ly on e st im at es ab ou t the futur e--the futur e o f th e g en eral eco no m y , th e fu tu re p erfo rm an ce o f PHC, an d t he futur e d iv id en d p ay ou ts by PHC--an d
ev ensm al l v ari at io ns inth os e es ti m at es canhave subs tant ia l ef fect s o n t he va lu e de te rm in ed
. The es ta te ’s val ua ti on m etho d t he refo re i gn or es th e m os t co nc ret e

1 4
an d re li ab le da taof v al ue th atare av ai labl e--i .e., th e actua l m ark etpri ces of t he publ ic ly trad edsec ur it ie s tha t co ns ti tu te d P HC’s po rtf ol io . Of cou rs e, th e n et as se t-v al ue m etho d c om es with i ts owndi ffi cu lt ie s an d u nc ert ai nt ie s (i n t hi s ca se , de te rm in in g t he am ou nt s o f th e d is co un ts di sc us se d b el ow) , bu t the NAV m etho d do es be gi n b y

st an di ng on firm

gro un d- -s to ckva lu es th aton e can si m pl y lo okup .

InSh an no n P . Prat t, Ro be rt F . Rei ll y , andRo be rt P . Sch weih s, Val ui ng a 1 4 Bu si ne ss : Th e Ana lysis an d Ap pr ai sa l 2 10 (4t h e d. 2 00 0) , Mr. Sch weih s an d h is co ll eag ue s s ta te th atth e d iv id en d c ap it al iz at io n app ro ach to va lu e is sen si ti ve to th e “ co ns tantan nu al in co m e st ream inpe rp etui ty or a co ns tantan nu al iz edrat e o f gr owt h (o r de cl in e) i n the eco no m ic in co m e v ari ab le be in g c ap it al iz edin pe rp etui ty. Obv io us ly, th is co ns tantgro wth rat e p ro jecti on is rare ly m etinth e rea l wor ld .” They ob se rv e, id . at 2 08 , th atth e Gor do n g ro wthm od el is ex tre m el y se ns it iv e to gro wth rat e as su m pt io ns an d t ha t “ [c]han ge s i n t he gro wth rat e pr ojec te d, s om et im es see m in gl y sm al l, ca n re su ltinstrik in g c hang es .” Inth e ex am pl e g iv eninth e es ta te ’s exp ert ’s bo ok , a 1% ch an ge inass um edgro wth rat e canres ul t i n m or e th anan11 % ch an ge inth e in di cat edva lu e.-2 5-

[* 25 ] Mo reo ve r, th e es ta te ’s val ua ti on m etho d a ss um es th atth e o nl y th in g a po te nt ia l i nv es to r wil l co ns id er wh enco nt em pl at in g wh ethe r to bu y

PHC s to ckis th e p res en t v al ue of t he di vi de ndstream th atth e st oc kh ol de r can expe ctto rece iv e. Howev er, i n Dec em

be r 20 05 a po te nt ia l i nv es to r wou ldha ve kn ownth at --as th e pa rti es ha ve st ip ul at ed --PHC’s p ortfo li o c on si st edpri m ari ly of se cu rit ie s wh os e va lu es co ul d h av e b eenco m pu te d wi th ou t co nt ro ve rs y to to ta l $ 52 m il li on , i.e., PHC’s n etass etva lu e (b efo re d is co un ts ) with wh ic h t he Co m m is si on er’s m etho d be gi ns . Whe re the ass et s the m se lv es are thu s ea si ly val ue d, v al ui ng th e h ol di ng co m pa ny ins te adby the in co m e ap pr oa chwou ldess en ti al ly ove rlo okth atfact , su rel y a rel ev an t an d h el pf

ul fact , whi chwe th in k a n i nv es to r was no t l ik el y to ov erl oo k b utwas i ns te adli ke ly to t ak e as hi s s tarti ng po in t. Inad di ti on , th e Co m

mis si on er cri ti ci zedth e es ta te ’s us e o f a 1 0.2 5%
ex pe ct edrat e o f return, b ecau se th e Ib bo ts on ’s stud y fro m whi chhe de riv edth at rat e u se d ape rio d (i .e., 19 26 -2 00 4) th atwas d iff eren t fr om

th e p eri od Mr. Sc hwe ih s h adus edto cal cu la te PHC’s di vi de ndgro wthrat e (i .e., 19 70 -2 00 4) , an d we b el ie ve th e cri ti ci sm is va li d. To co rrec t fo r th is di sc rep an cy , th e Co urt in de pe nd en tl y

cal cu la te d t he actua l ra te of r eturn (i .e., ass etgro wth pl us di vi de nd s pa id ) fo r PHC u si ng PHC’s hi st or ic da taan d fo un d the co m po un d a nn ua l g ro wth rat e to be no t 1 0.2 5% b utrathe r on ly 9.41 4%. We bel ie ve th atinDecem be r 20 05-2 6-

[* 26 ] a po te nt ia l i nv es to r in PHC wou ldha ve co ns id eredth e p os t-1 97 0 d at a m os t rel ev an t an d wo ul d h av e ex pe ct edth is rat e o f return, n otth e 1 0.2 5% ra te of r eturn as su m edby the est at e. Whe n we c orrectth e es tate ’s cal cu la ti on by usi ng an ex pe ct edrat e o f return o f 9.4 14 % an d k eep in g t he an nu al di vi de ndgro wth rat e co ns tantat 5 %, th e p res en t v al ue of f utur e d iv id en ds is ab ou t $ 1 m il li onhi gh er-- i.e., $ 6,0 05 ,00 0 (r ou nd ed ) --tha n a s ca lc ul at edby the est at e. Thi s co nf irms th e 1 5
se ns it iv ity

in he ren t i n u si ng th e cap it al iz at io n- of -d iv id en ds va lu at io n m etho d, whi chinou r op in io n m ak es itles s re li ab le
. Fo r su chreas on s, co urts are o ve rwh el m in gl y in cl in edto us e th e NAV
m etho d fo r ho ld in g c om

pa ni es who se ass et s ar e m ark et ab le sec ur it ie s. See , e.g., Est at e o f Lit ch fie ldv. Co m m is si on er, T.C. Mem o. 2 00 9- 21 (“ W ith re sp ectto st oc k in clo se ly hel d re al est at e h ol di ng co m pani es an d i nv es tm en t co m pa ni es su chas LRC an d LSC , th e n etass etva lu at io n m etho d i s o fte n a ccep te d a s the pre ferr ed
m etho d. Es ta te of S m ith v . Comm is si on er, T.C. Mem o. 1 99 9- 36 8; Est at e o f Fo rd v. Co m m is si on er, T.C. Mem o. 1 99 3- 58 0, af fd . 53 F.3d92 4 (8 th Cir . 19 95 ); R ev . Ru l. 5 9- 60 at s ec. 5 (b ), 19 59 -1 C.B. 2 43 ”).
W e n ot e th atth e v al ue of the de ced en t’s i nt eres t i n P HC cal cu la te d u si ng 1 5 th e n etass etva lu e m etho d ($ 6,3 54 ,51 9) , as d is cu ss edbe lo w, is rel at iv el y clo se to th e v al ue of t he de ced en t’s i nt eres t i n P HC us in g the cap it al iz at io n- of -d iv id en ds m etho d ($ 6,0 05 ,00 0) , us in g t he rat e o f return a s co rrec te d b y th e Co urt.-2 7-

