T.C. M em o . 2 0 1 9 -1 0 1

UNITED STATES TAX COURT

ESTATE OF AARON U. J ONES, DONOR, DECEASED, REBECCA L. J ONES AND DALE A. RIDDLE, PERSONAL REPRESENTATIVES, Pet it i on ers v . COM M ISSIONER OF INTERNAL REVENUE, Res po n d en t

Do ck etNo . 2 7 9 52 -1 3
. Fi l edAu gu s t 1 9 , 2 0 1 9
.

D. J o h n Th o rn t o n an dKev i n C. Bel ew, fo r p et i t i o n ers . Kel l ey A. Bl ai ne, Am

y B. Ul m er, Eri kW . Nel s o n , an d J an i ce B. Gei er, fo r
res p o n d en t.- 2
-

[* 2 ] M EM ORANDUM FINDINGS OF FACT AND OPINION PUGH, Ju d g e: In a n o t i ce o f d efi ci en cy d at edSep t em b er 5 , 2 0 1 3 , res p o n d en t d et erm i neda d efi ci en cy i n g iftt ax o f $ 4 4 , 9 86 ,4 1 6
. 1 Aft er
co n ces si o n s , 2 th e i s su es fo r d eci s i o n are t h e v al u at i o ns , as o f M ay 2 8 , 2 0 0 9 (t h e
v al u at i o n d at e), o f t h e fo l l o wi n g equ it y i n t eres t s tran s ferred as g ift s : (1 ) 1 0 ,2 6 7 .6 7 l i m i ted p artn er u n i t s i n Sen eca J o n es Ti m b er Co . (SJ TC), (2 ) 4 ,8 0 0 s h ares o f cl as s B n o n v o t i n g s t o ck

i n Sen eca Sawm i l l Co . (SSC), (3 ) 5 ,4 5 6 s hares o f cl as s B
n o n v o t i n g s t o cki n SSC, an d(4 ) 1 ,3 0 0 s h ares o f cl as s A v o t in g s to cki n SSC. FINDINGS OF FACT So m e o f t h e fact s h av e b een s ti p u lat ed an dare s o fo u n d. Th e s t ip u l at ed fact s are i n co rp o rat edi n o u r fi nd i n g s b y th i s referen ce. M r. J o n es res i d edi n Oreg o n wh en th e p et i t i o n was t i m el y fi l ed
. Aft er M r. J o n es ’ d eat h o n Sep tem b er 1 4 , 2 0 1 4 , M r. Ri d d l e an d M s . J o n es , wh o al s o res i d edi n Oreg o n wh en th e p et i t i on
was fi l ed , were ap p o i n t edas p ers o n al rep res en t at i v es o f t h e es t at e.

1 Un l es s o th erwi s e i n d i cat ed , al l s ect i o n referen ces are t o th e In t ern al Rev enu e Co de o f 1 98 6 , as am en d edan di n effect atal l rel ev an tt i m es . Ru l e referen ces are t o th e Tax Co u rtRu l es o f Pract i ce an dPro cedu re. Al l m o net ary am ou n t s are ro u n dedt o t h e n eares td o l l ar.

2 Res p o n d en tco n ced edth atth e es t at e i s n o tl i ab l e fo r accu racy -rel at ed p en al t i es u n d er s ec. 6 6 6 2 (h ) an dth atthe es tat e’ s n et -n et g iftarran gem en ti s p erm i s s i b l e, s ub

jectt o Ru l e 1 5 5 co m

p u t at i o n s .- 3
-

[* 3 ] I. Hi s t o ry

o f th e Sen eca Co m

pan i es A. Fo u n d i n g o f Sen eca Sawm il l Co
. M r. J o n es es t ab li s h edSSC i n Eu g en e, Oreg o n, i n 1 9 5 4 as an Oreg o n
co rp o rat i o n. SSC em

p l o y ed 2 5 p eo p l e duri n g i t s fi rs t y ear i n o p erat i o n an d
m an u fact u red1 8 m i l l i o n b o ardfeeto f d i m en s i o n al l um b er. SSC h as s i g n i fi can t l y
ex p an d edi t s o p erat io n s s i n ce i t s o rg an i zat i o n . Itb u i lta l u m ber s to rag e s h edan d
ex p an d edi t s l o g p o n d i n 1 9 5 9 , p u rch as edan ad j acen t m i l l faci l i ty

an db u il ta b ark er fo r i t s m i ll s i n 1 9 6 1 , an dp av edan d ex p an dedth e l u m ber an dl o g y ard s an d ad d eda ch ip p er i n 19 6 5 b efo re rem o d el i ng th e d i m en s i o n s awm i l l i n 1 9 67 . SSC
ex p an d edi t s l o g y ardtwi ce m ore, i n 1 9 7 1 an d1 9 8 0 , an db u i l t a n ew m i l l i n 1 9 7 8. SSC b u i l ti t s s tu d m i l l i n 1 9 8 8 an dfu rt h er ex p an d edi ts l og y ardan del i m i n at edi t s l o g p o ndi n 1 9 9 0
. B. Acqu i s i t i o n of Ti m

b erl an d s an dFo u n d i n g o f Sen eca J on es Ti m b er Co
. Fro m i t s fo u n d i n g th ro u gh the 1 98 0 s SSC was l arg el y d ep en d en t o n t i m

b er fro m Fed eral l an d s . M r. J o nes b eg an t o co n s i d er acq u i ri n g t i m b erl an d s i n th e earl y t o m i d -1 9 8 0 s wh en en v i ro n m en t al reg ul at i o n s p u tco n t i n u edacces s t o Fed eral t im

b erl an d s atri s k. In 1 9 8 9 wh enM r. J o n es b ecam e co nv i nced th atSSC
s o o n wo ul db e u n ab l e t o rel y o n t i m b er fro m Fed eral l an d s , h e p u rch as ed- 4
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[* 4 ] ap p ro x i m at el y 2 5 ,0 0 0 acres o f t i m b erl an d fro m the W o o l l ey fam i l y . In1 9 9 2 M r. J o n es p u rch as ed an ad d i t i on al 1 0 4 , 0 00 acres o f t im berl an dfro m

Ch am p i o n In t ern at io n al an d2 1,0 0 0 acres fro m Po p e & Tal b o t . OnAu gu s t2 5 , 1 9 9 2, M r. J o n es fo rm edSJ T C, an Oreg o n l i m i t ed p art n ers hi p , t o i n v es ti n, acq u i re, h o l d , an dm an ag e t i m b erl an d s an dreal p ro p ert y
an d t o in cu r i n deb t ed n es s , an d h e co n tri b u t edth e t i m berl an d s h e p urch as edi n 1 9 8 9 an d1 9 9 2 i n ex ch an g e fo r ani n t eres t . M r. J o n es co n tri b ut edth e t i m b erl an d s t o SJ TC rat h er t han SSC b ecau s e o f t ax an dl i ab i l i ty co n cern s . SJ TC’ s t i m b erl an d s were i n t en d edt o b e SSC’ s i n v en t o ry . SSC an dSJ TC s h are h ead qu art ers i n Eu g en e, wh i ch were b u i l ti n 1 9 9 6
. SSC o wn s a 1 0 % i n t eres ti n SJ TC as th e s o le g en eral p art ner. As g en eral p art n er SSC h as b ro adp o wers t o m an ag e an dco n tro l SJ TC. In 1 9 9 7 SSC co n t i nu edex p an d i n g wi th the co n s tru ct i o n o f i t s l o g
m erch an d i s er co m

p l ex . In2 0 0 0 SSC m o d i fi edi t s s tu dm i l l t o i n creas e p ro du ct i o n l en g th cap ab i l it i es an d , i n 2 0 0 6 , b ui l ta s tu dm i l l faci l i ty cap ab l e o f h an d l i n g
s m al l er l o g s --as s m al l as fo u r i n ch es i n d i am et er--cal l eda h ews aw l i n e.- 5
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[* 5 ] II. Op erat i o n s an d M an ag em en to f t h e Sen eca Co m p an i es A. SSC SSC co n s id ers i ts el f t o b e am o n g th e b es t l u m b er m an u fact u rers i n the
wo rl d . SSC’ s tw o m il l s --i t s d i m en s i o n an ds tu dm i ll s --are t ech n o lo g i cal l y ad v an cedan d en ab le i tt o d el i v er h i g h -qu al i ty p ro du ct s qui ck l y

wh i l e d em an d i n g a h i g h er p ri ce t h an i t s co m p et i to rs . So m e o f t h e t ech n o l o g i cal ad v an cem en t s feat uredi n SSC’ s m i ll s were d ev el o p edb y M r. J on es , an dSSC o wn s m o re t h an 2 5 p at en t s . Th e an n ual p ro du ct i o n cap aci t i es o f t h e d i m en s i o n m i l l an d th e s tu dm i l l are 2 1 4 m i l l i o n b o ardfeetan do v er 1 6 0 m il l i o n b o ardfeet , res pect i vel y . In2 0 0 8 th e d i m en s i o n m i l l p ro du ced 1 4 0 m i l l i on b o ardfeet , an dth e s tudm i l l p ro du ced 1 0 3 m i l l i o n b o ardfeet
. SSC s el l s i ts l u m

b er aro u n d th e co u n try

al th o ug h the b u l ko f i t s s al es are
m ad e i n th e W es t ern Un i t edSt at es . SSC’ s cu st o m ers can p i ck up th ei r l u m b er
o rd ers atth e m i ll s o r h av e t h em s h ip p ed b y

tru cko r rai l ro ad fl at car, d ep en d i n g o n th e s i ze o f t h e o rd er. As o f t he v al u at i o n d at e SSC’ s d im en s i o n an ds tu dl u m b er
were u s edp ri m ari l y

t o b u il d h o u s es an d , th erefo re, i t s l u m ber s al es were al m o s t
co m p l et el y d ep en d en t o n h o u s i n g s t art s . As o f t h e v al uat i o n d at e SSC’ s l arg es t s up pl i er o f l o g s was SJ TC, al th o u g h i t s p ro du ct i o n cap aci ty

req u i redi tt o p u rch as e ad d it i on al l o gs el s ewh ere. In 2 0 0 8- 6
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[* 6 ] SSC p u rch as ed3 2% o f th e l o gs i tm i ll edd i rect ly fro m SJ TC. Ad d i t io n al l y , i t acq u ired2 4 % o f i t s l o g s i n di rect l y fro m SJ T C, th ro u g h t i m

b er t rad es wi th Ro s eb u rg Fo res tPro du ct s (Ro s eb u rg ). See i n fra p p. 9 -1 0 . SSC b o u g h t 3 0 % o f i t s l o g s fro m th i rd -p arty s el l ers an d1 4 % was s tu m p ag e o r p u rch as edu nd er Go v ern m en tco n tract . Becau s e SSC p u rch as es Fed eral t i m b er, i ti s p ro h i b i t ed fro m s el l i n g i t s l u m

b er o u t s i d e t h e Un i t edSt at es . SSC’ s m an ag em en t t eam

as o f t h e v al u at i o n d at e was as fo l l o ws : Nam e Po s i t i o n Aaro n J o n es Pres i d en t , ch i ef ex ecu ti v e o ffi cer, an dch ai rm an o f

th e b o ard Ri ch ardT. Re Sen io r v i ce p res i d en t, g en eral m an ag er, an das si s t an t

s ecret ary Dal e A. Ri d d l e Sen io r v i ce p res i d en t o f l eg al affai rs Gary Bro kaw Vi ce p res i d en t , ch i ef fi n an ci al o ffi cer, s ecret ary , an d

treas u rer To d dPayn e Vi ce p res i d en t --t i m b er m an ag em en t Sco t tKeep Vi ce p res i d en t --l an dan dt i m b er Ted Ben n et t Sup eri n t en d en t --p ro duct i on W ayn e M ad sen Lo g g i n g m an ag er An i t a Rea Co n tro l l er J o dy J o nes Sen io r v i ce p res i d en t--p ro p ert y d ev el o p m en t- 7
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[* 7 ] As o f t h e v al uat i o n d at e SSC em pl o y ed2 6 3 em

p l oy ees , wh o were cl as s i fi ed
as ex ecu ti v e, ad m i n i s trat i v e, o r m an ufact uri n g . SSC’ s m an u fact u ri n g em p l o y ees i n cl u d edap p ro x i m at el y

1 1 5 t o 1 2 0 s k i l l edm il l wo rk ers , 3 5 t o 4 0 s em i sk i l l ed
wo rk ers , an dap pro xi m at el y 2 0 l ab o rers . In1 98 6 SSC el ect edt o b e t ax edas an S
co rp o rat i o n. Itwas o n th e v al u at i o n d at e, an dco n t i n u es t o b e, an S co rp o rat i o n . B. SJ TC SJ TC h el dap p ro x i m at el y 1 .4 5 b i ll i on b o ardfeeto f t i m b er o v er 1 6 5,0 0 0
acres i n wes t ern Oreg o n as o f t h e v al u at io n d at e. M o s to f SJ TC’ s trees are l o cat ed i n Lan e an dDo u g l as Co u n ti es , b u ts o m e are l o cat edi n Ben t o n, Co o s , Cu rry , J o s ep h i n e, an dLi nn Co u n t i es . Al m o s tal l o f i t s t i m b erl an d was acq u i redi n th e th ree i ni t i al p u rch as es i n 1 9 8 9 an d 1 9 9 2 . SJ TC s o ug h t , an d co n t i nu es t o s eek , t o ad d t o it s tree farm s , b u t i th as fo u n di td i ffi cu ltt o co m pet e fo r acq u i s i t i o n s wi t h t i m b er i nv es t m en tm an ag em en to rg an i zat i o n s (TIM Os ) an d real es t at e i n v es t m en t tru s t s (REITs ). 3 Th e p red o m i nan ts p eci es o n SJ TC’ s t im berl an d s was Do u g las fi r, al th o u g h SJ TC’ s t i m

b er al s o i ncl u d ed Hem l o ckfi r, W es t ern RedCed ar, Red Al d er, an d

3 A TIM O i s an i n v es t m en tm an ag er t h at s peci al i zes i n l arg e i n v es t m en t s i n t i m b erl an d . TIM O s d o n o to wnt i m berl an d s ; rat her t h ey

ty p i cal l y fi n dan d p u rch as e t i m

b erl an d fo r cl i en t s as i n v es tm en t s an dth en m an ag e t h o s e i n v es t m en t s fo r t h ei r cl ien ts . TIM Os an d REITs d o n otp ract i ce s u s t ai n ed y i el d h arv es t i n g .- 8
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[* 8 ] o th ers . Ti m

b er i s a l on g -t erm

as s et th ati n creas es i n v al u e as i tg ro ws , b u t
o n l y t o a p o i n t . Th e ran g e o f m erch an t ab i l i ty --du ri n g wh i ch th e t i m b er i s o f p ri m e h arv es t i ng m atu ri ty --fo r t i m b erl an d s s i m i l ar t o SJ TC’ s ty p ical l y b eg i ns at4 0 y ears . SJ TC ty

p i cal l y h arv es t edi t s t rees wh en th ey were 5 0 t o 5 5 y ears o l d
. SJ TC p ract i ceds u s t ai n edy i el dh arv es t i ng , wh i ch m ean s i t l i m i tedi t s h arv es tt o th e g ro wth o f i t s tree farm s . Ind o i n g s o SJ TC u s eda m o d el th at p ro ject s o u t5 0 y ears , as s u m i n g a 5 0 -y ear g ro wth t erm , t o d et erm i n e i ts an n u al y i el deach y ear. SJ TC al s o u s edco m p ut er p ro g ram s , i n cl u d i n g g eo g rap h i c i n fo rm at i o n s y s tem s s uch as ArcGIS--wh i ch i s t arg et edt o tree farm n eed s --an da t i m b er i nv en t o ry

m an ag em en t s y s t em

t o creat e, m ap , ch art , v i s u al i ze, an dan al y ze d at a s et s t o o p t i m i ze i t s o p erat io n . Th e l an d m an ag em en tp ract i ces em p l o y edb y SJ TC o ft ens u rp as s edth o s e m an d at edb y th e Su s t ai n ab l e Fo res try

