t c memo united_states tax_court bestate of frank a branson deceased mary m march executor petitioner v commissioner of internal revenue respondent docket no filed date robert a mills marco l quazzo and mary catherine wirth for petitioner rebecca t hill bryce a kranzthor and elizabeth groenewegen for respondent memorandum findings_of_fact and opinion parr judge respondent determined a deficiency of dollar_figure in petitioner's federal estate_tax the issues for decision are whether the fair_market_value of big_number shares of savings bank of mendocino county savings on the date of decedent's death was dollar_figure per share as respondent determined in the notice_of_deficiency dollar_figure as petitioner reported on its estate_tax_return or some other amount we hold it was dollar_figure per share whether the fair_market_value of shares of common_stock of bank of willits willits on the date of decedent's death was dollar_figure per share as respondent determined in the notice_of_deficiency dollar_figure per share as petitioner reported on its estate_tax_return or some other amount we hold it was dollar_figure per share whether under sec_2053 ' petitioner may deduct certain expenses_incurred in defending its reporting position we hold it may findings_of_fact some of the facts have been stipulated and are so found the stipulation of facts supplemental stipulation of facts and second supplemental stipulation of facts and the accompanying exhibits are incorporated herein by this reference petitioner is the estate of frank a branson decedent who died testate on date in mendocino california mary ‘all section references are to the internal_revenue_code in effect as of the date of decedent's death and all rule references are to the tax_court rules_of_practice and procedure unless otherwise indicated all dollar amounts are rounded to the nearest dollar unless otherwise indicated march march decedent's daughter is the executrix and residuary legatee of the estate march's legal address was potter valley california at the time the petition in this case was filed a decedent's stock acquisitions decedent inherited big_number shares of savings stock and big_number shares of willits stock from his wife charlotte in the balance of the savings shares owned by decedent at the time of his death was obtained either as gifts from his father-in-law or by purchase b savings bank of mendocino background in savings was headquartered in ukiah california and had seven branch offices savings was founded on date by judge j m mannon j m and a few other investors who contributed dollar_figure in total to the venture j m was elected president of savings in and upon his death in his son charles m mannon c m who was also one of the original stockholders was named president of savings c m was the father of charlotte decedent's wife decedent began working for savings in and served as its president from until when he became a director at the time of trial charles b mannon mannon the grandson of c m and decedent's nephew and march's cousin was president and chief_executive_officer of savings and a director and the chairman of the board_of willits savings' stock is not traded on any established exchange or over-the-counter market net_income for the months that ended on date savings had net_income of dollar_figure for the years through savings had net_income as follows year net_income dollar_figure big_number big_number big_number big_number savings' net_income increased on average by approximately dollar_figure percent per annum for the years preceding decedent's death savings has never had a negative income year earnings for were the best ever furthermore provisions for loan losses decreased from dollar_figure percent of total interest_income in to dollar_figure percent of total interest_income in thus during this time provisions for loan losses decreased both on an absolute basis and as a percentage of interest_income the results of the years through are for months that ended on december net_income for the months that ended on date was dollar_figure which i sec_23 percent higher than the same period in dividend history savings has a consistent history of paying dividends for the months that ended on date savings paid common_stock dividends of dollar_figure per share for the years through savings paid dividends as follows dividends_paid year per share sdollar_figure dollar_figure dollar_figure dollar_figure dollar_figure thus dividends_paid increased every year for the years preceding decedent's death on average by approximately percent per annum total assets and shareholder's equity at all relevant times savings has had big_number shares of common_stock issued and outstanding as of date savings had total assets of dollar_figure and shareholder's equity of dollar_figure as of date through savings had total assets and shareholder's equity as follows year total assets shareholder's equity dollar_figure big_number dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number thus total assets and shareholder's equity increased on average by approximately and dollar_figure percent per annum respectively for the years preceding decedent's death ownership at the date of valuation the shares of savings stock were distributed among shareholders as follows shareholder no of shares percentage estate of frank a branson big_number dollar_figure charles b mannon big_number dollar_figure everett martha coe big_number dollar_figure others big_number dollar_figure total dollar_figure ‘the shares held by others are widely distributed with many of the shareholders owning less than percent sales of savings stock the investment department of savings maintains an informal list of people who are interested in buying shares of its stock usually when a shareholder wants to sell his or her shares the shareholder contacts savings which informs the shareholder of the most recent sale price and the current book_value of the stock savings then assists the shareholder in finding a buyer willing to pay the price that the shareholder requires historically savings shares have traded at or near book_value since there have been several sales of blocks of several