[* 27 ] The est at e ci te s thr ee ca se s t o s up po rt i ts in co m e cap it al iz at io n v al ua ti on of ho ld in g c om

pa ni es --Ko hl er v . Commis si on er, T.C. Mem o. 2 00 6- 15 2; Barn es v. Co m m is si on er, T.C. Mem o. 1 99 8- 41 3; an d Es ta te of C am pb el l v . Comm is si on er, T.C. Mem o. 1 99 1- 61 5- -b utth os e cas es are cl earl y di st in gu is habl e fro m

th e in st an t cas e. Ineach of t ho se cas es , th e co m pa ny to b e v al ue d h el d s to ckina cl os el y he ld op erat in g c om

pa ny (no t p ub li cl y

tra de d s to ck ) orwas i ts el f anop erat in g c om pa ny. As a re su lt , th e und erl y in g a ss et s o f th os e co m pani es were d iff

ic ul t t o v al ue . PHC’s p rimary

ass et s, o n t he ot he r ha nd , are m ark et ab le sec ur it ie s, wh ic h ha ve asc ert ai nabl e m ark etva lu es . Mor eo ve r, th os e m ark etva lu es in he ren tl y refl ectth e m ark et ’s jud gm en t as to th e p ro jecte d i nc om e stream s o f eac h s to ckan d th eref or e ref le ctth e fu ture i nc om e st ream of P HC. Forth atreas on , a pr op erl y di sc ou nt edne t as se t v al ua ti on of P HC in di rect ly tak es in to acco un t the ex pe ct ed di vi de ndstream

th atun de rli es th e es ta te ’s val ua ti on m etho d. We th eref or e fo ll ow th is Co urt’s co ns is te ntpre ced en t o f us in g n etass etva lu at io ns forco m pa ni es with ho ld in gs li ke PHC. IV. The va lu e o f th e d eced en t’s i nt eres t i n P HC The pa rti es ag ree o n the $5 2 m il li on ne t as se t v al ue of P HC in Decem be r 20 05 ; an d a ltho ug h t he est at e d oe s n otag ree tha t the NAV m etho d i s th e m or e ap pr op ria te m etho d, b ot h p art ie s ag ree i n p rin ci pl e th at , if the NAV-2 8-

[* 28 ] m etho d i s u se d, the re m us t b e d is co un ts fro m

th at$5 2 m il li on ne t as se t va lu e to acco un t fo r (a) t he BICG t ax forwhi chPHC wou ldev en tu al ly be li ab le , (b ) th e la ckof m ark et ab il ity of P HC’s no n- publ ic ly trad edsh ares , and(c) the lac k of co nt ro l i nh eren t i n t he de ced en t’s 2 3.4 4% i nt eres t i n P HC. A. Dis co un t fo r BIC G li ab il ity The pa rti es ag ree t ha t PHC ’s un real iz edap pr eci at io n o n i ts ass et s was $4 5,5 76 ,67 7, wh ic h i f th e as se ts ha d b eenso ldon th e d at e o f de ath wo ul d h av e gi ve n ri se to a cap it al ga in tax li ab il ity of $ 18 ,11 3,0 83 , ass um in g a39 .74 %
co m bi ne d F ed eral an d S ta te tax rat e. The p art ie s fu rth er ag ree t ha t the va lu e o f PHC s ho ul d b e d is co un te d t o s om e ex te ntto acco un t fo r th e BIC G tax att rib ut ab le to th atun real iz edap pr eci at io n. Ho wev er, the qu an tu m of t ha t d is co un t i s i n di sp ut e. 1. Not ic e o f de fic ie nc y : a ze ro di sc ou nt The IRS’s n ot ic e o f de fic ie nc y see m s t o m ak e n o d is co un t fo r th e BIC G ta x- -a p os it io n t ha t the Co m m is si on er d oe s n otde fen d, an d fo r go odreas on : An in ve st orco ul d h av e eas il y rep li cat edPHC in Decem be r 20 05 by con tri bu ti ng $5 2 m il li on to hi s o wn n ew ho ld in g c om pa ny andth enha vi ng itpu rch as e th e v ery sa m e types of s ecu rit ie s tha t wer e in PHC’s po rtf ol io . No in ve st orin te res te d i n own in g s uc h aco m

pany woul d h av e b eenin di ffer en t t o t he factth atacqui rin g-2 9-

[* 29 ] PHC m ean t ac qu iri ng anev en tu al li ab il ity of $ 18 .1 m il li on . An in ve st or wou ldth eref

or e h av e in si st edon pa y in g l es s tha n $ 52 m il li onto acqui re PHC; if PHC h adoff

eredno di sc ou nt , an i nv es to r wou ldsi m pl y buy th e st oc ks an d b e be tt er o ff. Tha t i s, the m ark etwou ldha ve requi reda di sc ou nt , andan y fai r m ark et va lu at io n m

us t re fle cta di sc ou nt . 2. The est at e’s expe rt: 10 0% o f th e BIC G tax On the ot he r en d o f th e sp ectru m , th e es ta te co nt en ds th atPHC’s va lu e sh ou ldbe di sc ou nt edby 100 % of the $1 8,1 13 ,08 3 B ICG l iabi li ty. To s up po rt t hi s co nt en ti on th e es ta te rel ie s o n o pi ni on s b y th e Co urts of Ap pe al s fo r th e Fi fth an d Elev en thCir cu it s th atha ve he ldth atina ne t as se t v al ua ti on th e v al ue sh ou ldbe 1 6 reduc eddo ll ar fo r do ll ar b y th e am ou ntof aBICG t ax li ab il ity . The Co urt o f App eal s fo r th e Fi fth Cir cu itreas on edth at“ th e st art in g p oi ntforth e as se t-b as ed ap pr oa chinth is cas e is th e as su m pt io n t ha t the ass et s ar e so ld , th e st art in g p oi nt fo r th e earni ng s- ba se d app ro ach is th atth e Co rp or at io n’s as se ts are re ta in ed --ar e no t s ol d” , so co ns is te ntwith t ha t as se t-b as edst art in g p oi nt , th e b ui lt -in ga in wou ld
See Es ta te of J el ke v. Co m m is si on er, 5 07 F.3d13 17 ; Es ta te of Du nn v. 1 6 Co m m is si on er, 3 01 F.3dat 3 53 ; Es ta te of J am es on v. Co m m is si on er, 2 67 F.3d36 6 (5 th Cir . 20 01 ) (fi nd in g t ha t the Tax C ou rt i m pr op erl y de te rm in edon ly a part ia l di sc ou ntforcap it al ga in s t ax li ab il ity in he ren t i n abe qu es t o f st oc k b ecau se th e Tax Co urt fa il edto us e a tru ly hy po th et ic al wil li ng bu y er), v acat in g a nd rem an di ng T.C. Mem o. 1 99 9- 43
.-3 0-

[* 30 ] gi ve ris e to a curren t t ax li ab il ity reduc in g v al ue . Esta te of Dunn v. Co m m is si on er, 3 01 F.3d33 9, 3 53 (5t h C ir. 2 00 2) , rev ’g an d re m an di ng T.C. Mem o. 2 00 0- 12
. Howev er, o th er Co urts of Ap pe al s an d t hi s C ou rt ha ve no t fo ll owe d thi s 1 7 1 8 10 0% d is co un t ap pr oa ch , andwe co ns id er i t p la in ly wro ng ina cas e li ke th e pr es en t o ne . The rel ev an t i nqui ry is , of c ou rs e, wha t p ric e a wil li ng bu y er an d
se ll er wo ul d a gr ee t o; an d i t i s cl ear t ha t the y wou ldno t ag ree t o a10 0% d is co un t. To d em on st rat e th is fact , PHC (wit h a ss et s wo rth $5 2 m il li on bu t b ur de ne d b y an $1 8.1 m il li on BICG t ax ) canbe co m pa redto a hypo th et ic al ho ld in g c om pa ny (“ HHC”) tha t i s i de nt ic al to PHC ex cep t tha t HHC i s b ur de ne d n otby any BICG ta x b utby an $ 18 .1 m il li on no te pa y ab le th atis du e to m orro w. No in ve st orwou ld be in di ffer en t t o t hi s d is ti nc ti on an d t reatPHC an d HHC a s i f th ey were equi va le nt . The i nv es to r kn ows th at , if h e b uys HHC, th ento m orro w he m us t p ay
Est at e o f Eis enbe rg v. Co m mis si on er, 1 55 F.3d50 , 59 n.1 6 (2 d C ir. 1 99 8) 1 7 (“ Whe re the re i s a r el at iv el y si zab le nu m