In i t i at i v e Pro g ram --i n wh ich SJ TC i s a p art i ci p an t --an d t h e Oreg o n Fo res tPract i ces Act , wi th res p ect t o s u st ai nab l e t i m b er p ro du ct i o n , refo res t at i on , wi l d li fe p ro t ect i o n , ai r
an d wat er p ro t ect i o n , ro adco n s tru ct i o n , an drecreat i o n al act i vi t i es . SJ TC p rep aredi t s t im

b erl an ds o i l an ds i t es t o m ax i m i ze g ro wth , p art i ci p at edi n co o p erat i v es th atp ro du ce h ig h -qual i ty s eed s , s el ect edh i g h -qu al i t y
s eed l i n g s fro m

s ev eral n u rs eri es , p l an t edth e s eed l i ng s b y h an d , an d p ro t ect edth e
s eed l i n g s fro m

p red at o rs . SJ TC p ro t ect edi t s trees fro m b ears an d en s u red th at- 9
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[* 9 ] th ey h aden ou g h s p ace, n u tri en t s , an dwat er t o g ro w t o m atu ri ty . SJ TC’ s ro ad
m ai n t en an ce s t aff o v ers aw th e co n s tru ct i o n an dm ai n t en an ce o f acces s ro ad s . In ad d it i o n SJ TC p art i ci p at edi n St at e an dl o cal g ov ern m en t wat er reh ab i l i t at i o n effo rt s an di n wi l d fi re p rev en t i o n an ds up p res s i on effo rt s . SJ TC’ s m an ag em en t t eam was i d en t i cal t o th ato f SSC an dwas p ai db y SSC. SJ TC h ad2 1 em

p l o y ees o n th e v al u at i o n d at e, co m p o sedo f adm i n i st rat i v e
an d fo res try

s t aff. SJ TC rel i edo n SSC fo r hu m an res o u rces , l eg al s erv i ces , an di t s
co n tro l l er, an di tp ai da $ 1.2 m i l l i o n an n u al fee fo r ad m i n i s trat i ve s erv i ces t o SSC. It al s o us edi n dep en d en tco n tract o rs fo r m o s to f i t s act i v it i es o n th e t ree farm , i n cl u d i n g p l an ti ng s eed l in g s , ro adco n s tru ct i o n , an d h arv es t i n g trees . SJ TC’ s fo res try s t aff o vers aw b et ween 1 5 0 an d2 0 0 co n tract o rs t o en su re t h at they
co m p l et edth ei r t as k s acco rd i n g t o SJ TC’ s s t an dard s an do b j ect i v es . In 2 0 0 8 SJ TC h arv es t ed6 7 ,7 95 ,0 0 0 b o ardfeeto f t i m ber. Ap p ro x i m at el y 5 1 % o f t h e t im

b er i th arv es t ed --3 4 ,7 5 6 ,0 00 b o ardfeet --was s o l dt o SSC. SJ TC al s o trad edl o g s fro m

i t s tree farm s th atwere cl o s er t o Ro s eb u rg ’ s m i l l s fo r Ro s eb u rg ’ s l o g s t h atwere cl o s er t o SSC’ s m i l l s i n o rd er t o redu ce h au l i n g co s t s . In cl u d i n g th e Ro s eb u rg trad es , ap p ro x i m at el y 8 9 % o f SJ TC’ s h arv es t edl o g s wen t t o SSC. SJ TC ch arg edSSC t h e h i g hes tp ri ce th at SSC p ai dfo r l o g s o n th e o p en
m ark et . Th e o n l y

l o g s th atSJ T C d i dn o td i rect l y o r i n d i rect ly

s el l t o SSC were- 1 0 -

[* 1 0 ] l o g s th atSSC’ s m il l s were n o tcap ab l e o f p ro ces s i n g . In2 0 0 8 SJ TC m ad e trad es wi th Ro s eb u rg equ al t o ap p ro x i m at el y 3 7 % o f t he l o g s i t h arv es t ed
. In ad d i t i o n , SJ T C h adan ag reem en twi th Ro s eb u rg t o en g ag e i n t ax d eferred t i m

b erl an dex ch an ges t o i m

p ro v e t h e s i t e cl as s o f t h e t i m b erl an d s an dt o acq u ire l an d thatwas eas i er t o acces s . Th es e ex ch an ges i n v ol v edex t en s i v e du e d i l i g en ce. C. Th i rd -Part y

an dIn t erco m

p an y Lo an s SJ TC an dSSC were jo i n tp art i es t o th ei r th ird -p arty cred itag reem en t . Ban k l o an s were rep o rt edo n SJ TC’ s b o o k s b ecau s e i t s p ro p ert y --i t s t i m b er--s erv edas
co l l at eral . W i th o u t SJ TC’ s t i m b er, SSC was n o tl i k el y

t o b e ab l e t o o b t ai n fi nan ci n g o n i t s o wn . M an ag em en two u l dap p l y b o rro wed cas h wh ere i twas
n eed ed , tran s ferri n g itwi th o utres tri ct i o n an d d ocu m en t i ng i tas a l o an fro m SJ TC. An dwh en SSC g en erat ed rev en u e b y s el li ng p ro ces s edl o g s , i t tran s ferred m o n ey i n the fo rm

o f a l oan o r a recei v ab l e t o SJ TC t o rep ay th e b an k l oan s th at SJ TC h ad t ak en o u t ag ai n s t i t s t i m b er. On th e v al u at i o n d at e SSC h el d a $ 3 2 .7 m i l l i o n recei v ab l e fro m

SJ TC. Th e co m

p an i es d idn o t req u i re co ll at eral , an dthey ch arg ed i n t eres tatth e rat e s p eci fi edi n th ei r b an kl oan ag reem en t . M r. Bro k aw co m

p l et edfi n an ci al p ro

ject i on s atth e en do f each y ear t o b e i n cl u d edi n th e an nu al s t at em en t s p ro v i d edt o l en d ers . Inp rep ari n g th es e- 1 1 -

[* 1 1 ] p ro ject i o n s , h e g at h eredn eces s ary i nfo rm at i o n , s u ch as l o g p ri ces an dtree h arv es tan dm il l p ro du ct i o n n u m b ers , fro m

acro s s t h e Sen eca co m

p an ies . Th e
an n ual p ro

ject io n s were p rem is ed o n th e m o s tl ik el y o u t co m e. D. Fo rm at i o n o f Sen eca Su s t ai n ab l e En erg y Du ri n g th e m i d-1 99 0 s SSC b eg an t o n o t i ce a s h i fti n m ark etp referen ces fro m g reen l um

b er, wh i ch s t i l l h as th e n atu ral m o i s tu re i n trees , t o dry l u m b er, wh i ch h as h adthe m o i s tu re rem o v ed . SSC p ro du cedg reen l u m b er al m o s t
ex cl u s i v el y

u n t il th e earl y

t o m i d -2 0 0 0 s , atwh i ch p o i n t i tb ecam e cl ear t h ati t
wo u l dh av e t o m o v e fro m g reen t o dry

l u m b er. To p ro du ce d ry

l u m b er SSC h adt o b u i l ddry k i l n s an d a b o i l er, wh i ch i tp l an nedt o p o wer wi th the s awdu s tan db ark th atrem ai n edaft er i tcu tthe l o g s i n t o l u m b er. SSC d eci d edt o t ak e ad v an t ag e o f Fed eral Go v ern m en ti n cen t iv es an da v i b ran t en erg y m ark et . Itb ui lta ren ewab l e
en erg y p l an tt o creat e s t eam

en erg y t o h eati t s dry

k i ln an dt o s el l o n t o th e el ect ri cal g ri d . In2 0 0 9 M r. J o n es fo rm eda s ep arat e en ti ty , Sen eca Su st ai nab l e En erg y , LLC (SSE), t o o wnan dm an ag e th e ren ewab l e en erg y p l an t . Th e ren ewab le en erg y

p lan twas es t i m at edt o co stap p ro xi m at el y $ 5 0
m i l l io n . Wh i l e SSC’ s m an ag em en tp l an n edfo r SSE t o fi nan ce co n s tru ct i o n o f t h e p l an tb y g et t i n g a co ns tru ct i o n l o an fro m a b an k , SSC was fo rced t o b o rro w ag ai n s tSJ TC’ s t i m

b erl an d s b ecau s e t h e s t at e o f t h e eco n o m y m ad e b an k s h es i t an t- 1 2 -

[* 1 2 ] t o m ak e co n s tru ct i o n l o an s i n 2 00 9 . SJ TC ad v an ced SSE $ 1 8 , 4 1 2 ,0 0 9 i n 2 0 0 9 , g ro wi n g t o o v er $ 52 m i ll i o n b y 2 0 1 0
. E. Sym bi o t i c Rel at io n s h i p Bet ween SJ TC an dSSC SJ TC an dSSC, wh i l e s ep arat e l eg al en t i t i es , o p erat edi n t an dem i n fu rt heran ce o f SSC’ s s awm il l b u s i n es s . SJ TC’ s fo rm at i o n an di t s s ub s equ en t act i vi t i es were fo r th e b en efi t o f SSC. St art i n g i n 1 9 8 9 M r. J o n es p u rch as edwh at
wo u l db eco m e SJ T C’ s t im b erl an d s aft er b eco m i n g co n v i nced th atSSC’ s
co n ti n u edacces s t o Fed eral t im b erl an d s --i t s p ri m ary

s o u rce o f l o g s --was atri s k
. SJ TC, s i n ce i t s fo rm at i o n, h as ai m edt o ex p an di t s t i m b erl an d h o l d in g s u n d er t h e th eo ry th atm ak in g a s t ead y

s tream o f t i m b er av ai l ab l e t o SSC al l o ws SSC t o av o i d h av in g t o fi g h tfo r a l i m i t eds up p l y o f t i m ber o n th e o p en m ark etan dg i v es i ta b et t er ch an ce t o s ucceed an d fl o u ri s h. To th is en d , SJ TC s el l s --ei th er d i rect l y o r th ro u g h trad es --al l o f t h e l o g s i tcan t o SSC, s el l in g o nl y l og s i n co m p at i b l e wi t h SSC’ s equ i p m en tt o th ird p art i es . SSC’ s ab il i ty

t o u s e SJ TC’ s t i m

b erl an d s t o s ecu re b an kl oan s al s o h as b een i n t eg ral t o SSC’ s o p erat i o n s, p art i cu l arl y du ri n g th e s ub p ri m e m o rt g ag e cri s i s . Ev en as SJ TC redu ced i t s h arv es t , an dSSC was fo rcedt o cu tb ack o n s t aff h o u rs , SJ TC’ s t i m

b erl an d s al l o w edSSC t o o b t ai n l o an s t o m ai n t ai n cas h fl o wan dt o- 1 3 -

[* 1 3 ] fi n an ce t h e co n s tru ct io n o f t he ren ewab l e en erg y p l an t ata t i m e wh en
co n st ru ct i o n l o an s were n o t ty p i cal l y av ai l ab l e. An d as i d e fro m

SSC’ s 1 0 % g en eral p art ner i nt eres t i n SJ TC, th e o wn ers hi p
o f SSC an dSJ TC as o f t h e v al u at i o n d at e was v irtu al ly th e s am e. M r. J o n es
o wn edth e b u l ko f t h e s h ares o r u n i ts an deach o f h is d au g ht ers --Reb ecca J o n es , Kat h l een J o n es , an d J o dy J o nes --o wn eda s m al l i n t eres t . SSC’ s m an ag em en tt eam
m an ag edSJ TC an dSJ TC p ai dSSC a fee fo r ad m i n i s trat i v e s erv i ces , i n cl u d i n g h u m an res ou rces , l eg al s erv i ces , an d acco u nt i n g . An das n o t edab o ve, SJ TC an d SSC l en t m o n ey

b ackan dfo rt h , s en d i n g cas h wh ere i twas m o s tn eed edan d ch arg i n g each o th er t h e i n t eres trat e t h ey n eg o t i at edwi th i n s t i tu t i o n al l en d ers . III. Effect s o f Eco n o m i c Cri s i s o n Op erat i o n s As o f t h e v al uat i o n d at e t h e Un it edSt at es was ex p eri en ci n g s ev ere
eco n om i c tu rm o i l am i ds tth e s ub p ri m e m o rt g ag e cri s i s , es p eci al l y i n th e h ou s i n g
m ark et . Ho u s in g s t art s , wh i ch m eas u re n ew res i d en t ial co n s tru ct i o n p ro ject s du ri n g a g i v en p eri o d , d ecl in edi n th e Un i tedSt at es fro m 2
. 3 m i ll i o n u n i t s i n earl y 2 0 0 6 t o 4 9 0 ,0 0 0 u n i t s i n earl y 2 0 0 9 . Th e cri s i s req ui redSSC t o redu ce p ro duct i o n . Ital s o redu ced th e h o u rs thati t s em p lo y ees wo rk eds o th ati tco u l d
av o idl ay o ffs . Th e cri s i s al s o p ro m p t edSJ TC t o redu ce i t s t i m b er h arv es t b et ween 2 0 0 7 an d2 0 0 9 , m i n i m i zi n g th e n u m b er o f l o g s i ts o l datd ep res s edp ri ces wh i l e i t s- 1 4 -