be r of po te nt ia l b uyers wh o c anav oi d o r de fer the tax , th e fai r m ark etva lu e o f th e sh ares m ig htwell ap pr oa chth e p re-t ax m ark etva lu e o f th e rea l es tate ”), v acat in g a ndrem an di ng T.C. Mem o. 1 99 7- 48 3; Est at e o f W el chv. Co m

m is si on er, 2 08 F.3d21 3, 2 00 0 WL 26 33 09 , at * 6 (6 th Cir
. 20 00 ) (ap pr ov in g “ th e Eis enbe rg m etho d o f va lu at io n” ), rev ’g an d re m an di ng witho utpubl is he d o pi ni on T.C. Mem o. 1 99 8- 16 7. See e .g., Est at e o f Dav is v. Co m m is si on er, 1 10 T.C. 53 0 (1 99 8) ; Es ta te of 1 8 Je ns env. Co m

m is si on er, T.C. Mem o. 2 01 0- 18 2.-3 1-

[* 31 ] off th e $ 18 .1 m il li on no te an d h av e a p ortfo li o n otof $ 52 m il li on wort h o f st oc k b uton ly $34 m il li on ; an d i n t he futur e--b eg in ni ng to m orro w--h e wil l re cei ve th e cap it al ga in s an d t he di vi de nd s g en erat edby tha t s m al le r $3 4 m il li on po rtf ol io
. On the ot he r ha nd , th e in ve st or als o kno ws tha t i f in st eadhe bu y s PHC , th enhe
m ay de fer the pa ym en t o f th e $ 18 .1 m il li on BICG t ax as l on g a s h e ret ai ns th e ap pr eci at edst oc k; inth e fu tu re-- un ti l h e se ll s o ff the ap pr eci at edst oc k o ve r ti m e an d i nc ur s the tax pi ecemeal o ve r th atpe rio d- -h e wil l re cei ve th e cap it al ga in s an d di vi de nd s g en erat edby the en ti re $ 52 m il li on po rtf ol io . PHC is si m

pl y wort h
m or e th anHHC, bec au se a pr os pe ct iv e BIC G tax li ab il ity is no t the same as a d eb t th atreal ly doe s i m

m ed ia te ly redu ce the va lu e o f a co m pa ny do ll ar fo r do ll ar. A 10 0% d is co un t, o n t he ot he r ha nd , il lo gi cal ly treat s a p ot en ti al li ab il ity th atis
su sc ep ti bl e o f in de fin it e p os tp on em en t as if i t wer e th e sa m e as anaccrue d l iabi li ty du e imm ed ia te ly. W e d o n otad op t thi s ap pr oa ch
. 1 9
W e d o n otface he re a ci rcu m st an ce i n wh ic h t he fact s ab ou t the ass et s an d 1 9 th e m ark etwou ldm ak e itin ev it ab le th atan y in fo rm edbu y er wo ul d e xp ectto li qu id at e th e co m

pa ny im m ed ia te ly andth us im

m ed iate ly bear the tax li ab il ity for th e b ui lt -in ga in . Evenif, i n s uc h ahypo th et ic al cas e, th e ap pr op ria te di sc ou nt m ig htbe arg ue d t o b e as m uc h a s 1 00 % of t he BICG t ax , th e fac ts inth is cas e sh ow tha t a r at io na l b uyer m ig htin te nd(as PHC d idin te nd ) to co nt in ue to ho ldat le as t s om e th e p ortfo li o fo r a p eri odof years , inord er t o b en efi t fr om th e d iv ide nd s g en erat edby andth e fu rth er ap pr eci at io n e xp eri en cedby the ap pr eci at ed st oc k. Ina cas e li ke th is on e, th eref or e, a d ol lar-fo r-d ol lar di sc ou ntis un warrant ed
.-3 2-

[* 32 ] It s tand s t o re as on th ata po te nt ia l b uyer wou ldbe wil li ng to pa y m or e fo r a co m pa ny with a co nt in ge ntli ab il ity of $ 18 .1 m il li on th anhe wou ldpay fora co m pa ny oth erwi se equi va le ntbu t tha t h adanun co nd it io na l l iabi li ty of $1 8.1 m il li on pa y ab le no w. Like wis e, th e se ll er o f th e co m pa ny with th e co nt in ge ntfutur e li ab il ity wou ldde m an d ahi gh er p ric e th anth e se ll er o f a
co m pa ny with th e unc on di ti on al curren t l iabi li ty. As a re su lt , des pi te co nt rary ho ld in gs by som e co urts , we fin d t ha t a 1 00 % di sc ou ntwou ldbe un reas on ab le , be cau se itwou ldno t re fle ctth e eco no m ic real it ie s o f PHC’s s itua ti on .

3. The Co m

m is si on er’s ex pe rt: 43 % of t he BICG t ax The Co m m is si on er’s expe rt ( Mr. Th om so n) pro po se s a 1 5% d is co un t fo r BICG t ax , whi chat t he en ti ty lev el equa te s t o $ 7,8 17 ,10 6 (i .e., 15 % of t he ne t as se t v al ue of $ 52 ,11 4,0 41 an d 4 3% o f th e BIC G tax li ab il ity of $ 18 ,11 3,0 83 ). 2 0

W e n ot e th atth e Co m

m is si on er’s ex pe rt i nc lu de d t he BICG d is co un t as 2 0 pa rt o f th e la ckof m ark et ab il ity di sc ou ntth atwas app li edat t he in di vi du al lev el
. W e d o n otfin d t ha t ap pr oa chesp eci al ly hel pf ul inth is cas e. As the BICG t ax li ab il ity is a li ab il ity

of t he en ti ty, whi chaffe ct s i ts ne t as se t v al ue , we fin d i t ap pr op ria te to de te rm in e th e BIC G tax li ab il ity at t he en ti ty lev el . Whe n subs eque nt ly app lying th e o th er d is co un ts , we app ly the m ser ia ti m (as Mr. Th om

ps ondi d a ndas we ap pr ov edinEst at e o f Mag ni n v . Comm is si on er, T.C. Mem o. 2 00 1- 31 , 81 T.C.M. (CCH) 1 12 6, 1 14 1 & n.3 5 (2 00 1) ), rathe r th an si m pl y ad di ng th e d is co un t p erce nt ag es to ge th er as a co m bi ne d d is co un t (a s Mr. Sc hwe ih s d id ).-3 3-

[* 33 ] Fo r rea so ns we no w exp la in , we fin d h is m etho d to be pro bl em at ic , bu t we 2 1 fin d h is $7 .8 m il li on bo tt om li ne --wh ic h we t ak e as a co nc es si on by the Co m m is si on er-- to be reas on ab le , forreas on s d iff eren t fr om

th os e h e adva nc es . To re ach th is $7 .8 m il li on BICG t ax di sc ou nt , Mr. Tho m so n a na lyzed the
co rrel at io n b etweenun real iz edap pr eci at io n (i .e., bu il t-i n g ai n) an d NAV di sc ou nt s fo r cl os ed -en d fu nd s as of De cem be r 31 , 20 04 . He com

pi le d d at a fro m cl os ed -en d fu nd s wi th un real iz edap pr eci at io n a cco un ti ng for11 % to 46 % of t he to ta l n etass etva lu e, an d h e was un ab le to fin d a ny sta ti st ic al co rrel at io n b etween th e BIC G di sc ountth atco ul d b e o bs erv edon sal es an d t he un real iz edap pr eci at io n of th e se ve n c lo se d- en d fu nd s h e ex am in ed . He th eref or e co nc lu de d tha t i n the
cas e o f co m

pa ni es with u nr eal iz edap pr eci at io n t ha t co ns is ts of a s m uc h a s 4 6% o f th e co m pany’ s v al ue (whi chhe rou nd s up t o 5 0%) , buy ers are i nd iff eren t t o t he BICG t ax li ab il it ie s o n t ha t ap pr eci at io n wh enpu rch as in g an i nt eres t i n a cl os ed -en d fu nd . By

Mr. Tho m so n’s re ck on in g, the n, a p ot en ti al bu y er wo ul d b e in di ffer en t t o P HC’s BICG t ax to th e ex te ntitis att rib ut ab le to th e p orti on of i ts
The Co m mis si on er ch arac te riz es Mr. Tho m so n’s m etho d a s “ th e m etho d 2 1 th atwas a ccep te d i n Es ta te of Da vi s” v. Co m m is si on er, 1 10 T.C. 53 0 (1 99 8)
. Mr. Th om so n was th e ex pe rt i n Es ta te of Da vi s; he di d u se th ere aform ul a si m il ar to whathe us es he re; an d i n Es ta te of Da vi s the Co urt d idul ti m at el y ad op t a va lu at io n c lo se to th atoff eredby Mr. Tho m so n. Ho wev er, we s ee n ot hi ng inth e Est at e o f Dav is Opi ni on to en do rs e th e p art ic ul ars of M r. Tho m so n’s m etho d.-3 4-

[* 34 ] un real iz edap pr eci at io n t ha t i s equa l t o 5 0% o f it s $ 52 ,11 4,0 41 NAV (i.e., ta x a ttrib ut ab le to $2 6,0 57 ,02 1) . PHC’s un real iz edap pr eci at io n a cco un ts for $4 5,5 76 ,67 7 o f it s v al ue (i.e ., app ro xi m at el y 87 .5% o f th e to ta l NAV of $5 2,1 14 ,04 1) , so th e rem ai ni ng ap pr eci at io n (i .e., th e am ou ntof u nr eal iz ed ap pr eci at io n abo ve 50 % of NAV, or $4 5,5 76 ,67 7 l es s $ 26 ,05 7,0 21 ) is $1 9,5 19 ,65 6 (i .e., app ro xi m at el y 37 .5% o f NAV). Mr. Th om so n c on cl ud edth at“ a d ol lar-fo r-d ol lar di sc ou ntov er 5 0% o f th e ta x e xp os ur e” was ap pr op ria te . This see m s t o m eanth atMr. Tho m so n a ll owe d a do ll ar-f or -d ol lar di sc ou ntfor

th e ta x a ttrib ut ab le to th e ap pr eci at io n o ve r 50 % of PHC’s NAV (i.e., a d ol lar-fo r-d ol lar di sc ou ntforth e ta x attrib ut ab le to $1 9,5 19 ,65 6 i n app reci at io n, i .e., a di sc ou ntof $ 7,7 57 ,11 1 wh enus in g a39 .74 %
co m bi ne d F ed eral an d S ta te cap it al ga in s t ax rat e). App lying aneffe ct iv e ta x ra te of 39 .74 % to th is ga in equa l t o 3 7.5 % of P HC’s NAV (i.e., th e p orti on of P HC’s
un real iz edap pr eci at io n fo r whi chth e ta x l iabi li ty w ou ldbe affo rd eda do ll ar-f or do ll ar d is co un t), M r. Tho m so n fi gu redth atth e al lo wab le di sc ou ntforBICG sh ou ldbe 14 .9% (i .e., 39 .74 % ti m es 37 .5%), ro un de d up t o 1 5%. 2 2

Si nc e Mr. Th om so n ro un de d t hi s d is co un t t o 1 5%, we treata BICG 2 2 di sc ou ntequa l t o 1 5% o f PHC’s NAV--o r $7 .8 m il li on --as th e Co m mis si on er’s co nc es si on .-3 5-

[* 35 ] Thi s re as on in g i s n otsupp orte d b y th e ev id en ce. We are un co nv in cedth ata bu y er wo ul d b e who ll y

in di ffer en t t o t he tax im

pl ic at io ns of b ui lt -in ga inth at co ns ti tu te s up t o h al f of

a co m pa ny’ s as se ts . Furt he rm or e, Mr. Th om so n p oi nt s t o no da tato sh ow tha t, o nc e a fu nd ’s un real iz edap pr eci at io n e xc eed s 5 0% o f it s NAV, the re wo ul d the n b eg in to be a co rrel at io n b etweenNAV dis co un t an d t he
un real iz edap pr eci at io n abo ve 50 %; n oris th ere e vi de nc e th atth e d is co un t wo ul d si m pl y be do ll ar fo r do ll ar fo r th e p orti on inex ces s o f 50 % an d n otso m ethi ng m or e--e .g., anin crea se inela st ic ity (pr ic e se ns it iv ity) fo r BIC G li ab il ity on ce i t reac he s a c ert ai n p oi nt . He pre se nt edno dataat a ll co nc ern in g fu nd s wi th bu il t-i n ga in co ns ti tu ti ng m or e th an50 % of NAV. As a re su lt , we can no t en do rs e Mr. Th om so n’s ap pr oa chto cal cu la ti ng th e BIC G di sc ou nt , bu t we v ie w th e res ul ti ng di sc ou ntam ou nt --$ 7,8 17 ,10 6- -to be a co nc es si on onth e Co m m is si on er’s pa rt. 4. Ourco nc lu si on : p res en t v al ue of t he BICG t ax li ab il ity If (as we ho ld ) th e BIC G tax li ab il ity can no t b e d is reg ard edinva lu in g P HC, bu t i f (as we als o h ol d) PHC’s va lu e can no t b e rea so nabl y di sc ou nt edby that li ab il ity do ll ar fo r do ll ar, the n t he m os t re as on ab le di sc ou ntis th e p res en t v al ue of th e co stof p ay in g o ff tha t l iabi li ty in the futur e. See Es ta te of J en se n v . Co m m is si on er, T.C. Mem o. 2 01 0- 18 2; Est at e o f Lit ch fie ldv. Co m m is si on er, T.C.-3 6-

[* 36 ] Mem o. 2 00 9- 21 . The Co m m is si on er’s expe rt d idno t u se th is pre se ntva lu e ap pr oa ch , bec au se he ob se rv edth atat P HC’s hi st or ic rat e fo r tu rn in g o ve r it s se cu rit ie s, i t wo ul d t ak e 7 0 years b efo re al l the st oc k h adbe enso ldan d a ll th e bu il t-i n g ai n h adbe entax ed . If th e $ 18 .1 m il li on of B ICG t ax were d is co un te d
ov er tha t p eri od , onth e as su m pt io n t ha t PHC ’s st oc ks wou ldbe gra du al ly sol d a nd it s B ICG t ax wou ldbe gra du al ly inc urredov er 7 0 years ( on anav erag e o f $2 58 ,75 8 p er y ear) , th enth e p res en t v al ue of t he $1 8.1 m il li on li ab il ity wou ldbe
on ly $3,6 64 ,11 9 (a ss um in g a7% d is co un t ra te ). Howev er, thi s 7 0- y ear as su m pt io n wo ul d m is ta ke nl y

all ow PHC ’s un ique , subjec ti ve in ve st m en t g oa ls to di ct at e th e v al ue of t he co m pa ny, whe reas whatwe se ek is a fai r m ark etva lu e--t he pr ic e atwhi chPHC wou ldch an ge hand s b etweena wil li ng bu y er an d awil li ng se ll er, n otth e p ric e th ata parti cu lar se ll er m ig htde m an d o r th ata pa rti cu lar bu y er m ig htbe wil li ng to pa y , andth eref or e n ota pr ic e th atass um es subs eque nt
m an ag em en t o f th e co m

pa ny by a sp eci fic own er. As th e es ta te rig ht ly 2 3 Adm it te dl y , whatwe ul ti m at el y va lu e h ere i s n otth e en ti rety of P HC bu t 2 3 rathe r a m in or ity

23 .44 % in te res t i n i t; an d i t ca n b e o bs erv edth atth e acqui rer o f a m ere m in or ity

in te res t i s b ou ndto th e in ve st m en t d eci si on s o f th e m ajor ity , andhe m ig htth eref

or e supp os e th atPHC’s ph il os op hy andhi st ory po rte nd eda 70 -y ear tu rn ov er p eri od(an d the refo re a l on g d eferral of t he BICG t ax , y ie ld in g ave ry sm al l d is co un t). Ho wev er, thi s o bs erv at io n abo utth e m in or ity sh areh ol de r’s be in g bo un d t o t he m ajor ity ’s in ve st m en t d eci si on s p ro pe rly pert ai ns to th e qua ntum of th e d is co un t tha t m

us t b e m ad e o n a cco un t o f th e la ckof c on tro l tha t a m in or ity (co nt in ue d...)-3 7-