[* 1 4 ] u n h arv es t edt im

b er co nt in u ed t o ap preci at e. Other co m p an ies i n the area th atd i d n o to wnt i m

berl an d s were n o t ab l e t o s u rv i v e t h e reces s i o n b ecau se t h ey
were u n ab l e t o g en erat e s u ffi ci en t cas h fl o ws o r b o rro w m o ney ataffo rd ab l e i n t eres trat es . In th e m i d s to f t h e reces s i o n, i n earl y 2 0 0 9 , Ro s eb u rg , a co m

pet i to r wi th
n ei g h b o ri n g t i m

b erl an d s, ap p ro ach edSJ TC ab o u ta t i m b erl an dex ch an g e b ecau s e Ro s eb u rg was co ncern edab o u ti t s co m p l i an ce wi th l o an co v en an t s . SSC’ s
m an ag em en tt eam

co m p l et edrev i sedfi n an ci al p ro j ect i on s fo r b o th SJ TC an dSSC i n Ap ri l 2 0 0 9 t o as ses s th ei r ab i l i t i es t o co m p ly wi th th ei r o wnl o an co ven an t s , u s i n g th e s am e p ro ces s t o co m p l et e th e Ap ri l 2 0 09 p ro

ject i o n s t h ati t u s edt o
co m p l et e i t s reg u l ar, y earl y

fi n an ci al p ro

ject i o n s . Th e Ap ri l 2 0 0 9 p ro ject i o n s
s h o wedm o re p es s i m i s t i c res ul t s th an th e p ro j ect i o n s SJ TC co m

p l et ed fo r 2 0 0 9
an d 2 0 1 0 aty earen d. SJ TC ag reedt o th e ex ch an ge t o b oo s t i t s rev en ue fo r g en eral l y accep tedacco u n t in g p ri n ci p l es p u rp o s es t o en s u re co m p l ian ce wi th i t s
o wnl oan co v en an t s an d t o i m p ro v e i t s l an dacces s an ds i t e cl as s . IV. Own ers h i p o f Sen eca Co m p an i es an dGi ft s A. SSC SSC h adth e au tho ri ty

t o i s s u e 1 0 ,0 0 0 s h ares o f cl as s A co m m o n s to ckan d 9 0 ,0 0 0 s h ares o f cl as s B co m m o n s t o ck
. SSC s h areh o l d ers were en t i t l edt o o n e- 1 5 -

[* 1 5 ] v o t e p er s h are o f cl as s A s t o cko n m at t ers v ot edo n b y s h areh o ld ers . Ho l di n g cl as s B s to ckd i dn o ten t i t l e s h areh o l d ers t o v o t e. As o f t h e v al uat i o n d at e SSC h ad i s s u edal l 1 0 ,0 0 0 s h ares o f cl as s A s t o ck an d4 1,1 0 0 s h ares o f cl as s B
s t ock . Im m ed iat el y b efo re t he g i ft s o f SSC s t o ck , th e o wn ers h i p o f SSC was as fo l l o w s : Own er Cl as s A s h ares Cl as s B s h ares Aaro n U. J o n es 4 , 9 0 0 3 9 ,4 6 8 Dal e A. Ri d d le 1 6 0 0 -0
- Reb ecca J o n es 1 , 5 0 0 5 4 4 Kat h l een J o nes 1 , 5 0 0 5 4 4 J o dy J o n es 1 , 5 0 0 5 4 4

1 M r. Ri dd l e was a s h areh o l d er as tru s t ee o f t h e Aaro n U. J o n es Ch i l dren ’ s Tru s t . SSC’ s s h areh o l d ers co u l dn o ts el l , g i ve away , o r t ran s fer t h ei r SSC s t o ck
u n l es s th ey

d i ds o i n co m

pl i an ce wi th the Bu y -Sel l Ag reem en t . An y s al e o f SSC
s t ockth atcau s edSSC t o ceas e t o b e an S co rp o rat i o n wo u ldb e n ul l an dv o i d
u n d er t h e Bu y -Sel l Ag reem en t , u n l es s SSC an ds h areh o l d ers o f a m ajo ri ty o f i t s
o u t s t an d i n g s h ares g av e t h ei r co n s en t . If an SSC s h areh o l der i nt en d edt o s el l , g i v e away , o r t ran s fer SSC s t o ckt o a p ers o n o th er t h an a fam i l y m em b er, t h e
s h areh o ld er h adt o n ot i fy SSC, wh i ch h adth e ri g h to f fi rs t refu s al wi th res p ectt o- 1 6 -

[* 1 6 ] th o s e s hares . If SSC d ecl i n edt o p u rch as e t h e s h ares , th e o th er s h areh o l d ers were g i v enth e o p t i o n t o p u rch as e t h em . If SSC o r t he o th er s h areh o l d ers d i d
ex erci s e t h ei r o p t i o n t o p u rch as e s hares , th e p u rch as e p ri ce was th e fai r m ark et
v al u e o f t h e s h ares . Fai r m ark etv al u e, fo r p u rp o s es o f t h e Bu y -Sel l Ag reem en t , was t o b e m

u tu al l y ag reedup o n o r, i f t h e p art i es co u l dn o t co m e t o an ag reem en t , d et erm i n edb y

an ap prai s al . Un d er t h e Bu y -Sel l Ag reem en t , the reas o n ab l y
an t i ci p at edcas h d i s tri bu t i o n s al l o cab l e t o t h e s h ares h adt o b e co n si d eredan d d i s co u n ts fo r l acko f m ark et ab il i ty , l acko f co n tro l , an d l ack o f v ot i n g ri g h t s h adt o b e ap pl i edi n d et erm i n in g th e fai r m ark etv al u e. B. SJ TC SSC, as SJ TC’ s g en eral p art n er, m ad e al l m an ag em en t d eci si o n s fo r SJ TC
an d h adfu ll co n tro l o v er i t s b u s i n es s . SSC’ s b ro adp o w ers as th e g en eral p art n er
o f SJ TC i n cl u dedthe p o wers t o b u y , s el l, an dex ch an g e t i m b erl an d s an d p art n ers hi p p ro p ert y ; t o p l an ttrees , h arv es tt i m b er, an ds el l l o g s ; an dt o i n cu r i n d eb t ed n es s . Li m it edp art ners d i dn otp art i ci p at e i n th e SJ TC’ s m an ag em en t , al th o u g h th ey

h adth e ri g h tt o v o t e o n the co n ti nu at i o n o f SJ TC, th e ap p o i n t m en t
o f a s u cces s o r as g en eral p art n er, t h e ad m i s s i o n o f an ad d i ti o n al g en eral p art n er, th e d i s s o l u t i o n o f SJ T C, an dam en d m en t s t o t h e p art n ers h ip ag reem en t . Th e
u n an im o u s co n s en to f al l p art ners was req u i red t o ad m i tan ad d i ti o n al g en eral- 1 7 -

[* 1 7 ] p art n er o r t o di s so l v e SJ T C. Im m ed i at el y b efo re t h e g i ft s o f SJ TC p art n ers hi p u n i t s , th e o wn ers h i p o f SJ TC was as fo l l o ws : Own er Gen eral p art n er u n i t s Li m i t edp artn er u n i t s Aaro n U. J o n es -0
- 4 3 ,2 9 0 .7 1 7 SSC 5 ,5 5 0
. 0 92 -0
- Reb ecca J o n es -0
- 2 ,2 2 0 .0 3 7 Kat h l een J o nes -0
- 2 ,2 2 0 .0 3 7 J o dy J o n es -0
- 2 ,2 2 0 .0 3 7 Un d er SJ TC’ s p art n ers h ip ag reem en t , l i m i t edp art n ers were res tri ct edi n th ei r ab i l i ty

t o tran s fer t h ei r i n t eres t s i n SJ TC. No tran s fer o f SJ T C p art ners h i p
u n i t s was v al i di f i two u ldt erm i n at e t h e p art n ers h i p fo r Fed eral o r St at e t ax p u rp os es . Th e co ns en t o f al l p art n ers was req u i redfo r th e s ub s t itu t i on o f a tran s feree o f SJ TC p art n ers h ip u n i ts as a l i m i t ed p artn er. A tran s feree wh o was
n o ts ub s t i tu t edas a l i m i t edp art n er wo u l db e m erel y an as s i g nee o f al l o cat i o n s o f p art n ers hi p p ro fi t s an dl os s . Li m i tedp art n ers were al so s ubjectt o a Bu y -Sel l Ag reem en t , wh i ch res tri ct edtran sfers o f th ei r i n t eres ts i n SJ TC. It m i rro redSSC’ s Bu y -Sel l Ag reem en t : An y tran s fers th atwo u l d t erm i n at e SJ TC’ s p art n ers h i p
s t atu s fo r t ax p u rp o s es were v o i d ; SJ TC an d t h en th e o th er l i m i t edp art n ers were g ran t eda ri g h to f fi rs t refu s al b efo re a l im i t edp art ner t ran s ferred h i s o r h er u n i t s ;
an d a d et erm i n at i on o f fai r m ark et v al u e h adt o t ak e i n t o acco u n tl acko f- 1 8 -

[* 1 8 ] m ark et ab i l i ty , l acko f co n tro l , l acko f v o ti n g ri g h t s o f an as s i g n ee, an dth e
reas on ab l y

an t i ci p at edcas h d i s tri b u t i o n s al l o cab l e t o th e u n i t s . C. Gi ft s an d Su cces s i o n Pl an In 1 9 9 6 M r. J o n es b eg an t o creat e a s u cces s i o n p l ant o en su re t h at h i s fam i l y b u s in es s es rem ai n edo p erat i o n al i n p erp etu i ty . As p arto f t h is p l an , h e fo rm edth e fo l l o wi n g fam i l y an dg en erat i o n -s ki p p i n g tru s ts o n M ay 2 8 , 2 00 9 , t o wh i ch i n t eres t s i n th e co m p an ies wo u l db e t ran s ferred as g i ft s : Tru s t Tru st ee Ben efi ci ary Aaro n U. J o n es Vo t i n g St o ckTru s t Dal e Ri d d l e Is s u e o f Aaro n J o n es Kat h l een J o nes Hal l Fam i l y Tru s t Kat hl een J o n es Hal l Kat h l een J o n es Hal l an dh er i s s u e du ri n g h er l i fet i m e an d , aft er h er d eat h , h er ch i l dren J o dy J o n es Fam i l y

Tru s t J o dy

J o n es J o dy

J o nes an dh er i s s u e du ri n g h er l i fet i m e an d , aft er h er d eat h , h er ch i l dren Reb ecca J o n es Fam i l y Tru s t Reb ecca J o n es Reb ecca J o n es an dh er i s s u e du ri n g h er l i fet i m e an d , aft er h er d eat h , h er ch i l dren Kat h l een J o nes Hal l Tru st Kat hl een J o n es Hal l Kat h l een J o n es Hal l J o dy J o n es Tru s t J o dy J o n es J o dy

J o nes Reb ecca J o n es Tru s t Reb ecca J o n es Reb ecca J o n es- 1 9 -

[* 1 9 ] Onth e v al u at i o n d at e, M r. J o n es g av e b l o ck s o f s t o cki n SSC i n th e fo l l o w i n g am o u nt s :

Tru s t Cl as s A s h ares Cl as s B s h ares Aaro n U. J o n es Vo t i n g St ockTru s t 1 ,3 0 0 -0
- Kat h l een J o nes Hal l Fam i ly Tru s t -0
- 4 ,8 0 0 J o dy J o n es Fam i l y

Tru s t -0
- 4 ,8 0 0 Reb ecca J o n es Fam i l y

Tru s t -0
- 4 ,8 0 0 Kat h l een J o nes Hal l Tru st -0
- 5 ,4 5 6 J o dy J o n es Tru s t -0
- 5 ,4 5 6 Reb ecca J o n es Tru s t -0
- 5 ,4 5 6 In ad d it i o n , M r. J on es m ad e g i ft s t o each o f h i s d au g h t ers --Reb ecca J o n es , Kat h l een J o n es H al l , an dJ o dy J o n es --o f b lo ck s o f 1 0,2 6 7 .6 7 SJ TC l i m i t edp art n er
u n i t s an d1 0 ,2 56 s h ares o f cl as s B n o n v o t i n g s to cki n Ri fl e Ran g e Ro adCo rp . (Ri fl e Ran g e). Im m ed i at el y aft er t he g i ft s were m ad e, t h e o wn ers h i p o f SSC was as fo l l o w s :- 2 0 -

[* 20 ] Own er Cl as s A s h ares Cl as s B s h ares Aaro n U. J o n es 3 , 6 0 0 8 , 7 0 0 Aaro n U. J o n es Vo t i n g St ockTru s t 1 , 3 0 0 -0
- Dal e Ri d d l e 1 6 0 0 -0
- Reb ecca J o n es 1 , 5 0 0 5 4 4 Kat h l een J o nes Hal l 1 , 5 0 0 5 4 4 J o dy J o n es 1 , 5 0 0 5 4 4 Reb ecca J o n es Fam i l y

Tru s t -0
- 4 , 8 0 0 Kat h l een J o nes Hal l Fam i ly Tru s t -0
- 4 , 8 0 0 J o dy J o n es Fam i l y

Tru s t -0
- 4 , 8 0 0 Reb ecca J o n es Tru s t -0
- 5 , 4 5 6 Kat h l een J o nes Hal l Tru st -0
- 5 , 4 5 6 J o dy J o n es Tru s t -0
- 5 , 4 5 6

1 M r. Ri dd l e was a s h areh o l d er as tru s t ee o f t h e Aaro n U. J o n es Ch i l dren ’ s Tru s t . Im m ed i at el y aft er t he g i ft s were m ad e, t h e o wn ers h i p o f SJ TC was as fo l l o ws : Own er Gen eral p art n er u n i t s Li m i t edp artn er u n i t s Aaro n U. J o n es -0
- 1 2 ,4 8 7 .7 0 7 SSC 5 ,5 50 .9 2 -0
- Reb ecca J o n es -0
- 1 2 ,4 8 7 .7 0 7 Kat h l een J o nes Hal l -0
- 1 2 ,4 8 7 .7 0 7 J o dy J o n es -0
- 1 2 ,4 8 7 .7 0 7- 2 1 -

[* 2 1 ] M r. J o n es s i g n edn et -n et g i ftag reem en ts wi th each o f h i s d au g h ters i n wh i ch h i s d au g h t ers as s u m edl iab i l i ty fo r t h e g i ftt ax an des t at e t ax as s o ci at ed wi th th e tran s fers m ad e o n th e v al u at i o n d at e. M r. J o n es t i m el y

fi l ed h i s Fo rm

7 0 9 , Un i t edSt at es Gi ft(an dGen erat i o n Sk i p pi n g Tran sfer) Tax Retu rn , fo r t h e 2 0 09 t ax y ear, al o ng wi th v al uat i o n rep o rt s fo r SSC an dSJ TC p rep aredb y Co l u m b ia Fi n an ci al Ad v i s o rs , In c. (Co l u m b i a Fi n an ci al ). Co l um

bi a Fi n an ci al cam e t o t h e fo l l o w i ng v al u at i o n co ncl u s io n s : Sh ares /u n i ts Val ue p er s h are/ un i t Val ue o f b l o ck SSC cl as s A (v o t i n g) $ 3 2 5 $ 4 22 ,5 0 0 SSC cl as s B (n o nv o t i n g ) 1 3 1 5 1 , 5 12 ,0 0 0 SSC cl as s B (n o nv o t i n g ) 2 3 1 5 1 , 7 18 ,6 4 0 SJ TC l im i t ed p art n ers h i p u n i t s 3 5 0 3 , 5 93 ,6 8 5 In th e n ot ice o f d efi ci en cy , res p o n den tm ad e t h e fo ll o wi ng d et erm i n at i o n s
o f v al u e:- 2 2 -