[* 37 ] ackno wled ge d, “ The wil li ng bu y er an d t he wil li ng sel le r are hypo th et ic al , no t ac tu al pe rs on s, an d e ach is a rat io na l ec on om ic act or ; tha t i s, ea chsee ks to
m ax im iz e h is adva nt ag e in th e co nt ex t o f th e m ark etth atex is ts at t he va lu at io n da te .” The ad vi ce tha t PHC rece iv edto di ve rs ify its po rtf ol io (i.e ., to sel l s to ck 2 4
m or e qui ck ly than i ts 70 -y ear t ren d wo ul d c al l fo r) i nd ic at es th ata rat io na l ac to r wou ldex pe cta tu rn ov er p eri odsh orte r th an70 y ears . PHC’s dec is io n n otto fo ll ow tha t ad vi ce was no t i rrat io na l, b utitwas p art ic ul ar t o P HC’s subjec ti ve go al s. Ev enass um in g tha t the PHC m an ag em en t wo ul d i nd efi ni te ly foll ow i ts tra di ti on al ph il os op hy andwou ldsel l s to ckon ly at th e 7 0- y ear p ace, andass um in g th atPHC s ha reh ol de rs wou ldrefu se to sel l atpri ces th atpre su m eda sh orte r tu rn ov er, tha t re fu sa l wo ul d n otaffe ctth e fai r m ark etva lu e o f PHC; itwou ld

(...co nt in ue d) 2 3 own er wi ll ex pe rie nc e (d is cu ss edbe lo w). The BI CG ta x fo r whi chwe no w de te rm in e a d is co un t i s, o n the ot he r hand , an e nt ity -le ve l at tri bu te of P HC as a who le , andno t o f a p art ic ul ar i nt eres t i n P HC. A pu rch as er o f PHC s to ck m ig ht la te r owe cap it al ga in s t ax if h e se ll s tha t s to ckat aga in ; b uthe wil l n ev er b e li ab le fortax onPHC’s ga in s fr om th e sa le of i ts ho ld in gs . The Co m mis si on er s im il arl y

ex pl ai ne d: “ Fo r th is pu rp os e, fai r m ark et 2 4 va lu e is th e p ric e th ata hypo th et ic al wil li ng bu y er wo ul d p ay a hypo th et ic al wil li ng sel le r * * *. The pa rti cu lar ch arac te ris ti cs of t he se hypo th et ic al pe rs on s are n otne ces sa ril y

th e sa m e as th os e o f an y sp eci fic in di vi du al or e nt ity , andare no t n eces sa ril y

th e sa m e as th os e o f th e actua l b uyer or t he actua l s el le r.”-3 8-

[* 38 ] in st eadin di cat e th atPHC’s pa rti cu lar m an ag ers an d o wne rs were wi ll in g t o fo rfei t o r fo rg o s om e o f PHC’s fai r m ark etva lu e in ord er t o p ur su e o th er ai m s. The est at e p utonno ev id en ce as to th e le ng th of t he pe rio d tha t a t y pi cal in ve st orwou ldco ns id er l ik el y or o pt im al fortu rn in g o ve r PHC’s s to ck(ap artfro m th e g en eral factth atPHC’s advi so rs rep eat ed ly sug ge st edth atPHC s el l s to ckin
or de r to di ve rs ify) bu t as se rte d o nl y PHC’s parti cu lar hi st or ic rat e (y ie ld in g a 70 -y ear turno ve r pe rio d a nd , to th e es ta te ’s det riment, arel at iv el y sm al l $3 .6 m il li on BICG t ax li ab il ity di sc ou nt ). Mr. Tho m so n’s t es ti m on y on th is
sc or e--i .e., th at , no twi th st an di ng PHC’s hi st or ic tu rn ov er ra te , a po te nt ia l i nv es to r wou ldex pe ctth ata po rtf ol io li ke PHC’s wou ldturnov er wi th in a pe rio d o f 20 to 30 y ears --i s n otreb ut te d, an d we f in d i t re as on ab le . A pres en t-v al ue ap pr oa chth at us es eit he r a 2 0- y ear o r a 3 0- y ear h ol di ng pe rio d a ndus es th e d iff eren t d is co un t rat es em pl oyed i n v ari ou s co nt ex ts inth is cas e y ie ld s the fol lo win g ra ng e o f pr es en t v al ue s fo r th e $ 18 .1 m il li on BICG:-3 9-

[* 39 ] Dis co un t ra te 20 y ears 30 y ears 10 .27 % (as cal cu la te d b y

P us in g Ib bo ts on ’s dat a) $7 ,57 0,3 58 $5 ,56 5,9 37 10 .25 % (as us edby P in the cap it al iz at io n o f di vi de ndm od el ) 7,5 80 ,58 4 5,5 75 ,08 6 9.4 14 % (as cal cu late d b y

th e Co urt u si ng PHC’s hi st or ic da ta ) 8,0 29 ,07 0 5,9 82 ,09 7 7% (g en eral ly accep te d ra te of return) 9,5 94 ,51 3 7,4 92 ,20 0 Si nc e th e Co m

m is si on er’s $ 7.8 m il li on co nc es si on fal ls co m fo rtabl y withi n t hi s ran ge of $ 5.5 to 9.6 m il li on , we us e th atfig ur e. As a re su lt , onth e b as is of t he se fin di ng s an d t he reco rdbe fo re u s, we fi nda $7 ,81 7,1 06 BICG d is co un t t o b e reas on ab le inth is cas e. B. Dis co un t fo r la ckof c on tro l A m in or ity

di sc ountis a di sc ou ntth ata bu y er wo ul d d em an d fo r th e la ckof
co nt ro l the bu y er wi ll ha ve ov er h ow h is in ve st m en t wi ll be m an ag ed(e.g .,-4 0-

[* 40 ] di sp os it io n o f as se ts , pa ym en t o f di st rib ut io ns , or app oi nt m en t o f 2 5
m an ag em en t). Th e p art ie s ag ree t ha t a d is co un t fo r la ckof c on tro l i s p ro pe r if a ne t as se t v al ua ti on is us edinth is cas e. Howev er, the m eas ur e o f th atdi sc ou nt rem ai ns indi sp ut e. The Co m m is si on er’s expe rt u se d ada tasetco ns is ti ng of t he ne t as se t v al ue s an d trad in g p ric es of 5 9 c lo se d- en d fu nd s fo r th e weekof De cem be r 9, 2 00 5. He th enan al yzedth e p erce nt ag e d iff eren ce b etweenth e n etass etva lu e an d t rad in g pr ic e (i f ne ga ti ve , a di sc ou nt ; i f po si ti ve , a pr em iu m). Over al l, thi s m etho do lo gy is
so un d andap pe ars to be a reas on ab le way to cal cu la te anap pr op ria te di sc ou nt as so ci at edwith l ackof c on tro l (t ho ug h we f in d aco rrec tabl e fl aw in th e d at a se t it se lf)
. The Co m m is si on er’s expe rt f

ou ndth e m ean(i.e ., th e av erag e) o f th e pr em iu m s an d d is co un ts of a ll 59 da tapo in ts to be -6.7 %. Howev er, h e d idno t us e th is nu m

be r as th e d is co un t. Rat he r, he ob se rv edth atth e d eced en t an d o ne A po te nt ia l p ur ch as er o f a m in or ity in te res t i n P HC wou ldob se rv e certa in 2 5 di sa dv an ta ge s tha t m ig htres ul t fr om lac k o f co nt ro l, s uc h a s an in ab il ity to ov erco m e PHC’s h is to ric de vo ti on to m ax im iz in g d iv id en ds when th atap pr oa ch m ig htcau se itto m is s o th er o pp ortu ni ti es th atwou ldpro du ce n otst eady di vi de nd s bu t capi ta l g ro wth . Like wis e, a m in or ity sh areh ol de r inPHC wou ldbe un ab le to co m pe l the co m

pany to fo ll ow p ro fes si on al advi ce an d d iv ers ify op ti m al ly (tho ug h th is ap pr oa chha s the co rres po nd in g a dv an ta ge of d eferrin g t he BICG t ax on PHC’s ap pr eci at edho ld in gs ).-4 1-

[* 41 ] ot he r own er ea chown edab ou t 2 3% o f PHC, an d t ha t the ne xtlar ge st ho ld in g was on ly abo ut12 %. His e xp ertrep ort the refo re co nc lu de d t ha t, ev en th ou gh th e d eced en t d idno t co nt ro l the co m pa ny, the de ced en t’s 2 3.4 4% i nt eres t was a larg e an d i nf

lu en ti al bl oc k o f PHC’s s to ck , so th atit s l ackof c on tro l was
so m ewh atm it ig at ed , andhe reduc edth e d is co un t t o -6 .0% b ecau se of t he “ lo w di sp ers io n o f th e rem ai ni ng own ers hi p i nt eres t [i n P HC] andeas e o f
m an ag em en t”
. He di d n otex pl ai n h ow h e ch os e -0 .7% as th e am ou ntof t he 2 6 ap pr op ria te reduc ti on , anditap pe ars to be si m pl y a vi sc eral reduc ti on , for

whi ch we do no t s ee the jus ti fic at io n. The est at e’s expe rt u se d t he same dat a b utsi m pl y sel ect edth e m ed ian (i .e., th e m id dl e v al ue ) of

th e d at a se t, -8 .0%, as th e ap pr op ria te di sc ou ntbe cau se th e Co m m is si on er’s ex pe rt “ in co rrec tl y sel ect eda nu m

be r ba se d upo n m is in te rp ret at io n o f th e Fac to rs id en ti fie d i n [M r. Tho m so n’s] * * * re po rt” , for whi chhe cit edas asupp os edex am pl e th at“ th e h ol de r of

th is in te res t ca nn otbe a The ph ras e “ eas e o f m an ag em en t” inhi s re po rt m ay be sh orth an d fo r 2 6 Mr. Th om

ps on ’s reck on in g (a s ex pl ai ne d i n h is tes ti m on y ) th at , bec au se PHC en ga ge d Wil m in gt on Trus t as it s i nv es tm en t ad vi so r, “ we ha ve a pr of es si on al m an ag em en t h ere [ atPHC] too , so it ’s no t as if we ju stha ve a fam il y do in g ev erythi ng by the m se lv es ”. Howev er, i n p ur su itof i ts di st in ct iv e (n otto say ecce nt ric ) in ve st m en t p hi lo so ph y , PHC di sr eg ard edW il m in gt on Trus t’s pr of es si on al advi ce t o fu rth er d iv ers ify. It th eref or e ap pe ars th atlac k o f co nt ro l o f PHC m ig htin de edha ve ha d v is ib le , con ti nu in g e ffec ts th atmig htco nc ernan in ve st or(an d m ig htrequi re a g reat er d is co un t).-4 2-

[* 42 ] Dire ct or .” Howev er, thi s ex am pl e ap pa ren tl y

refl ect s the est at e’s ex pe rt’s
erro ne ou s as su m

pt io n- -co rrec te d b y

th e ti m e o f tr ia l-- th ata PHC d ire ct orm us t b e a m em be r of th e Pea rs onfam il y . Suc h ares tri ct io n m ig htin de edag gr av at e la ckof
co nt ro l (a ndm ig htin crea se th e ap pr op ria te di sc ou nt ), bu t i t d idno t ex is t h ere. An ex am in at io n o f th e d at a se t s ho ws tha t am on g t he 59 fun ds th ere a re th ree o ut li ers th atsk ew th e m eanan d wh os e rel ev an ce o r rel iabi li ty Mr. Tho m so n di d n otsh ow. Removi ng th es e o ut li ers --i .e., th e h ig he sttwo va lu es an d the lo wes t va lu e --y ie ld s a m eanm in or ity di sc ou ntof - 7.7 5%, wh ic h i s co m fo rtabl y clo se to 2 7 th e es ta te ’s 8.0 % m ed ian. As a res ul t, we co nc lu de th ata di sc ou ntforlac k o f
co nt ro l o f 7.7 5% i s re as on ab le inth is cas e. C. Dis co un t fo r la ckof m ark et ab il ity A pro sp ect iv e in ve st oris li ke ly to p ay m or e fo r anass etth atwil l b e eas y to se ll an d l es s fo r anass etth atm ay be di ffi cu ltto sel l. Inth is cas e, PHC o wns eas y to -s el l p ub li cl y

tra de d s to ck s; bu t we v al ue anin te res t i n P HC it se lf, wh ic h i s a
The hi gh es t two v al ue s re fle ctpre m iu m s o f 28 .3% an d 3 8.2 %, with th e 2 7 ne xthi gh es t p rem iu m

be in g o nl y

10 .9%. The se two rem ark ab le pre m iu m s ar e un ex pl ai ne d i n o urreco rd , andwe can no t t el l h ow the y rel at e to th e rem ai nd er o f th e d at a se t n orwhat , if an yth in g, the y co ul d s ug ge stab ou t the ap pr op ria te m in or ity di sc ou ntfora co m

pa ny lik e PHC. We the refo re d is reg ardth em as ou tl ie rs . At th e o th er en d o f th e sp ectru m , th e lo wes t v al ue refl ect s a d is co un t o f 25 .9%. We dis reg arditas a n o ut li er, s in ce the ne xthi gh es t d is co un ts are 1 7.1 %, 17 .0%, 1 6.7 %, 16 .5%, 1 6.4 %, and15 .3%.-4 3-

[* 43 ] fam il y -o wne d, n on -p ub li cl y tra de d c om

pa ny the st oc k o f whi chha s n o re ady m ark et . The p art ie s ag ree t ha t a m ark et ab il ity di sc ount --i .e., a di sc ount at tri bu tabl e to th e co stan d d iff ic ul ty of fi nd in g awil li ng bu y er fo r a n on -tr ad ed cl os el y he ldin te res t-- is ap pr op ria te he re i f PHC i s v al ue d b y a ne t as se t v al ua ti on m etho d. Ho wev er, the qu an tu m of t ha t d is co un t re m ai ns indi sp ut e. To d et erm in e th e ap pr op ria te di sc ou ntforlac k o f m ark et ab il ity , th e Co m m is si on er’s ex pe rt e xa m in edsev enstud ie s o f res tri ct edst oc k, wh ic h i s id en ti cal to free ly trad edst oc k o f a p ub li c co m pa ny exce ptth atitis res tri ct edfro m be in g t rad edon anop enm ark etfora cert ai n p eri odof t im e. The s tu di es 2 8
co m pa redtwo types of d at a: (1) th e se ll in g p ric es of t he res tri ct edst oc ks with the
se ll in g p ric es of t he co rres po nd in g u nr es tri ct edsh ares , and(2) th e se ll in g p ric es of sh ares inclo se ly hel d c om pa ni es at t he ir p re-I PO le ve l v ers us th ei r subs eque nt po st -IPO p ric e, an d m eas ur edth e d iff eren ce b etweenit s re st ric te d v al ue an d i ts The Co m mis si on er’s ex pe rt a ls o e xa m in edbu t d idno t re ly on s tu di es 2 8 co m pa rin g t he sal e p ric e o f cl os el y he ldco m pa ny sha res to th e p ric es of s hares at subs eque ntin it ia l p ub li c o ffer in gs of t he same com pa ni es . The es ta te arg ue s tha t th e Co m m is si on er’s ex pe rt i s the refo re s ub ject t o c rit ic is m

as i n Es ta te of Da vi s v . Co m m is si on er, 1 10 T.C. 53 0, i n wh ic h we d is cu ss edth e li mit at io ns of r es tri ct ed st oc k s tu di es an d g av e m or e wei gh t t o IP O stud ie s. Ho wev er, the re i s n o abs ol ut e ru le th at , forpurp os es of d et erm in in g am ark et ab il ity di sc ou nt , IPO stud ie s ar e supe rio r to res tri ct edst oc k s tu di es , si nc e in othe r ci rcu m st an ces we ha ve pre ferr ed th e la tt er. See Est at e o f Giu st in a v . Commis si on er, T.C. Mem o. 2 01 1- 14 1. Th e es ta te ’s exp ertpre se nt edno an al y si s o f IPO s tu di es or o f wha t d is co un t the y m ig ht su gg es t h ere, s o t he est at e’s arg um en t d oe s n otco nv in ce u s.-4 4-