[* 22 ] Sh ares /u n i ts Val ue p er s h are/ un i t Val ue o f b l o ck SSC cl as s A (v o t i n g) $ 1 , 3 95 $1 ,8 1 3 , 0 3 2 SSC cl as s B (n o nv o t i n g ) 1 1 , 3 25 6 ,3 5 9 , 5 6 8 SSC cl as s B (n o nv o t i n g ) 2 1 , 3 25 7 ,2 2 8 , 7 0 9 SJ TC l im i t ed p art n ers h i p u n i t s 2 , 5 11 25 ,7 8 0 , 0 0 0 Ri fl e Ran ge cl as s B 1 4 .2 0 4 3 ,0 7 5

1 Th e es t at e h as n o ti nt ro du ced an y ev i d en ce o r m ad e an y

arg u m en t reg ard i n g res p on d en t’ s ad ju s tm en t s t o the b l o ck o f Ri fl e Ran g e s t o ck tran s ferred as g i ft s. W e t h erefo re d eem th os e co n ced ed
. V. Exp ert Val u at io n Rep o rt s Bo th p art i es s ub m i t t edex p ertrep o rt s p ro v i d i n g v al u at i o n s o f t h e b l ock s o f SJ TC l i m i t edp art ners h i p u n it s tran s ferred b y M r. J o n es . Th e es t at e s ub m i t t edan
ex p ertrep o rtp ro vi di n g a v al uat i o n o f t he b l o ck s o f cl as s A an dcl as s B SSC s t ock tran s ferred b y

M r. J o n es , an d res p o n d en ts ubm i t t eda reb u t t al ex p ertrep o rt cri t i qu i n g th atv al u at i on . W e p ro v i d e a s u m m ary o f t h ei r co n cl u s i on s an do u r o wn
co n cl u s i o n s as t o t h ei r v al u at i o n s b el o w as p arto f o u r an al y si s.- 2 3 -

[* 2 3 ] OPINION I. In tro duct i o n an d Bu rd en o f Pro o f Ati s s ue are t h e v al u es o f M r. J o n es ’ g ift s o f SSC cl as s A an d B s t o ckan d SJ TC l i m i t edp art ners h i p u n it s . Ord i n ari l y , the t ax p ay er b ears th e b u rd eno f p ro v in g th atth e Co m

m is s io n er’ s d et erm i n at i o ns are erro n eo us . Ru l e 1 42 (a); W el ch v . Hel v eri n g , 2 9 0 U.S. 1 1 1 , 1 1 5 (1 9 3 3). Th e es t at e as s ert s t h ati t p ro v i d ed
co m p l et e an dco n cl u si v e d o cu m en t at i o n an dcred i b l e t es ti m o n y o f a co rrect
v al u at i o n o f t h e i n t eres t s i n SJ TC an dSSC s u ffi ci en t t o s h i ftthe b u rd en o f p ro o f
u n d er s ect i o n 7 4 9 1 (a). Un d er s ect i o n 7 49 1 (a)(1 ), “ [i ] f, i n an y co u rtp ro ceed i n g, a t ax p ay er i n tro du ces cred i b le ev id en ce wi th res p ectt o an y fact u al i s s ue rel ev an tt o
as cert ai n i n g th e l i ab i l i ty

o f t h e t ax p ay er fo r an y

t ax i m po s edb y s ub t i t le A o r B, th e Secret ary

s h al l h av e th e b u rd en o f p ro o f wi th res p ectt o s u ch i s s u e.” See Hi g bee v . Co m

m i ss i o n er, 1 1 6 T.C. 4 3 8 , 4 4 2 (2 0 0 1 ) (“ Cred i b l e ev i den ce i s th e qu al i ty o f ev i d en ce wh i ch , aft er cri t i cal an al y s i s , th e co u rtwo u l dfi n ds u ffi ci en t
up o n wh i ch t o b as e a d eci s i o n o n th e i s s u e i f n o co n traryev i d en ce were s ub m i t t ed (wi tho u t reg ardt o t h e ju d ici al p res u m p t i o n o f IRS co rrect n es s ).” (q u o t i n g H.R. Co n f. Rep t . No . 1 05 -5 9 9 , at2 4 0 -2 4 1 (1 9 98 ), 1 9 9 8 -3 C.B. 7 4 7 , 9 9 4 -9 9 5 )). Th e
res o l ut i o n o f t h i s i s s u e d o es n o td ep en do n wh ich p art y h as the b u rd en o f p ro o f.- 2 4 -

[* 2 4 ] W e res o l v e i to n th e b as i s o f a p rep o n d eran ce o f t h e ev i d en ce i n the reco rd
. See Kn u d s en v . Co m

m i s s i o n er, 1 3 1 T.C. 1 85 , 1 89 (2 0 08 ), s up p l em en t i n g T.C. M em o. 2 0 0 7 -3 4 0 ; Sch an kv . Co m m i s s i o n er, T.C. M em o. 2 0 1 5 -2 3 5 , at* 1 6
. Th e SSC Cl as s A an d B s t o ckan dth e SJ TC u n i t s were v al u edat$ 3 25 , $ 2 0 7 , an d$ 2 3 0 , res p ect i v el y , o n the g i ftt ax retu rn . 4 Th e es t at e n o w as s ert s th at th e i n t eres t s ’ fai r m ark etv al u es are $ 3 9 0 , $ 3 80 , an d$ 3 8 0 , res p ect i v el y , th u s
co n ced i ng a s m al l p arto f res p o n d en t ’ s d efi ci en cy . Res p on d en ts ub s equ en t l y i n creas edh i s v al u at i o n o f an SJ TC l i m i t edp art n ers h ip u n itfro m $ 2 ,5 1 1 t o $ 2 ,5 3 0 , an d h e b ears th e b u rd en o f p ro o f wi th res p ectt o th e i n creas edd efi ci en cy at tri b u t ab l e t o th ati n creas e i n v al u at i o n . See An s el m o v . Co m m i s si on er, 8 0 T.C. 8 7 2 , 8 8 6 (1 9 8 3), aff’ d , 7 5 7 F.2 d1 20 8 (1 1 th Ci r. 1 98 5 ); Learn er v . Co m m i s s i o n er, T.C. M em o . 1 98 3 -1 2 2
. II. Gi ftTax Val u at i on Pri n ci p l es Gi ftt ax i s i m

p o sed fo r each cal en d ar y ear o n th e t ran s fer o f p ro p ert y b y g i ft du ri n g th att ax ab l e y ear b y an i n d i v i du al
. Sec. 2 5 0 1 (a). Gi ftt ax o rd i n ari l y i s t o b e p ai db y th e d o n or. Sec. 2 5 02 (c). Th e t ax i s co m p u tedo n th e b as i s o f t h e t ax ab l e g i ft s m ad e i n a cal en d ar y ear. Sec. 2 5 0 2 (a). Th e t erm t ax ab l e g i ft s m ean s th e t o t al

4 Th e es t at e’ s rep o rt edv al u es d i ffer fro m th e v al u es atwh i ch Co l u m b i a Fi n an ci al arri v ed
.- 2 5 -

[* 2 5 ] am o un to f g i ft s m ad e i n t h e y ear, l es s cert ai n d edu ct i o n s . Sec. 2 50 3 (a). Th e t o t al am o u n to f g i ft s i n th e y ear i s th e s u m o f t h e v al u es o f t h e g i ft s m ad e i n th e y ear i n ex ces s o f t h e ex cl us i o n am o un ti n s ect i o n 2 5 0 3 (b ). Sec. 2 5.2 5 0 3 -1 , Gi ft Tax Reg s . Th e v al u e o f a g i fto f p ro p ert y i s d et erm i n ed as o f t h e d at e i ti s g i v en . Sec. 2 5 12 (a). Th e fai r m ark et v al u e o f p ro p ert y tran s ferred as a g i fti s th e p ri ce atwh i ch i t
wo u l dch an g e h an d s b et w een a wi l l i n g b u y er an da wi l l i n g s el l er, n ei th er u n d er
an y co m p u l s i o n t o b u y

o r s el l an db o th h av in g reas o n ab l e kn o wl ed g e o f th e rel ev an t fact s. Un i t edSt at es v . Cart wri g h t , 4 1 1 U.S. 5 4 6 , 5 5 1 (1 9 7 3 ); Es t at e o f Newh o us e v . Co m

m i s s i on er, 9 4 T.C. 1 9 3 , 2 1 7 (1 99 0 ); s ec. 2 5 .2 5 1 2 -1 , Gi ftTax Reg s. Th e wi l li n g b u y er an ds el l er are h y p o th et i cal p ers o n s , n o t an y s p eci fi c o r
n am edp ers o n . Es t at e o f Si m p l o tv . Co m

m i s s i o n er, 2 4 9 F.3 d1 1 91 , 1 19 5 (9 th Ci r. 2 0 0 1 ), rev ’ g an drem an d i n g 1 1 2 T.C. 1 30 (1 9 99 ); M o rri s s ey v . Co m m i s si on er, 2 4 3 F.3 d1 1 4 5 , 1 1 4 8 (9 th Ci r. 2 0 0 1 ), rev ’ g T.C. M em o. 1 9 99 -1 1 9 ; Es t at e o f Kah n v . Co m m i s s i o n er, 1 2 5 T.C. 2 2 7 , 2 3 1 (2 0 0 5). Wh en d et erm i n i n g th e fai r m ark etv al u e o f u nl i s t eds t o ck s fo r wh i ch n o
recen ts al es o r b i d s h av e b een m ad e, s ev eral fact o rs s h ou l d b e co n si d ered , i n cl u d i n g : th e co m

p an y ’ s n etwo rt h , i t s earn i n g p o wer an dd i v i d en d -p ay i ng cap aci ty , i t s g o o dwi ll , the eco n o m i c o u t l o o k i n th e i n du s try , i t s m an ag em en tan d- 2 6 -

[* 2 6 ] i t s p os i t i o n i n th e i n du st ry , th e d eg ree o f co n tro l o f t h e b u s i n es s rep res en t ed i n the b l o cko f s to ckt o b e v al u ed , an d th e v al ue o f s t o ck i n s i m i lar, p ubl i cl y trad ed
co m p an i es . Sec. 2 5 .2 5 1 2 -2 (f)(2 ), Gi ftTax Reg s .; s ee al so Es t at e o f Ad el l v . Co m m i s s i o n er, T.C. M em o . 2 0 1 4 -1 5 5 , at* 4 2 ; Rev . Ru l . 5 9 -6 0 , s ec. 4 , 1 9 59 -1 C.B. 2 3 7 , 2 3 8 -2 42 . Wh end et erm i n i n g th e fai r m ark etv al u e o f an i n t eres ti n a p art n ers hi p , th e v al u e o f t h e p art n ers h i p’ s as s et s m ay b e co n s i d ered , al o n g wi th th e
s am e fact o rs co n s id eredi n d et erm i n in g th e fai r m ark etv al u e o f s t ock . Sec. 2 5 .2 5 1 2 -3 (a), Gi ftTax Reg s . III. Ex p ertRep o rt s A. Th e Es t at e’ s Ex p ert Th e es t at e’ s v al u at i o n ex p ert , Ri ch ardRei l l y , h as p erfo rm edap p ro x i m at el y 1 0 0 b u s i n es s v al u at i o ns o f s awm i ll s an d t i m b er p ro du ctco m

p an i es . M r. Rei l l y
v al u edSJ TC an d SSC as g o i ng co ncern s an drel i edo n an i n co m e ap p ro ach
-- s p eci fi cal l y

the d is co u nt edcas hfl o w (DCF) m et h od --an da m ark etap p ro ach i n
v al u i n g th e u ni t s o f SJ T C an dSSC t ran s ferred as g i ft s . M r. Rei ll y

co n cl u d edth atSJ TC was wo rt h $ 2 1 m i l l i o n o n a n o n co nt ro l l i n g , n o n m ark et ab l e b as i s , aft er ad ju s t m en t s an dd i s co u n t s , an dh e cal cu l at eda v al u e o f $ 3 8 0 p er u ni to n th e b as i s o f t he n u m b er o f o u t s tan d i n g p art ners h i p u n i t s . Us i n g- 2 7 -

[* 2 7 ] th atv al u at i o n , th e n o nco n t ro l l i n g , n o nm ark et ab l e v al u e o f t h e b l o cko f l i m i ted p artn er u n i t s tran sferred b y M r. J o n es t o each o f h i s d au g h ters i s $ 3 ,9 0 1 ,7 1 5
. M r. Rei ll y

co n cl u d edth atSSC was wo rt h $ 2 0 m i l l i o n o n a n o n co n tro l l i n g , n o n m ark et ab l e b as i s , aft er ad ju s t m en t s an dd i s co u n t s , an dh e cal cu l at eda v al u e o f $ 3 9 0 p er s hare o f cl as s A v ot i n g s t o cko n th e b as i s o f t h e n u m b er o f o u t st an d i n g
s h ares . He ap pl i eda 3 % d i s co u n tfo r l ack o f v o t i n g ri gh t s b y rel y i n g o n em p i ri cal
s tud i es an darri v ed ata $ 3 8 0 v al u e p er s h are o f cl as s B n o n v o t i n g s t o ck
. B. Res p o n d en t ’ s Ex pert s Res p o n d en t ’ s v al u at io n ex p ert , Ph i l ip Sch wab , h as p erfo rm eds ev eral p ri v at el y h el db u s i n es s v al u at i on s . M r. Sch wab v al u edSJ TC as a g oi n g co n cern
an d rel i edo n an as s et -b as edap p ro ach --s p eci fi cal l y th e n etas s et v al u e (NAV)
m et h o d--an da m ark etap p ro ach i n v al u i n g o n e SJ TC l i m i tedp art n ers hi p u ni t . Aft er ap p l y i n g ad

ju s tm en t s an dd i s co u n t s, M r. Sch wab d et erm i n edth atthe v al u e
o f SJ TC o n a n o n co n tro l l i n g , n o n m ark et ab l e b as is was $ 1 4 0 ,3 9 8 ,0 0 0 . He d et erm i n eda v al u e o f $ 2,5 3 0 p er l i m i tedp art n er u n i to n th e b as i s o f t h e n u m b er o f
o u t s t an d i n g p art n ers hi p u n it s an d a v al u e o f $ 2 5 , 9 73 ,6 1 1 fo r th e b lo cko f u n i t s M r. J o n es tran s ferred t o each of h i s d au g h t ers .- 2 8 -

[* 2 8 ] J o h n As h b ro o k was res p o n d en t ’ s reb u t t al ex p ertwi th res p ectt o M r. Rei l l y ’ s
v al u at i o n o f SSC s t o ck . M r. As h b ro o kp rev i o us l y h adrev i ewed an d co m

p l et ed
s ev eral b u s i nes s v al u at i o n s , i n cl u d i n g s ev eral s awm i l l s . M r. As hb ro o k ch al l en g ed M r. Rei l l y ’ s u se o f t h e Ap ri l 2 0 0 9 rev i s edp ro ject i o n s an dh i s treat m en to f SSC’ s g en eral p art n er i n t eres t i n SJ TC an d th e i nt erco m p an y recei v ab l e i th el d
. C. Val u at i o n Is s u es Wh en co n s i d eri n g ex p ertt es t i m o n y , we h av e “b ro ad d i s cret i o n t o ev al u at e