[* 44 ] no n- res tri ct edva lu e to qu an ti fy a di sc ou ntforlac k o f m ark et ab il ity . The
se ve n s tu di es pro du ce l ack -o f-m ark et ab il ity di sc ou nt s ra ng in g fr om

26 .4% t o 35 .6%, wit h a n a ve rag e d is co un t o f 32 .1%. Mr. Th om so n c ho se to us e th e v ery bo tt om of thi s ra ng e--2 6.4 %--as hi s st art in g p oi ntforde te rm in in g l ackof m ark et ab il ity forPHC s to ck , bec au se m os t of th e stud ie s d eal t wi thst oc k i n o pe rat in g c om pa ni es (in he ren tl y

m or e ri sky

th an st oc k i n aco m

pa ny tha t h ol ds publ ic ly trad edsh ares ). Mr. Tho m so n t he n fu rth er reduc edth e d is co un t t o 2 1% fo r va rio us reas on s- -e.g ., PHC pa idco ns is te nt di vi de nd s; PHC h ada ve ry sm al l am ou ntof d eb t; an d P HC was m an ag edby pr of es si on al in ve st or s. Alt ho ug h t he se reas on s wo ul d l ik el y warran t co ns id erat io n, M r. Tho m so n p ro vi de d n o b as is forth e qua ntum of t he ad jus tm en t at tri bu tabl e to each . Furt he rm or e, we are u nc on vi nc edth atMr. Tho m so n’s l ow st art in g p oi nt --2 6.4 %--was warran te d b ecau se of h is su m m ary ob se rv at io n t ha t
m os t o f th e stud ie s d eal t wi th ris ki er o pe rat in g c om pa ni es . Aga in , th e es ta te ’s exp ertdi d n otpe rfo rm anin de pe nd en t an al y si s fo r la ck of m ark et ab il ity . Ins te ad , Mr. Sch weih s ac cep te d M r. Tho m so n’s g en eral ap pr oa chan d d at a, bu t h e si m pl y ch os e th e v ery to p o f th e ran ge of t he stud y ’s
m ark et ab il ity

di sc ou nt s- -i.e ., 35 .6%-- arg ui ng th atth e se ve n s tu di es th atwere u se d to de riv e th is di sc ou ntare b as edon en ti ti es who se st oc k (u nl ik e PHC’s) wo ul d-4 5-

[* 45 ] rel at iv el y

so on be free ly m ark et ab le . He con te nd edth atst oc k (l ik e th atin th e se ve n s tu di es ) who se publ ic tra di ng is res tri ct edforon ly a defi ne d p eri od (dur in g wh ic h p riv at e tr ad es m ay be m ad e) m ay

be les s d is co un te d i n v al ue th an st oc k (l ik e PHC’s) wh os e n on -p ub li c st atus is of i nd efi ni te du rat io n. The pa rti es see m

to ag ree t ha t the ge ne ral ran ge of m ark et ab il ity di sc ou nt s rel ev an t fo r co ns id erat io n i n thi s ca se is 26 .4 t o 3 5.6 %, with anav erag e d is co un t of 32 .1%, an d we a re u nc on vi nc edby eith er p arty ’s rat io na le forde vi at in g fr om th is ge ne ral ity . W e th eref or e fi ndth ata m ark et ab il ity di sc ou ntof 3 2.1 %--i .e., th e av erag e o f th e d at a se ts --i s re as on ab le inth is cas e. D. Co nc lu si on On the ba si s o f th e fo reg oi ng , we fin d t ha t the va lu e o f th e d eced en t’s 23 .44 % in te res t i n P HC atth e ti m e o f he r de ath i s $ 6,5 03 ,80 4, fi gu redth us :-4 6-

[* 46 ] Ass et s o f PHC $5 2,1 59 ,43 0

Less : Liabi li ti es - 45 ,38 9 Less : BI CG di sc ou nt - 7,8 17 ,10 6 NAV of PHC 44 ,29 6,9 35 23 .44 % Int eres t i n NAV 10 ,38 3,2 02 Less : LOC d is co un t (7 .75 % of $ 10 ,38 3,2 02 ) - 80 4,6 98 9,5 78 ,50 4 Less : LOM d is co un t (3 2.1 % of $ 9,5 78 ,50 4) - 3,0 74 ,70 0 Valu e o f de ced en t’s in te res t i n P HC 6,5 03 ,80 4
V. Accu racy-rela te d p en al ty Gen eral ly, a 2 0% p en al ty is i m po se d o n “ an y

po rti on of a n u nd erp aym en t o f ta x re qu ire d t o b e sh own on a return” wher e th e und erp aym en t i s at tri bu tabl e to a subs tant ia l es ta te tax va lu at io n u nd ers ta te m en t. Sec . 66 62 (a), (b )(5 ). An es ta te ta x v al ua ti on un de rs ta te m en t i s treat edas “ subs tant ia l” wher e th e v al ue of a ny pr op erty requi redto be rep orte d o n a n e st at e ta x re tu rnis rep orte d a t 6 5% or l es s 2 9 The est at e ta x re tu rnat i ss ue he re was fil edon Sep te m be r 20 , 20 06
. 2 9 Sect io n 6 66 2( g) (1 ) was am en de d fo r returns fil edaft er Au gu st17 , 20 06 , to pr ov id e th ata va lu at io n u nd ers ta te m en t i s s ub st an ti al if the va lu e o f an y pro pe rty (co nt in ue d...)-4 7-

[* 47 ] of t he co rrec t v al ue . Sec. 6 66 2( g) (1 ). The C ommis si on er b ears th e b ur de n of pro du ct io n wi th res pe ctto th e p en al ty det erm in edun de r se ct io n 6 66 2. Se e se c. 74 91 (c); Hig be e v . Comm is si on er, 1 16 T.C. 43 8, 4 46 (20 01 ). The est at e rep orte d t he va lu e o f th e d eced en t’s i nt eres t i n P HC to be $3 ,14 9,7 67 on th e es ta te tax return. Gi ve n t ha t we h av e d et erm in edth e p ro pe r va lu e o f th e d eced en t’s i nt eres t i n P HC was $6 ,50 3,8 04 , th e am ou ntrep orte d o n th e es ta te tax return was les s tha n 6 5% o f th e p ro pe r va lu e, an d a“ subs tant ia l”
va lu at io n u nd ers ta te m en t the refo re ex is ts forpurp os es of s ect io n 6 66 2( g) (1 ). The refo re, the Co m

m is si on er h as m ethi s b ur de n und er s ect io n 7 49 1( c). Howev er, the 20 % pe na lty un de r se ct io n 6 66 2( a), (b )(5 ), an d (g ) wil l n ot ap pl y to an y po rti on of a n u nd erp aym en t “ if i t i s s ho wn tha t the re was a reas on ab le
cau se forsu chpo rti on an d tha t the tax pay er ac te d i n g oo d fa ith wi th res pe ctto su chpo rti on .” See s ec. 6 66 4( c)(1 ) (em ph as is ad de d) . The reg ul at io ns pro vi de th atwhet he r anun de rp aym en t o f ta x i s m ad e in go odfai th an d due to reas on ab le
cau se wil l d ep en d upo n t he fact s an d c irc um st an ces of e achcas e. 26 C.F.R. s ec. 1.6 66 4- 4( b) (i) , Inc om e Tax Reg s. Re as on ab le cau se m ay in vo lv e rel ianc e o n a (...co nt in ue d) 2 9 requi redto be rep orte d o n a n e st at e ta x re tu rnis rep orte d a t 6 5% o r le ss of t he co rrec t v al ue . Befo re Au gu st17 , 20 06 , th atfig ur e was 50 %. See Pen si on Pro te ct io n Actof 2 00 6, Pub. L. No. 1 09 -2 80 , sec . 12 19 (a)( 1) (B), 1 20 Sta t. at 10 83
.-4 8-

[* 48 ] pro fes si on al tax advi so r, bu t s uc h re li an ce d oe s n otne ces sa ril y de m on st rat e reas on ab le cau se an d g oo d fa ith, an d “ [r]eas on ab le cau se an d g oo d fa ith o rd in ari ly is no t i nd ic at edby the m ere f actth atth ere i s an ap pr ai sa l o f th e v al ue of p ro pe rty.” Id
. Inde te rm in in g wh ethe r a t ax pay er ac te d re as on ab ly andingo odfai thwith reg ardto th e v al ua ti on of p ro pe rty, facto rs to be co ns id eredin cl ud e: (1) th e m etho do lo gy andass um

pt io ns un de rlyin g t he ap pr ai sa l; (2) th e ap pr ai se d v al ue ; (3 ) th e ci rcu m st an ces un de r whi chth e ap pr ai sa l was ob ta in ed ; an d (4 ) th e ap pr ai se r’s rel at io ns hi p t o t he tax pay er o r to th e act iv ity inwhi chth e p ro pe rty is
us ed . Id. To e st ab li sh go odfai th , tax pa y ers can no t re ly bli nd ly on a dv ic e fro m advi se rs or o n an app rai sa l. Ber gqui stv. Co m m is si on er, 1 31 T.C. 8, 2 3 (2 00 8) (ci ti ng Kell ah anv. Co m

mis si on er, T.C. Mem o. 1 99 9- 21 0; an d Es ta te of Go ld m an v. Co m m is si on er, T.C. Mem o. 1 99 6- 29 ). Mr. Ly le , who was d ecea se d a t the ti m e o f tr ia l, was th e co -ex ecu to r of th e es ta te , was a C .P.A., andwas p rimaril y res po ns ib le forob ta in in g t he va lu at io n. Ms . Zerbe y , th e o th er co -ex ecu to r, who att en de d b us in es s s ch oo l an d h adso m e m od es t ex pe rie nc e in fin an ci al m at te rs , all owe d M r. Ly le to be th e p rin ci pa l
co nt actwith t he acco un tant(Mr. Winni ng to n a t the Bel fin t fi rm) who was re ta in ed to va lu e th e d eced en t’s i nt eres t i n P HC. Ms . Zerbe y tes ti fie d t ha t M r. Ly le ke pt-4 9-

[* 49 ] he r in fo rm ed , andsh e kne w th atMr. Winn in gt on was s el ect edto va lu e th e de ced en t’s i nt eres t i n P HC an d t ha t two p rio r va lu at io ns were b ei ng us edas gu id el in es . Accor di ng to Mr. Winn in gt on , Mr. Ly le pro vi de d h im with s uf fic ie nt in fo rm at io n t o v al ue th e d eced en t’s i nt eres t i n P HC. Mr. Winn in gt on is a C.P.A. who is kn owl ed ge ab le ab ou t PHC
. Mr. Winn in gt on tes ti fie d t ha t h is fee was no t co nt in ge nton th e v al ue he reac he d
an d tha t M r. Ly le di d n otin flu en ce the va lu e u lt im at el y rep orte d o n t he est at e ta x return. Al th ou gh Mr. Winn in gt on ha s s om e ap pr ai sa l ex pe rie nc e (i .e., hav in g writ te n 1 0- 20 va lu at io n re po rts an d h av in g t es ti fie d i n c ou rt) , he d oe s n otha ve an y ap pr ai se r certi fic at io ns . The es ta te di d n otpro fferhi m as an e xp ertwitne ss an d di d n otde m on strat e th athe is qu al ifi edas a n e xp ertinva lu at io n. On the reco rdbe fo re u s, we ca nn otsay tha t the est at e act edwith re as on ab le
cau se an d i n g oo d fa ith i n u si ng anun si gn eddra ft r ep ort p rep aredby its
acco un tantas i ts ba si s fo r rep orti ng th e v al ue of t he de ced en t’s i nt eres t i n P HC on th e es ta te tax return. Mr . W in ni ng to n i s n ota cert ifi edap pr ai se r. The es ta te ne ve r de m on st rat edor d is cu ss edho w Mr. Winn in gt on arri ve d at the va lu e rep orte d o n th e es ta te return e xc ep t t o s ay th attwo pri orest at e tr an sa ct io ns in vo lv in g P HC st oc k u se d t he cap it al iz at io n- of -d iv id en ds m etho d fo r va lu at io n. Fu rth erm or e, th e es ta te di d n otex pl ai n- -m uc h l es s ex cu se --wh at ev er d efec ts inMr. Winn in gt on ’s-5 0-

[* 50 ] va lu at io n re su lt edinth atin it ia l $ 3.1 m il li onva lu e’s be in g aba nd on edin fav orof t he hi gh er $ 5 m il li on va lu e fo r whi chth e es ta te co nt en de d a t tria l. Co ns eque nt ly, th e v al ue rep orte d o n t he est at e ta x re turnis ess en ti al ly
un ex pl ai ne d. The est at e o bs erv es th atfou r subs tant ia ll y di ffer en t v al ue s wer e rea ch edby fo urpro fes si on al s- -Mr . W in ni ng to n ($ 3.1 m il li on ), th e es ta te ’s exp ert($5 m il li on ), th e Co m m is si on er’s ex pe rt ( $7 .3 m il li on ), an d t he IRS au di to r ($ 9.2 m il li on )--a nd th e es ta te arg ue s tha t thi s fa ctde m on st rat es th e d iff ic ul ty of va lu in g t he de ced en t’s in te res t i n P HC. Whi le we do no t d is ag ree wi th th e es ta te ’s ass ert io n t ha t the de ced en t’s i nt eres t i n P HC m ay be di ffi cu ltto va lu e, we be li ev e th atth is furth er supp orts th e im

po rta nc e o f hi rin g aqu al ifi edap pr ai se r. In o rd er t o b e ab le to in vo ke “ reas on ab le cau se ” in a cas e o f th is di ffi cu lty an d m ag ni tu de , th e es ta te ne ed edto ha ve th e d eced en t’s i nt eres t i n P HC ap pr ai se d b y a cert ifi edap pr ai se r. It d idno t. In st ead , th e es ta te rel ie d o n t he va lu at io n b y Mr. Winn in gt on bu t d id
no t s ho w th athe was re al ly qua li fie d t o v al ue th e d eced en t’s i nt eres t i n t he
co m pa ny. The $3 .1 m il li on va lu e rep orte d o n the est at e ta x re tu rnwas l es s tha n 65 % of e ve n t he $5 m il li on va lu e d efen de d b y th e es ta te ’s ownexpe rt; an d i f th e Co urt h adad op te d t he $5 mil li on va lu e, th e return wo ul d s ti ll refl ecta subs tant ia l
va lu at io n u nd ers ta te m en t tha t wo ul d warran t the accu racy-rela te d p en al ty; th atis ,-5 1-

[* 51 ] ev enby the est at e’s li gh ts , th e v al ue on th e es tate tax return n eed ed
ex pl ai ni ng , bu t n o e xp lana ti onwas g iv en . Giv enth atth e Co m

m is si on er h as m ethi s b ur de n t o s ho w th atth e acc ur acyrel at edpe na lty

ap pl ie s, the burd ensh ift edto th e es ta te to sh ow wh y itsh ou ldbe
ex cu se d fr om

th e p en al ty. The e st at e fai le d t o m ak e su cha sh owi ng . As a res ul t, we fi ndth atth e es ta te ha s n otde m on st rat edth atitact edwith re as on ab le cau se an d in go odfai th inrep orti ng th e v al ue of t he de ced en t’s i nt eres t i n P HC onth e es ta te ta x re turn . As a res ul t, the Co m m is si on er’s i m

po si ti on of a n a ccu racy-rela te d pe na lty un de r se ct io n 6 66 2( a), (b )(5 ), an d (g ) wil l b e su st ai ne d. Deci si on wil l b e en te redun de r Ru le 15 5.