‘ th e o veral l co gen cy o f each ex p ert ’ s an al y si s .’ ” Samm o n s v . Co m m i s s i o ner, 8 3 8 F.2 d3 3 0 , 3 3 4 (9 th Ci r. 1 9 8 8 ) (qu o t i n g Eb b env . Co m m is s i o n er, 7 8 3 F.2 d9 0 6 , 9 0 9 (9 th Ci r. 1 9 8 6 ), aff’ g i n p art , rev ’ g i n p artT.C. M em o . 1 9 8 3 -2 0 0), aff’ g i n p art , rev ’ g i n p artT.C. M em o. 1 9 8 6 -3 1 8 . W e are n otb o un dt o fo l l o w th e o p i n io n o f
an y ex p ertwi tn es s wh ere i t i s co n traryt o o u r o wn ju d g m en t . Hel v eri n g v . Nat ’ l Gro cery Co ., 3 0 4 U.S. 2 8 2 , 2 9 5 (1 9 3 8 ); Es t at e o f Hal l v . Co m m i s s i o ner, 9 2 T.C. 3 1 2 , 3 3 8 (1 9 8 9); Es t at e o f Ad el l v . Co m m i s s i o n er, at* 43 . An dwe m ay ad o p to r rejectan ex p ert ’ s o p i n io n i n wh o l e o r i n p art . Dav i s v . Co m m i s s i o n er, 1 1 0 T.C. 5 3 0 , 5 3 8 (1 9 9 8); s ee al s o Bu ffal o To o l & Di e M fg . Co . v . Co m m i s si on er, 7 4 T.C. 4 4 1 , 4 5 2 (1 9 8 0). Val u at i o n i s a qu es t i on o f fact , an dth e fact o rs co n s i d eredi n d et erm i n i n g v al u e s h o ul db e wei g hedacco rd i n g t o t h e ci rcu m s t an ces i n each cas e.- 2 9 -

[* 2 9 ] Samm o n s v . Co m

m i s si o ner, 8 3 8 F.2 dat3 3 4 ; Rev . Ru l . 5 9 -6 0 , s ec. 5 , 1 9 5 9 -1 C.B. at2 4 2
. Th ree g en eral l y

accep tedap pro ach es are u s ed t o v al u e eq u i ty i n t eres t s i n cl o s el y h el db us i nes s es : the i n co m e ap pro ach , th e m ark etap p ro ach , an d t h e as s et b as edap p ro ach . Ex el o n Co rp . v . Co m m i s s io n er, 1 4 7 T.C. 2 30 , 2 44 (2 0 16 ), aff’ d , 9 0 6 F.3 d5 1 3 (7 th Ci r. 2 0 1 8); Es t at e o f No bl e v . Co m m i ss i o n er, T.C. M em o . 2 0 0 5 -2 , 2 0 0 5 W L 2 3 3 0 3, at* 7 . Th e i n co m e ap p ro ach u ses ei th er t h e d irect cap i t al i zat io n m eth o d or t h e DCF m et h o dt o co n v ertth e an ti ci p at edeco n o m i c b en efi t s th atth e h ol d er o f t he i n t eres two u lds t an dt o real i ze i n t o a s i n g l e p res en t v al u edam ou n t . Es t at e o f No b le v . Co m m i s s i on er, 2 0 0 5 W L 2 33 0 3 , at* 7
. Th e
m ark etap p ro ach v al ues th e i n t eres tb y co m p ari n g i tt o a co m

p arab l e i n t eres tth at
was s ol datarm ’ s l en g th i n t h e s am e t i m efram e, acco un t i n g fo r d i fferen ces b et ween th e co m

p an i es b y m ak i n g ad

ju s t m en ts t o th e s al e p ri ce. Id . An d th e
as s et -b as edap pro ach v al u es th e i n t eres tb y referen ce t o the co m

p an y ’ s as s et s n et
o f i t s l i ab i l i t ies . Id . Wh en v al u i n g an o p erat in g co m p an y th ats el l s p ro du ct s o r
s erv i ces t o th e p ub l i c, t h e co m pan y ’ s i n co m e recei v es th e m o s t wei g h t . See Es t at e
o f An drews v . Co m

m i ss i o n er, 7 9 T.C. 9 3 8 , 9 4 4 -9 4 5 (1 9 8 2). Wh en v al ui n g a h o l d i n g o r i n v es t m en t co m p an y , wh i ch recei v es m o s to f i ts i n co m e fro m h o l d i n g- 3 0 -

[* 3 0 ] d eb t , s ecu ri ti es , o r o th er p ro p ert y , th e v al ue o f t he co m p an y ’ s as s et s wi l l recei v e t he m o s twei g h t . Id . at9 4 5. Th e p ri m ary

d i s pu t e b et ween th e p art ies i s wh et h er SJ TC s h o u ldb e v al u ed
u s i n g an i n co m e ap p ro ach o r an as s et -b as edap p ro ach . Th e p art ies h av e s ev eral
o th er p o i n t s o f d i s p u t e: (1 ) t h e rel i ab i l i ty o f t h e 2 0 0 9 rev is edp ro

ject i o n s , (2 ) t h e p ro p ri et y o f “ t ax -affect i ng ”, (3 ) t h e p ro per t reat m en to f i n t erco m p an y l o an s fro m SSC t o SJ TC, (4 ) t h e p ro p er t reat m en t o f SSC’ s 1 0 % g en eral p art n er i n teres ti n SJ TC, an d(5 ) th e ap p ro p ri at e d i s co u n tfo r l acko f m ark et ab i l i ty . W e co ns i d er th es e i n d et ai l b el o w. IV. Val ui n g SJ TC Th e es t at e co n ten d s th at SJ TC i s an o p erat in g co m p an y th ats el l s a p ro du ct -- l o g s --an d , th erefo re, s h ou ldb e v al u edas a g o i n g co ncern wi th p ri m ary
co n si d erat io n t o i t s earn in g s . See Rev . Ru l
. 5 9 -6 0 , s ec. 5 (a). Res p o n den t , o n th e
o th er h an d , co nt en d s thatSJ TC i s a n atu ral res o urce h o l d i ng co m pan y an d , th erefo re, t h e v al u e o f i t s t im b erl an d s --i t s u n d erl y i n g as s et s --s ho u l db e g iv en p ri m ary co n s i d erat i o n i n o u r v al u at i o n . See i d . Th e es tat e reject s res p o n den t ’ s
as s et -b as edv al u at i o n b ecau s e th ere i s n o l i k el ih oo do f SJ TC’ s s el l i n g i t s t i m b erl an d s .- 3 1 -

[* 3 1 ] A. Op erat in g Vers u s Ho l d i n g Co m pan y Th e p art i es d o n o t d is p u t e t h atSJ TC i s a g o i n g co n cern . Rat her, t h ey d i s ag ree o n wh et h er SJ TC i s an o p erat in g co m p an y th ats el l s a p ro du cto r a n atural
res o u rce h o l di n g co m

p an y th ats i m p l y h o l d s t im

b er as an i n v es t m en t fo r i t s p art n ers . No tal l co m

p an i es are ap tt o b e ch aract eri zed as s i m p l y an o p erat i n g
co m p an y o r a h o l d i n g o r i n v es t m en tco m p an y . Es t at e o f An drews v . Co m m i s s i o n er, 7 9 T.C. at 9 4 4
. Anex am p l e i s a co m

p an y wh o s e as s et s , es p eci al ly i t s real p ro pert y , p l ay

a s i g n i fi can tro l e i n i t s i n co m e-p ro du ci ng o p erat i on s . See Es t at e o f Sm i th v . Co m

m i s s i o n er, T.C. M em o . 1 9 9 9 -3 6 8 , 1 9 9 9 W L 1 0 0 11 8 4 , at* 5 . Wh en v al u i n g an i n t eres ti n a co m pan y th ath as as p ect s o f b o th an o p erat i n g
co m p an y an da h o l d i n g o r i n v es t m en t co m p an y , we wi l l n o t “ res tri ct[o ur]
co n si d erat io n t o o n ly

o n e ap pro ach t o v al u at i o n ”. Es t at e o f An drews v . Co m m i s s i o n er, 7 9 T.C. at 9 4 5
. SJ TC’ s t i m

berl an d s are i t s p ri m ary

as set , an d t h ey

wi l l ret ai n an d i n creas e i n
v al u e, ev en i f SJ TC i s n otp ro fi t ab l e o n a y ear-t o -y ear b as i s . See i d . at9 4 4
. Th erefo re, i tm ay

b e ap p ro p ri at e t o co n s i d er an as s et -b as edap p ro ach i n v al u i n g an i n t eres ti n SJ T C. See Es t at e o f Sm i th v . Co m m i s s i o n er, 1 9 9 9 W L 1 0 0 1 1 8 4 , at* 5
. SJ TC al s o i s an o p erat i n g co m pan y th at p l an t s trees an dh arv es t s an d s el l s th e l o g s . Cf. Harwo o dv . Co m m i s s i o n er, 8 2 T.C. 2 3 9 , 2 43 , 2 65 (1 9 8 4 ) (h o l d i n g- 3 2 -

[* 3 2 ] th ata t i m

b er co m p an y th ats i m

p l y acq u i redan dh el dt i m

b erl an ds an dt i m

b er ri gh t s fo r u s e b y

i ts affi l i at edco m

p an i es s ho u ldb e v al u edo n the b as i s o f i t s
as s et s), aff’ d , 7 8 6 F.2 d1 1 7 4 (9 th Ci r. 1 9 86 ). Itex p en d s s i gn i fi can tt i m e an deffo rt t o en s u re t hati t s o p erat i o n i s effi ci en t , i n cl ud i n g s el ect in g h ig h -qual i ty s eed l i n g s , p l an t i n g th em

p ro p erl y , an dp ro t ect i n g th em o n ce p l an ted . Ital s o p ract i ces
s u s t ai n edy i el dh arv es t i n g , wh i ch req u ires th e u s e o f s o p hi s t i cat eds o ft ware t o
en s u re th ati t co u ldm ai nt ai n i t s t i m b erl an d s o v er t h e l o n g t erm , ev en i f s el l i n g th e l an do r h arv es t i ng al l o f t h e t rees wo u l db e m os tp ro fi t ab l e i n th e s h o rtt erm . Th u s, SJ TC i s d i fferen tfro m TIM Os , REITs , an d o th er h o l d i n g o r i n v es tm en t
co m p an i es , an dan i n co m e ap p ro ach m ay b e ap p ro p ri at e i n v al u i n g an i n t eres ti n SJ TC. W e co ncl u d e t h at SJ TC h as as p ect s o f b ot h an o p erat i n g co m p an y an dan i n v es t m en to r h o l d i n g co m p an y . Becau s e i td o es n o t fi tn eat l y i n t o ei th er cat eg o ry , a v al u at i o n th atco m b i n es co ns i d erat i o n o f SJ TC’ s earn i n gs an d as s et s
an d wei g h t s each ap p ro p ri at el y m ay b e n eces s ary , s o we m

u s t d i g d eep er i n t o th e fact s.- 3 3 -

[* 3 3 ] B. Sal e o f Ti m

b erl an d s Anas s et -b as edap p ro ach n eces s ari ly as s um es acces s t o t h e v al u e o f SJ TC’ s
u n d erl y i n g as s et s --i t s t im b erl an d s --t h ro u g h a h y

p o th et ical s al e. Th e l i k el ih o o d th atSJ TC wo u l ds el l i ts t i m b erl an d s g o es t o t h e rel at i v e wei g h tth atwe g i v e an
as s et -b as edap pro ach i n v al ui n g SJ TC; th e l es s l i k el y SJ TC i s t o s el l i t s t i m b erl an d s , th e l es s wei g h t we s h o u l das s ig n t o an as s et -b as edap p ro ach . See Es t at e o f Gi u s t i n a v . Co m m i s s io n er, 5 8 6 F. Ap p ’ x 4 1 7 , 4 1 8 (9 th Ci r. 2 0 1 4 ) (h o l d i n g th atn o wei g h t s ho u l db e g i v en t o an as s et -b as edv al u at i on b ecau s e t h e
as s u m pt i o n o f an as s ets al e was a h y p ot h et i cal s cen ari o co n traryt o th e ev i d en ce i n th e reco rd ), rev ’ g an d rem an d i ng T.C. M em o . 2 0 1 1 -1 4 1, 2 0 1 1 W L 2 5 5 9 8 47
. Th e p art i es d i s ag ree o n t wo p o i n t s th atb ear o n wh et h er SJ TC wo u l ds el l i t s t i m b erl an d s : (1 ) wh et her SJ TC co ul ds el l i t s t i m b erl an d s an d(2 ) wh et h er we
s h o u ldco n s i d er SJ TC s ep arat el y o r as a s i ng l e b u s i n es s en t erp ri se wi th SSC. Res po n d en tco n t en d s th atci rcu m s t an ces m ay ari s e i n wh i ch SJ TC co u ldan d
wo u l ds el l i t s t im

b erl an d s. Th e es t at e arg ues th ath o l d ers o f b l o ck s o f SJ TC l i m i ted p artn ers h i p u n i t s co ul dn o tfo rce a s al e o f i t s t im b erl an ds u n d er th e p art n ers hi p ag reem en t an dth atSSC, wh i ch h as th e ex cl us i v e au th o ri ty t o d i rect SJ TC t o m ak e s u ch a s al e, wo u l dn ev er ex erci s e th atau th o ri ty . Res p o n d en targ ues th atth is i n ap p ro p ri at el y

co ns i ders s p eci fi c--rat h er t h an h y p ot h et i cal --b u y ers an d- 3 4 -

[* 3 4 ] s el l ers . W e d i s ag ree. SSC’ s ex cl u s i v e au tho ri ty t o ex erci s e co n tro l o v er SJ TC u n der t h e p art n ers h i p ag reem en t , i t s i n t eres ti n SJ TC’ s co n t in u ed o wn ers h i p
o f t h e t i m b erl an d s , s ee i n fra, an dth e res tri ct i o n s i m p os edo n l i m i t edp art n ers
u n d er t h e p art n ers h ip ag reem en td o n o t d ep en d o n h o w m an y l i m i t edp art n ers SJ TC h as o r wh o th ey are. Th es e res tri ct i o n s ap pl y t o t h e i n t eres tb ecau s e o f t h e p art n ers hi p ag reem en t an dth e ri g h t s h el db y SSC an dwo u l d b e t ak en i n t o acco un t b y an y h y p o th et ical b u y er an d s el l er o f a l i m i t edp art n er i n teres t . As fu rt h er s up p o rtfo r i ts p o s i t i o n , th e es t at e arg u es th atwe s h o ul dco n s i d er SJ TC an dSSC as a s i n g l e b u s i n es s o p erat i o n ev en th o u g h th ey are s ep arat e l eg al
en t i t i es . Res p o n d en targ u es th atb ecau se SJ TC an dSSC are s ep arat e l eg al en t i t i es , we s h ou l di g no re t h ei r i n t erd ep en d en trel at i on s h i p wh env al u i n g th em . SSC’ s
co n ti n u edo p erat i on as a s awm i l l co m p an y d ep en d edo n SJ TC’ s co nt i n u ed
o wn ers hi p o f t i m

b erl an d s an dth ere was n o l i kel i ho o dth atSSC, as SJ T C’ s g en eral p art n er, wo u l dd i rect SJ TC t o s el l i t s t i m b erl an ds wh il e SSC co n t i n u ed o perat i on s
as a s awm i l l
. Inad di t i o n , th ey h adal m o s ti d en t i cal o wn ers hi p , an dth ey s h ared ad m i n is trat i v e s t aff. Th erefo re, o n th e b as i s o f t h e fact s we fo u n dab o ve, we
co n cl u d e th atSJ TC an d SSC were s o cl o s el y al i g nedan di n t erd ep en d en tth at , i n
v al u i n g SJ TC, i t i s ap pro p ri at e t o t ak e i n t o acco u n ti t s rel at i o n s h ip wi th SSC an d
v i ce v ers a. Co n trary t o res p o n den t ’ s o b ject i o n , th i s d o es n o ti g n o re t h e s t atu s o f- 3 5 -

[* 3 5 ] SJ T C an dSSC as s ep arat e l eg al en t it i es b u treco g n izes th ei r eco n o m i c rel at i o n s h i p an di t s effect o n thei r v al u at i o n s . W e, t h erefo re, co n cl u de t h atan i nco m e-b as ed ap p ro ach , l i k e M r. Rei l l y ’ s DCF m eth o d , i s m o re ap p ro p ri at e fo r SJ TC th anM r. Sch wab ’ s NAV m et h o d
v al u at i o n . See Es t at e o f Gi u s t i n a v . Co m m is si o n er, 5 8 6 F. Ap p ’ x at4 1 8
. C. M r. Rei l l y ’ s DCF M et h o d Res p o n d en to ffered two p ri n ci p al cri ti ci sm s o f M r. Rei l l y ’ s DCF m et h o d
v al u at i o n : (1 ) M r. Rei l l y s h o u l dn o th av e rel i ed o n th e Ap ri l 2 0 0 9 rev i sed p ro ject io n s an d(2 ) M r. Rei l l y s h o u l dn o t h av e “ t ax -affect ed ” SJ TC’ s earn i n g s b efo re i n t eres t an dt ax es (EBIT) i n p ro ject i n g n etcas hfl o w. 1
. Ap ri l 2 0 0 9 Rev i s ed Pro ject i o n s Res p o n d en targ u es th atth e Ap ri l 2 0 0 9 rev i s edp ro j ect i o n s t h atM r. Rei l l y
u s ed in d et erm in i n g SJ TC’ s n etcas h fl o w were u n rel i ab le. Th es e rev i s ed p ro ject io n s were m ad e l es s th an two m o nt h s aft er SJ TC’ s an n ual rep o rto u to f
co n cern th at SJ TC was g o i n g t o v i ol at e l o an co v en an t s . Th e co m p an i es ’ m an ag em en tt eam co m p let edth e Ap ri l 2 0 0 9 rev i s ed p ro ject io n s u s in g th e s am e p ro ces s thatth ey u s edt o p rep are t h e y earl y p ro ject i o n s i n cl u d edi n th ei r an n ual rep o rt s . Th ey were t h e m o s tcu rren tp ro j ect i o n s an dwere rel i edo n fo r b us i nes s d eci s i o n s at th e v al uat i o n d at e. Infact , res po n d en t ’ s ex p ert ,- 3 6 -

[* 3 6 ] M r. Sch wab , al s o u s edth e rev i s ed p ro ject i on s i n h i s g u i d el i n e p ub li cl y trad edco m

p an i es v al u at i o n . He av erag edthe rev i s edp ro ject i o n s wi th t h e p ro ject io n s fro m

the m o strecen tan n u al rep o rtb ecau s e h e t h ou g h tth e rev i s ed p ro ject io n s m ay

h av e rep res en tedth e wo rs t -cas e s cen ari o an dwere o v erl y p es s i m i s t i c, n o tb ecau se h e fel tth e p ro ject i o ns were u n rel i ab l e. Th e o n l y g ro u n d fo r ch al l en g in g t h e rel i ab i l it y o f t h e rev i s edp ro

ject i o ns i s th atth e v o lat i le
eco n om i c co n d i ti o n s m ean t th atth ey were n o t rel i ab l e fo r l o n g . Th is i s p reci s el y wh y m an ag em en twan t edth e rev i s edp ro ject i o n s . As they

were t h e m o s tcu rren t
as o f t h e v al uat io n d at e, M r. Rei l l y ’ s u s e was ap p ro p ri at e.

2
. “ Tax -Affect i n g ” t h e Val u at i o n o f SJ TC In h i s DCF m et h o d M r. Rei l l y “ t ax -affect ed ” SJ TC’ s earn i n gs . To d o th i s h e u s ed3 8 % as a p ro x y

fo r t h e co m

b i n edFed eral an dSt at e t ax b u rd en s th at
o wn ers o f SJ TC wo u l db ear (t reat i n g SJ T C i n effect as a t ax ab l e C co rp o rat i o n , al b ei t atan i nd i v i du al , n o tco rp o rat e, t ax rat e), an dad ju s t edb ot h th e earn i n g s h e
u s ed to cal cu l at e SJ TC’ s n etcas h fl o w an dth e co s t o f d eb tcap i t al h e u s edt o d et erm i n e t h e ap p ro p ri at e d i sco u ntrat e. He th en co m p u t edth e b en efi to f t h e d i v i d en d t ax av o i d edb y es t i m at i n g t h e i m p l i edb en efi tfo r SJ TC’ s p art n ers i n p ri o r y ears an dco n s id eri n g an em pi ri cal s tu dy an al y zi n g S co rp o rat i o n acq u i si t i o n s ci t ed i n h i s rep o rt . Inh i s g u i d el i n e p ub li cl y trad edco m

pan i es v al u at io n , h e u s ed- 3 7 -

[* 3 7 ] th e t ax -affect edearn i n g s as wel l , al tho u g h th e m etri cs h e u s edt o co m p are th e co m pan i es t o SJ TC were p ret ax . Fi n al l y , h e ap p l i ed a 2 2 % p rem i u m t o SJ TC’ s wei g h t edb u si nes s en t erp ri s e v al u e (t h ati s , h i s wei g ht edDCF m et ho dan d g u i d el i n e p ub l icl y

trad edco m

p an i es m et h o d v al u at i o n s ) t o refl ectth atb en efi t . Res p o n d en tco n t en d s th atM r. Rei l l y i m pro p erl y ad ju st edSJ TC’ s v al u e fo r
en t i ty -l ev el t ax es ev en tho u g h i ti s a p art n ers hi p an d , th erefo re, i s n o t l i ab l e fo r t ax atthe en t i ty

l ev el , an dthere i s n o ev i d en ce t hatSJ TC wo u l db eco m e a t ax ab l e C
co rp o rat i o n. He fu rt h er arg u es th att ax -affect i n g ab an do n s th e arm ’ s l en g th fo rm u l at i o n o f fai r m ark etv al u e, i n th e ab s en ce o f a s h o wi n g th attw o u n rel at ed p art i es d eal i n g atarm s l en g th wo u l dt ax -affect SJ TC’ s earn i n g s , b ecau s e i t i n ap p ro p ri at el y

fav o rs a h y

p o th et i cal b u y er o v er t he h y p o th et i cal s el l er. Th erefo re, i tu n d ers t at es th e v al u e o f a l i m i tedp art n er i n teres ti n SJ TC. Res po n d en ti n s t eadarg u es th ata zero t ax rat e ap p ro p ri at el y refl ect s SJ TC’ s fl owt h ro u g h s tatu s . Th e es t at e arg u es thata zero t ax rat e atth e en t i ty l ev el wo u l do v ers t at e t h e
v al u e o f an i nt eres t i n SJ TC. Th i s , i tco n t en d s, i s b ecau s e SJ TC i s a p as s th ro u g h
en t i ty , an di t s p art n ers are t ax edatth ei r o rd i naryrat es o n th ei r s h ares o f p art n ers hi p i n co m e an d g ai n wh et h er o r n otSJ TC d i s tri b ut es an y cas h , an da h y p o th et i cal b uy er wo u ldt ak e t h i s i n t o co n s i d erat i o n . An dtherefo re, i t co n t en d s ,- 3 8 -

[* 3 8 ] a v al uat i o n o f SJ TC m u s tt ak e i n t o acco u n tth e p art n ers ’ t ax l i ab i l i t i es i n th ei r ex p ect edretu rn o n thei r i n v es tm en t . Th e es t at e al so arg u es th ata h y p o th et i cal b uy er an ds el l er al s o wo u l dt ak e i n t o acco u n tth e b en efi t o f d i v i d en d t ax es av o i d edb y

o perat i n g as a fl o wth ro ug h
. In s up p o rto f i t s arg u m en t , th e es t at e ci t es Bern i er v . Bern i er, 8 7 3 N.E.2 d 2 1 6 (M as s . 2 0 07 ). Th ere, i n th e co n t ex to f a d iv o rce d i s p u t e i n v o l v i n g an S co rp o rat i o n, a M as sach u s et t s St at e co u rth el d : [A] p p l y in g the C co rp o rat i o n rat e o f t ax at i o n t o an S co rp orat io n s ev erel y u n d erv al u es th e fai r m ark etv al u e o f th e S co rp o rat io n b y i g n o ri n g th e t ax b en efi t s o f t h e S co rp o rat i o n s tru cture an dfai l i n g t o co m p en s at e t he s el l er fo r t h e l o s s o f t h o s e b en efi t s . Onth e o th er h an d , * * * we ag ree * * * th atfai l u re en t i rel y t o t ax affect an S co rp orat i o n art i fi ci al ly

wi l l i n fl at e t h e v al u e o f t h e S co rp orat i o n b y o v ers t at i n g t h e rat e o f retu rn th atth e ret ai ni n g s h areh o l d er co u l dh o p e t o ach iev e. * * * Id . at2 2 1 (ci t i n g Del . Op en M RI Rad i o l o g y As s o cs . v . Kes sl er, 8 9 8 A.2 d2 9 0 , 3 2 7 -3 2 8 (Del . Ch . 2 0 0 6 ) (“ A ffo rd i n g a rem ed y t o t h e Kes s l er Gro up th at d en i es th e real i ty

th at each s h areh o l d er o wes t ax es o n h i s p ro p o rt i o n al i nt eres t i n Del aware Rad i o lo g y

wo u l dres u l t i n th e Kes s l er Gro up recei v i n g a h i g h er p er
s h are v al u e fro m

th e co u rtth an i tco u l dev er h av e real i zedas a co nt i n ui n g
s h areh o ld er.”)); s ee al so Fran k l i n M . Fi s h er, Ch ri s t o p h er F. No e, & Ev an Su e Sch ou t en , “ Th e Sal e o f t h e W as h i n g t o n Red s k i n s : Di s co u n t edCas h Fl o w- 3 9 -

[* 3 9 ] Val u at i o n o f S-Co rp o rat io n s , Treat m en to f Pers o n al Tax es , an dIm p l i cat i o n s fo r Li ti g at i o n ”, 1 0 St an . J
. L. Bu s . & Fi n . 1 8 (2 00 5 ); Co u rtn ey Sp ark s Whi t e, Co m m en t , “ S Co rp orat i o n s : A Tax i n g An al y s i s o f Pro p er Val u at io n”, 3 7 Cap . U. L. Rev . 1 1 1 7 (2 00 9 ). In effect , b o th p art i es arg u e th ata h y po th et i cal b uy er an d s el l er wo ul dt ak e i n t o acco u n tSJ TC’ s b u s i n es s fo rm wh en d et erm i n in g th e fai r m ark etv al u e o f a l i m i ted p artn er i n t eres t ; they ju s td i s ag ree ab o u th o w t o d o thi s . As we d i di n Gro ss v . Co m

m i s si o ner, T.C. M em o . 1 9 9 9 -2 54 , 1 99 9 W L 5 4 9 4 63 , aff’ d , 2 7 2 F.3 d 3 3 3 (6 th Ci r. 2 0 01 ), an ds ub s equ en tcas es , we d eci d e t h is qu es ti o n o f facto n th e b as i s o f t h e reco rd befo re u s . Wh i l e res p o n d en to b

ject s v o ci fero u s l y

i n h i s b ri ef t o p et i t i o n er’ s t ax affect i n g , h i s ex p ert s are n o t ab l y s i l en t . Th e o n l y m en ti o n co m es i n M r. Sch wab ’ s reb u t t al rep o rt , i n wh i ch h e arg u es th atM r. Rei l l y ’ s t ax -affect i ng was i m p ro p er,
n o tb ecau s e SJ TC p ay s n o en t i ty l ev el t ax , b u t b ecau s e SJ TC i s a n atu ral res o u rces h o l d i n g co m

p an y an d t h erefo re i t s “ rat e o f retu rni s cl o s er t o the p ro p ert y rat es o f retu rn ”. Th ey d o n oto ffer an y d efen se o f res p on d en t ’ s p ro p o sedzero t ax rat e. Th u s, we d o n oth av e a fi gh tb etween v al u at i o n ex pert s b u t a fi g h t b et ween l awy ers .- 4 0 -

[* 4 0 ] W e d o n o tfi ndres p o n d en t ’ s arg um en t s ag ai n s tM r. Rei l l y ’ s m et h o do l o g y
co n vi n ci n g . Wh i l e res p o n den tco rrect l y p o i nt s o u tth atwe reject edth e p ro ffered t ax -affect i n g i n Gro s s an d l at er cas es , h e m i s co n s tru es o u r rat io n al e. In Gro s s v . Co m m i s s i o n er, 1 9 9 9 W L 5 4 94 6 3 , at* 1 0 , we co n cl u d edth at“ th e p ri nci p al b en efi t th ats h areh o l d ers ex p ectfro m an S co rp o rat i o n el ect i o n i s a reduct i o n i n th e t o t al t ax b u rd en i m

p o s edo n th e en t erp ri s e. Th e o wn ers ex p ectt o s av e m on ey , an dwe
s ee n o reas o n wh y

th ats av i n gs o u g h tt o b e i g n o redas a m at t er o f co u rs e i n
v al u i n g th e S co rp o rat i o n .” W e t h en co n cl u ded th at , o n th e reco rdi n thatcas e, a
zero -p ercen tco rp o rat e t ax rat e p ro p erl y refl ect edth o s e t ax s av in g s , reject in g th e
ex p ert ’ s o ffered ju s t i fi cat i o n s . 5 M o re recen t l y , i n Es t at e o f Gal l ag h er v . Co m m i s s i o n er, T.C. M em o . 2 0 1 1 -1 4 8 , 2 0 11 W L 2 5 5 9 8 47 , at* 1 2 , s up pl em en t ed b y T.C. M em o . 2 01 1 -2 4 4 , we ag ai n reject edt ax -affect in g b ecau se t he t ax p ay er’ s
ex p ertd i dn o tju s t i fy

i t b ut ag ai n ackn o wl ed g edth atth e b en efi to f a red u ct i o n i n th e t o t al t ax b u rd en b o rn e b y S co rp o rat i o n o wn ers s ho u l db e co n s i d eredwh en

5 In d eedi n d i s cu s s i ng th e an al y s i s b y th e Co m m i s s i o n er’ s ex p erti n Gro s s we n o t edth e i m

po rt an ce o f t reat i n g b o th cas h fl o w s an dth e d i sco u n trat e co n si s t en t l y , as M r. Rei l l y d i d h ere. Gro ss v . Co m

m is s i o n er, T.C. M em o . 1 9 9 9
- 2 5 4 , 1 9 9 9 W L 5 4 9 4 6 3 , at* 1 0-* 1 1 , aff’ d , 2 72 F.3 d 3 33 (6 th Ci r. 2 0 0 1 ). In Gro s s th e ex p ertap p l i eda h y

p ot h et i cal 4 0 % co rp o rat e t ax rat e t o earn i n g s b u td i d n o t ap p ly an y p rem i um t o refl ectth e b en efi to f av o i d edd i v i den d t ax . Thu s t h e Co u rt was p res en t edwi th a ch oi ce b et ween a 4 0 % o r a 0 % co rp o rat e t ax rat e. Id . Th at i s n o tth e ch o i ce b efo re u s h ere.- 4 1 -

[* 4 1 ] v al u i n g an S co rp o rat i o n . An di n Es t at e o f Gi us t i n a v . Co m m i s s i o n er, 2 0 1 1 W L 2 5 1 6 1 6 8 , at * 6 , we reject edt ax -affect i n g i n th e v al uat i on o f a p art n ers h i p b ecau s e we fo un dthe t ax p ay er’ s ex p ert ’ s m eth o d t o b e fau l ty : He u s eda p ret ax d i s co u n t rat e t o p res en tv al u e p o s t t ax cas hfl o w. Th e qu es ti o n i n th os e cas es , as h ere, was n o twh et h er t o t ak e i n t o acco u ntth e t ax b en efi t s i n uri n g t o a fl owt h ro u g h en t i ty

b u t h o w. W e fi n do n the reco rdb efo re u s th atM r. Rei l l y h as m ore accu rat el y t ak en i n t o acco u n tth e t ax co ns equ en ces o f SJ TC’ s fl o wthro u g h s t atu s fo r p urp o ses o f
es t i m at in g wh at a wi l l in g b uy er an dwi ll i n g s el l er m i g h tco n cl ud e reg ard i n g i t s
v al u e. Hi s ad

ju s t m en ts i n cl u d e a red uct i o n i n th e t o t al t ax b u rd en b y i m p ut i n g t h e b u rd eno f t h e cu rren tt ax th atan o wn er m i g h to we o n th e en t i ty ’ s earn i n g s an dth e b en efi to f a fu tu re d i v i den dt ax av o i d edth at an o wn er m i g h ten jo y . W e are
m i n d fu l th at th e s ci en ce o f v al u i n g cl o s el y h el d co m p an ies u s u al l y

res ul t s i n a

“ g ro s s t erm i n al l o g i cal i n ex act i tu d e” i n th e wo rd s o f W i n st o n Ch u rch il l. E.g ., M ari s v . Co m

m i s si o ner, T.C. M em o . 1 9 8 0 -4 44 . An das we ad m o n is hedi n Bu ffal o To o l & Di e M fg . Co . v . Co m m i s s i o n er, 7 4 T.C. at4 5 2 , “ i n th e fi nal an al y si s , th e Co u rtm ay

fi n dth e ev id en ce o f v al u at i o n b y o n e o f t h e p art i es s u ffi ci en t l y m o re
co n vi n ci n g th an th ato f t h e o th er p art y , s o thatth e fi n al res u lt wi l l p ro du ce a
s i gn i fi can tfi n an ci al d efeatfo r o n e o r t h e o ther, rat h er t h an a m id d le-o f-th e-ro ad- 4 2 -

[* 4 2 ] co m

pro m i s e wh i ch we s u s p ect each o f t h e p art i es ex p ect s t h e Co u rtt o reach .” M r. Rei l ly ’ s t ax -affect i n g m ay n o tb e ex act , b u t i ti s m o re co m p l et e an d
m o re co nv i n ci n g th an res p o n d en t ’ s zero t ax rat e. D. Th e M ark etAp p ro ach Bo th M r. Rei l l y

an dM r. Sch wab al s o u s edth e g u i d el i n e p ub li c co m p an y
m et h o d fo r SJ T C, wh i ch v al u es an i n teres ti n a s ub j ectco m p an y b y co m pari n g i t t o p ub li cl y

trad edco m

pan i es i n t h e s am e l i n e o f b u s i nes s , co m bi n i n g the res u l t i n g
v al u e fro m

th atm et h odwi th th ei r o th er ch o s en m et h o d . Bo th ex p ert s co n du ct ed d at ab as e s earch es fo r g u i d el i n e co m p an i es th atp ro du ceds i m il ar g ro ups o f
co m p an i es . Inh i s b ri ef res p o n d en taccep t edM r. Rei l l y ’ s m ark et ap p ro ach
v al u at i o n . W e d o as wel l an d recap i tb el ow. M r. Rei ll y

ch o s e s i x g ui d el i n e co m

p an i es : Po p e Res ou rces , Pl u m Creek Ti m b er, Po t l at ch Co rp . , Ray o n i er, W ey erh aeu s er, an dDel t i c Ti m b er. He th en
u s ed fo u r d i fferen tm eas u res t o as s es s the d i fferen ces b etween SJ TC an dth e g u i d el i n e co m

p an i es : (1 ) EBIT, (2 ) earn i n gs b efo re i n t eres t, t ax es , d ep reci at i o n , d ep let i o n , an d am o rt i zat i o n (EBITDDA), (3 ) rev en ue, an d(4 ) ad ju st edt an g i b l e b o o kv al u e o f i n v es t edcap i t al (ATBVIC). ATBVIC i s cal cu l at edb y ad d i n g th e
acco u n t in g b o okv al u e o f t h e i nt eres t -h o l d er’ s equ i ty t o th e acco u n t i n g b o o kv al u e- 4 3 -

[* 4 3 ] o f t h e i n teres t -b eari n g d eb t , m i n u s t h e acco u n t in g b oo kv al u es o f i n t an g i b l e
as s et s an dth e t i m

b erl an d s, p l u s th e es t i m at edm ark etv al u e o f t h e t i m b erl an d s . M r. Rei ll y

rel iedo n SJ TC’ s rep o rt edan dp ro ject edearn i ng s fo r t h e 2 0 1 0 fi scal y ear, t h e l as t1 2 m o nt h s b efo re t h e v al u at i on d at e, an dth e h i s t o ri cal fi v ey ear av erag e, an dSJ TC’ s rep o rt edan d p ro ject edrev en u e fo r t h e 2 0 0 9 an d2 0 1 0 fi scal y ears , th e l as t1 2 m o n th s b efo re t h e v al u at i o n d at e an d t h e h i s to ri cal fi v ey ear av erag e. An dh e rel i edo n SJ TC’ s ATBVIC fo r th e l as t1 2 m o n th s b efo re t h e
v al u at i o n d at e. Th e es t at e accep t edth e t im berl an dv al u at i on s ub m i t t edb y
res p o n d en t’ s ex p ert , Ch ri s t o p h er Si n g l et o n , wh i ch co ncl u d edth atth e t i m b erl an d h ad a fai r m ark etv al ue o f $ 4 2 4 m i l l i o n as o f th e v al u at i on d at e. Th erefo re, M r. Rei l l y u s ed$ 4 24 m i l l i on as the es t i m at ed m ark etv al u e o f SJ TC’ s t i m b erl an d s i n cal cu l at in g ATBVIC. M r. Rei ll y

fo u n d t h atSJ TC was s i gn i fi can t l y s m al l er t h an the m ed i an g u i d el i n e co m

p an y m eas u redb y

rev en u e an das s et s i n th e l as t1 2 m o n th s b efo re th e v al u at i o n d at e. He al s o fo u n dth atSJ TC was l es s p ro fi tab l e th an al l b u to n e o f th e g u id el i n e co m

p an i es m eas u redb y

p ro ject edEBITDDA fo r t h e 2 0 0 9 fi s cal y ear, al th o u g h i twas m o re p ro fi t ab l e t h anan y o f t h e g u i del i ne co m

p an i es i n t erm s
o f t h e h i s t o ri cal fi ve-y ear av erag e o f EBITDDA. Fi n al ly , wh i l e SJ TC p ro ject ed
s i gn i fi can tearn i n gs g ro wth b et ween th e 2 0 0 9 an d2 0 1 3 fi s cal y ears , i t s rev en u e- 4 4 -

[* 4 4 ] d ecreas edata fas t er p ace t h an th e m ed i ang u i d el i n e co m p an y o v er t h e p rev i o u s fi v e y ears . To acco u n tfo r the d ifferen ces b et ween SJ TC an dth e g u i d el i n e co m pan i es , M r. Rei l l y

s el ect edp ri ci ng m

u l t i p l es t o ap p l y

t o SJ TC’ s fi nan ci al fu n dam en t al s fo r EBIT an dEBITDDA th atwere s l ig h t l y ab o ve t he g u i del i n e co m p an y l o w, fo r
rev en u e th at was s l i g h t l y u nd er t h e g u i d el i n e co m p an y l ow, an dfo r ATBVIC t h at
was b el o wth e g u i d el i n e co m p an y l o w. On the b as i s o f th e i n di cat eden t erp ri s e
v al u es fo r each m eas u re, M r. Rei l l y cal cu l at ed a wei g ht eden t erp ri s e v al u e fo r SJ TC o f $ 1 0 7 m i l l i o n o n a n o n co n tro l l i n g , m ark et ab l e b as i s . 6 E. In t erco m

p an y Deb t Res p o n d en targ u es th atM r. Rei l l y erred i n h i s treat m en to f i n t erco m p an y l o an s fro m

SSC t o SJ TC. M r. Rei l l y reg ard edth e i n t erco m

p an y d eb tas a cl eari n g
acco u n t or “ s i m

p l y two p ock et s o f t h e s am e p ai r o f p an ts ”, ex cl u d i n g the recei v ab l e h el d by

SSC an dSJ TC’ s o ffs et ti n g l i ab i l i ty , wh i l e t ak i n g acco u n to f SSC’ s an dSJ TC’ s i n t erco m p an y i n t eres ti n co m e an dex p en s e. Res po n d en targ u es

6 M r. Rei l l y

g av e a 1 0% wei g h tt o each o f EBIT an dEBITDDA p ro ject i o n s fo r t h e 2 0 1 0 fi scal y ear, fo r t h e 1 2 m o n th s b efo re t he v al u at i o n d at e, an dfo r t h e h i s t o ri cal fi v e-y ear av erag e. He g av e a wei g h to f 5 % t o each o f t h e rev en ue p ro ject io n s fo r t he 2 0 0 9 an d2 01 0 fi s cal y ears , th e rev en u e fo r th e 1 2 m o n th s b efo re t h e v al u at io n d at e, an dth e h is t o ri cal fi v e-y ear rev en u e av erag e. An dh e g av e a 2 0 % wei g h t t o th e ATBVIC fo r t he 1 2 m o n th s b efo re t h e v al u at i o n d at e.- 4 5 -

[* 4 5 ] th atM r. Rei l l y

el i m i n at edth e i n t erco m

p an y d eb tb ecau s e i two u ldh av e l eft SJ TC wi th a n eg at i ve v al u e, an ab s u rdco n cl u s i o n thatM r. Rei l l y wi s h edt o av o i d
. Res po n d en targ u es th at , wh i le M r. Rei l ly treat edSSC’ s recei v ab le fro m SJ TC as
an o p erat i n g as s et , i ti s actu al l y a n o n o p erat i n g as s et , the v al u e o f wh i ch s h o u l d h av e b een ad d edb ack i n t o M r. Rei l l y ’ s DCF m et h o dv al u at i o n atth e en d
. Res po n d en tco n t en d s th atth e i n t erco m p an y recei v ab l e i s an i n v es t m en ti n a
s ep arat e co m

p an y rat h er th an o n e m ad e i n t h e co u rs e o f SSC’ s b u si n es s . SJ TC wo ul dh av e a n eg at i v e v al ue o n l y i f we accep t edres p o n den t ’ s p rem i s e th atwe s h o u l dn o t co n si d er SJ TC an dSSC as a s i n g le b u s i n es s en t erp ri s e. W e reject edres p o n d en t’ s p rem is e. Here, t he s i ze o f t he i n t erco m p an y d eb ti s d i rect ly rel at ed t o the co n n ect i o n b et ween th e t wo co m p an i es . SSC’ s l o ant o SJ TC was n ot
an i n v es t m en ti n a s ep arat e co m p an y b u trat h er an i n t erco m

p an y cl eari n g acco u nt . M an ag em en t u s edth es e acco u n t s t o m o v e cas h acro s s th e Sen eca co m p an i es , as
n eed ed , as s i g n i n g th e co s t o f b o rro wi n g t o th e u n i tu s i n g the cas h b y ch arg i n g i n t eres to n i n terco m

p an y tran s fers . Wh i l e t h e i n t eres trat e was arm ’ s l en gt h i n th at i t refl ect edth e rat e t h e Sen eca co m p an i es were ch arg edb y

th e t h i rd -p art y

l en d er, th ere was n o i n d i cat i on th atth ird -p art y l o an s wo u l db e av ai l ab le t o SSC o n th o s e t erm s wi th o u t th e s ecu ri ty o f SJ TC’ s t i m

berl an d s . Rat h er th e fact th at SSC an d SJ TC’ s jo i n tcred i tag reem en t s are s ecu redb y SJ T C’ s t i m b erl an d s i s ev i d en ce t h at- 4 6 -

[* 4 6 ] SSC co u l dn o to bt ai n th i rd -p art y l oan s . Si m i l arl y , th e reco rdd o es n o t
s up p orta co n cl u s i o n th atSJ TC wo u l d b e ab l e t o b o rro w fro m thi rdp art i es th e
am ou n t s o f t h e o u t st an d in g l oan s fro m SSC o n tho s e t erm s , i n ad d i ti o n t o th e th i rd -p art y d eb t i th ado u t st an d i n g . By el i m i n at i n g SSC’ s recei v ab le an d SJ TC’ s p ay ab l e an dtreat i n g th ei r i nt erco m p an y i n t eres ti n co m e an dex p en s e as o p erat i n g i n co m e an d ex pen s e, M r. Rei l l y cap tu redth ei r rel at i o ns h i p as i n t erd ep en den tp art s
o f a s i n g l e b us in es s en t erp ri s e. Becau s e SJ T C’ s i n t erco m p an y i n t eres t i n co m e an d
ex p en s e were acco u n t edfo r i n th e DCF m et h o dv al u at i o n , th e i n t erco m p an y d eb t
n eed no tb e ad d edi n atth e en das a n o n o p erat in g as s et . See Es tat e o f Heckv . Co m m i s s i o n er, T.C. M em o . 2 0 0 2 -3 4
. V. Val u i n g SSC Res p o n d en td i dn o ts ub m i ta v al u at i o n o f SSC an d l arg el y accep t edth e
v al u at i o n m et h o d s an di np u t s M r. Rei l l y u s ed i n h i s v al u at i on o f SSC. Res po n d en th as th ree cri t i ci s m s o f M r. Rei l l y ’ s co n cl u d edv al u es o f $ 3 9 0 an d $ 3 8 0 p er s hare fo r SSC v o t i n g an dn o n v o t i n g s t o ck , res p ect i v el y : (1 ) M r. Rei l l y i m p ro p erl y treat edSSC’ s $ 3 2 .7 m i l li o n recei v ab l e fro m SJ TC as an o p erat i n g
as s et , (2 ) M r. Rei l l y im

p ro p erl y treat edSSC’ s g en eral p art n er i n teres ti n SJ TC as
an o p erat i n g as s etan d i m p ro p erl y acco u n tedfo r i ti n SSC’ s v al u e, an d(3 ) M r. Rei l l y i m p ro p erl y t ax -affect edh i s DCF m et h o dv al u at i o n o f SSC.- 4 7 -

[* 4 7 ] A. In t erco m

p an y Deb t Res p o n d en to b

ject s t o treat m en to f SSC’ s i n t erco m p an y recei v ab l e fro m SJ TC as an o perat i n g as set . As d i s cu ss edab o v e, SSC an dSJ TC were p art o f a
s i ng l e b u s i n es s en t erp ri s e, an dm an ag em en tu s edi nt erco m p an y acco u n t s t o m o v e
cas h b etween th e co m

p an ies
. SSC’ s ad v an ces t o SJ TC were n o ti n ves t m en t s ; th ey
were cas h tran s fers t o th e b o rro wi n g arm o f t h e Sen eca en t erp ri s e--SJ T C--s o th ati t
co u ldp ay d o wnd eb tt o th i rd -p art y l en ders . M r. Rei ll y ’ s v al u at i o n p ro p erl y el i m i n at edth es e i nt erco m p an y cl eari n g acco u n t s an dp ro p erl y treat edth e recei v ab l e as p arto f SSC’ s o perat i o n s th atp ro du ced o p erat i n g i n co m e. B. SSC’ s Gen eral Part n er In t eres ti n SJ TC M r. Rei ll y

acco u nt edfo r SSC’ s g en eral p art n er i nt eres t i n SJ TC i n h i s DCF
m et h o d b y i n cl u d i n g a p ro ject edam o u nto f p art n ers h i p i n co m e i n h is p ro ject i o n s . Fo r each y ear i n the p ro

ject i o n p eri o dM r. Rei l l y ad d ed$ 3 50 ,0 0 0 i n p art n ers h i p i n co m e, wh i ch h e d et erm in edu s i n g th e 5 -y ear an dth e 1 0-y ear h is t ori cal m ed i an d i s tri b u t i o n s fro m

SJ TC. Res p o n d en tco n t en d s th ata v al u at i o n o f SSC s h o u l d acco u n tfo r t h e g en eral p art n er’ s co n tro l o v er SJ TC. He arg u es thatM r. Rei l l y u n d ers tat es th e v al ue o f SSC’ s g en eral p art n er i n t eres ti n SJ TC b y l i m i ti n g i tt o ex p ect edd i s tri b u ti on s . He
co n ten d s t h atth e g en eral p art n er i n t eres ti s a n o n o p erat i n g as s et --an o u t s i d e- 4 8 -

[* 4 8 ] i n v es t m en t --t h atg ran t s SSC ex cl u s iv e co n tro l o v er t h e m an ag em en to f SJ TC. Res p o n d en t arg u es , th erefo re, t h at th e v al u e o f SSC’ s 1 0 % g en eral p art n er i n t eres ti n SJ T C i s b et t er rep res en t edb y 1 0% o f t h e v al u e o f SJ TC th an b y p ro ject edan nu al d i st ri b u t io n s . Bu th e h as n o t o ffered an ex p l an at i o n as t o h o w we
s h o u ldt ak e SSC’ s co n tro l i n t o acco un tth atal s o t ak es i n t o acco u n to u r fi n d i n g th at SSC wo u l dn o t d i rect SJ TC t o s el l i t s t i m b erl an d s. W e co n cl u d e i n s t eadth atth e g en eral p art n er i n t eres t i s an o p erat in g as s et . Th atco n tro l li n g i n t eres ten s u redth at SSC an d SJ TC co u l db e o perat edas a s i ng l e b u s i n es s en t erp ri s e. An dres p o n d en t ag rees wi th th e es t at e t h atSSC i s an o p erat i ng co m pan y an d s ho u ldb e v al u edo n th e b as i s o f i t s earn in g s . In th i s l i g h twe fi n dM r. Rei l l y ’ s u s e o f ex p ect ed d i s tri b u t i o n s t o rep res en tth e v al u e o f t h e g en eral p artn er i n t eres tt o SSC t o b e
reas on ab l e. W e, t h erefo re, co ncl u d e t h atM r. Rei l l y ’ s treat m en to f SSC’ s 1 0 % g en eral p art n er i n t eres t i n SJ TC was ap p ro p ri at e. C. Tax -Affect i n g th e Val u at i o n o f SSC M r. Rei ll y

u s ed th e s am e m et h o d ol o g y t o t ax -affect h i s v al u at i o n o f SSC
ex cep tth ath e u s eda d i fferen trat e fo r t h e d i vi d en dt ax av o i dedb ecau s e h i s
an al y s i s o f t h e i m

p l i ed b en efi t fo r SSC’ s s h areh o ld ers i n p ri o r y ears y i el d eda d i fferen t rat e. W e accep tM r. Rei ll y ’ s m eth o d o f t ax -affect i n g th e v al u at io n o f SSC fo r t h e s am e reas o n s we accep t ed i tfo r t h e v al u at i o n o f SJ TC.- 4 9 -

[* 4 9 ] VI. Di s co u n tfo r Lack o f M ark et ab i l i ty Th e t wo ex p ert s are o n l y

5 % ap art o n m ark et ab i l i ty d i s co un t s . M r. Rei l l y ap p li edt o h i s wei gh t edb u s i n es s en t erp ri s e v al u e a 3 5 % d i s co u n tfo r l acko f
m ark et ab i l i ty , wh i ch h e b as edo n em p i ri cal s tu di es o f t h e d i s co u n ts o n tran s fers o f
res tri ct eds h ares o f p ub l i cl y trad edco m

p an i es an d o n p ri v at e tran s fers b efo re i n i t i al p ub l i c o fferi n g s (IPO). M r. Sch wab d et erm i n eda 3 0 % d i s co u n tfo r l ack o f
m ark et ab i l i ty

b y an al y zi n g th e d i s co u n t s ap p l i edi n p ri v at e s al es o f res tri ct ed
s t ock
. Res p o n d en tco n t en d s th atM r. Rei l l y ’ s 3 5 % d i s co u n tfo r l acko f
m ark et ab i l i ty

was ex ces s i v e an dth ath e d i dn o tex p l ai n s u ffi ci en t l y h o w h e arri v ed atthe d i sco u n t . W e d i s ag ree. M r. Rei l l y at t ach edan ap pen d i x t o h i s rep o rti n wh i ch h e ex p l ai nedthe reas o n i n g b eh i ndth e d i sco u n tfo r l ack o f m ark et ab i l i ty . In d o i n g s o , h e ex p l ai nedi n d et ai l th e co m m o n em p i ri cal m o d el s --s tu d ies o n th e
s al es o f res tri ct eds t o ck

an do n p ri v at e, p re-IPO s al es o f s t o ck --an dth e t wo th eo ret i cal m od el s --t h e o p t i o n p ri ci n g m o d el an dth e DCF m o d el --s u m m ari zi n g th e m et h o d o l o g y

an d res u lt s o f i n d i vi du al s tu di es . He th en d i s cu s s ed th e effect th atres tri ct i o n s o n tran s ferab i li ty h av e o n a d i s co u n t , as wel l as th e o th er fact o rs l i st edi n M an d el bau m

v . Co m m i s s i on er, T.C. M em o . 1 9 9 5 -2 55 , aff’ d , 9 1 F.3 d1 2 4- 5 0 -

[* 5 0 ] (3 dCi r. 1 9 9 6 ). 7 M r. Rei l l y arri vedata 3 5 % d i s co un to n t h e b as i s o f t h e
s tud i es h e p rev i ou s ly

d i scu ss edan do n SJ TC’ s u n i qu e ch aract eri s ti cs , s u ch as i t s Bu y -Sel l Ag reem en t , i t s l acko f h i s t o ri cal tran s fers , a p o t en t i al l y i n d efi n i t e h o l d i n g p eri o d , i t s rep o rt edl os s i n th e 1 2 m on ths b efo re t o th e v al u at i o n d at e, an d th e u npred i ct ab i l i ty

o f p artner d i s tri bu t io n s . 8 W e co n cl u d e t h atM r. Rei ll y ’ s d i s co u n t was ap pro pri at e an dad equ at el y ex p l ai n ed
. M r. Sch wab d i dn otco n s i d er t h e res tri ct i o n s o n tran s ferab i l i ty i n the SJ TC Bu y -Sel l Ag reem en t , an d h e co n ced ed attri al th ati t wo u l dl i k el y i n creas e t h e d i s co u n t b y

“ s o m et hi n g l i ke 1 % , 2 %”. Becau s e M r. Sch w ab was g u es si n g at

7 In M an d el b au m v . Co m m i s s i o n er, T.C. M em o . 1 9 9 5 -2 55 , aff’ d , 9 1 F.3 d 1 2 4 (3 d Ci r. 1 99 6 ), we ex am i n edo u r cas el aw reg ard i n g m ark et ab i l i ty d i s co u n t s an d d i st i l l ed1 0 fact o rs th atwe m ay co n s i der i n d et erm i n in g th e ap p ro p ri at e d i s co u n t: (1 ) t he v al u e o f t h e co m p an y ’ s p ri v at el y

trad eds t o ckrel at i v e t o th e v al u e o f i t s p ub l i cl y

trad eds t o ck ; (2 ) an an al y s is o f t h e co m p an y ’ s fi n an ci al s t at em en t s ; (3 ) t h e co m

p an y ’ s cap aci ty

t o m ak e d i s tri b u t i o ns , i t s h i s t o ry o f p ay i n g d i s tri b u t i o n s , an d am o u nt s o f p ri o r d is tri b u t i o n s; (4 ) t h e n atu re o f t h e co m p an y , i t s h i s t o ry , i t s p os i t i o n i n i t s i n du st ry , an di t s eco no m i c o u t l o o k ; (5 ) t h e co m p an y ’ s m an ag em en t ; (6 ) t h e d eg ree o f co n tro l co n ferred b y th e i n t eres ttran s ferred ; (7 ) res tri ct i o n s o n tran s ferab i l it y ; (8 ) t h e h o l d i n g p eri o d req u iredt o real i ze a p ro fi t; (9 ) t h e co m

p an y ’ s red em

p t i o n p o l i cy ; an d(1 0 ) th e co s tt o m ak e a p ub l i c o fferi n g. See Es t at e o f Gi l fo rdv . Co m m is si o n er, 8 8 T.C. 3 8 (1 9 8 7 ); N. Tr. Co . v . Co m m i s s i o n er, 8 7 T.C. 3 49 (1 9 8 6 ).
8 Al th o u g h M r. Rei l l y

arri v edata d i sco u n to f 3 5 % i n h i s rep o rt , th e ap p en d i x t o h i s rep o rts ay s th ath e co n cl u d eda d i s co u n to f 3 0 % . Itap p ears th at h i s co n cl u s i o n i n th e ap p en d i x i s a t y p o . Hi s cal cu l at io n s u s eda 3 5 % rat e.- 5 1 -

[* 5 1 ] ch an g es t o h i s d is co u n tdu ri n g th e t ri al t o acco u n tfo r co ns i d erat i o n s t h ath e l efto ut , we co ncl u d e t h atth e p ro p er d i s co u n t fo r l acko f m ark et ab i l i ty was 3 5 %. VII. Co n cl u s i o n W e s u m m ari ze o u r co ncl u s i o n s as fo ll o ws . Fi rs t, we d o n o taccep tM r. Sch w ab ’ s NAV m et h o dfo r v al u i n g SJ T C b ecau s e th ere was n o l ik el i h o odo f a
s al e o f SJ TC’ s t i m

b erl an d s an d , th u s , an as s et -b as edap p ro ach was n ot ap p ro p ri at e fo r v al u i n g SJ TC. Seco n d , we fi n d th atM r. Rei l l y ’ s u s e o f t h e 2 0 0 9 rev is ed p ro ject io n s i n h is v al u at io n o f SJ TC was p ro per. Th i rd , we accep t M r. Rei l l y ’ s t ax -affect i n g i n h i s v al u at i o n s o f SJ TC an dSSC as m o re accu rat e t h an
res p o n d en t’ s b l u n t zero -rat e ap p ro ach . Fo u rt h , we co ncl u d e t h atM r. Rei l l y p ro p erl y treat ed th e i n t erco m

p an y l o an s fro m

SSC t o SJ TC an dSSC’ s 1 0 % g en eral p art n er i n t eres t i n SJ TC as o p erat i n g as s et s . An d fi n al l y , we fi n d t h atM r. Rei l l y ’ s d i s co u n tfo r l acko f m ark et ab i l i ty was reas o n ab l e. W e t h erefo re ad o p tth e v al u at i o n s i n M r. Rei ll y ’ s rep o rtan d fi n dth atth e
n o n co n tro l l i ng , n o n m ark et ab le v al u es o f t h e b l o ck s g iv en as g i ft s as o f t h e
v al u at i o n d at e were as fo l l ows :- 5 2 -

Sh ares /un i t s Val u e p er s h are/ u n i t s Val u e o f b l o ck SSC cl as s A (v o t i n g) $ 3 9 0 $ 5 07 ,0 0 0 SSC cl as s B (n o nv o t i n g ) 1 3 8 0 1 , 8 24 ,0 0 0 SSC cl as s B (n o nv o t i n g ) 2 3 8 0 2 , 0 73 ,2 8 0 SJ TC l im i t ed p art n ers h i p u n i t s 3 8 0 3 , 9 01 ,7 1 5 An y co nt en t i o n s we h av e n o tad dres s edwe d eem i rrel ev an t , m o o t, o r
m eri t l es s . To refl ectthe fo reg o i n g , Deci s i o n wi ll b e en t eredu n d er Ru l e 1 5 5
. [* 5 2 ]