hundred shares in each of these sales the shares changed hands on a single day and all the shares traded for the same price per share although most of the buyers each purchased less than shares no blocks of savings stock comparable to the size owned by petitioner have ever been sold the only shareholders who have ever owned blocks of that size are members of the mannon family or their relatives and none of them have ever tried to sell their entire interests however on date decedent sold a total of big_number shares for dollar_figure per share to approximately buyers the book_value on date was dollar_figure per share on date petitioner sold big_number shares for dollar_figure per share to approximately buyers the third-quarter book_value was dollar_figure per share savings assisted petitioner in this sale and petitioner made no attempt to sell these shares in any way other than through savings the stipulated amount of this sale is dollar_figure which is dollar_figure per share however the amount reported on petitioner's form_1041 u s fiduciary income_tax return for is dollar_figure dollar_figure per share furthermore at trial respondent introduced evidence a list of sales of savings shares after anda list of sales of savings shares from through which show the price per share was dollar_figure while stipulations are not set_aside lightly we have broad discretion in determining whether to hold a party to a stipulation see 994_f2d_1542 11th cir affg tcmemo_1991_636 the evidence in the record demonstrates that the stipulated amount is simply incorrect we are not bound by stipulations of fact that appear contrary to the facts disclosed by the record see rule e blohm v commissioner supra we therefore find asa fact that the big_number shares were sold for dollar_figure dollar_figure per share on date the western bank monitor c bank of willit sec_1 background willits has two branches and provides a full range of banking services to individual and commercial customers willits was incorporated on date and began business with dollar_figure of paid-in capital decedent's father-in-law c m was willits' president from until willits stock is not traded on any established exchange or over-the-counter market net_income for the months that ended on date willits had net_income of dollar_figure for the years through willits had net_income as follows year net_income dollar_figure big_number big_number big_number big_number thus net_income increased on average by approximately dollar_figure percent per annum during the years preceding decedent's death furthermore except for net_income increased every year during this time the provision for loan losses increased from dollar_figure in to dollar_figure in however it decreased as the results of the years through are for months that ended on december a percentage of total interest_income from dollar_figure percent in to dollar_figure percent in dividend history willits has a history of paying dividends dividends_paid increased each year during the years preceding decedent's death for the months that ended on date the dividends were dollar_figure per share for the years through savings paid dividends as follows dividends_paid year per share s18 thus dividends_paid increased during this measurement_period on average by approximately dollar_figure percent per annum assets and shareholder's equity at all relevant times willits had big_number shares of common_stock issued and outstanding as of date total assets were dollar_figure and shareholder's equity was dollar_figure as of date through willits had total assets and shareholder's equity as follows year total assets shareholder's equity dollar_figure dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number thus total assets and shareholder's equity increased each year during the years preceding decedent's death total assets increased on average by approximately dollar_figure percent per annum and shareholder's equity by dollar_figure percent per annum ownership at the date of valuation the shares of willits stock were distributed among shareholders as follows shareholder no of shares percentage estate of frank a branson dollar_figure charles b mannon big_number dollar_figure everett martha coe big_number dollar_figure others big_number dollar_figure total big_number dollar_figure ‘of the shares held by others percent are owned by two out-of-state shareholders and the balance by local residents who own very small percentages sales of willits stock historically very few willits shares have been traded each year a total of big_number shares changed hands in transactions from date until the valuation_date no shares were sold during or for more than years after date most of the sales were by willits board members either to willits employees board members or directors or to induce gualified persons to become board members or officers for instance in a total of shares was traded in four sales of those shares were sold as qualifying shares by a board member to three persons hired by willits two as executive officers and one as a director similarly the only shares that changed hands in were qualifying shares which mannon sold as an inducement to a new board member in the only shares traded were shares sold by a departing executive officer to an incoming officer the most recent sale before the valuation_date was mannon's sale of qualifying shares to dick bozarth bozarth on date for dollar_figure per share consequently in these transactions there were only six sellers and three buyers who were not willits employees board members or directors most of the sellers with the exception of decedent sold few shares decedent sold shares most of the buyers with the exception of mannon purchased minimal interests mannon was a buyer in seven of the sales and purchased a total of shares from members of his family and from other sellers historically willits shares have traded at or near book_value for instance decedent sold of the willits shares in for dollar_figure dollar_figure per share and shares between date and date for dollar_figure dollar_figure per share the ‘the parties stipulated that decedent sold shares for dollar_figure dollar_figure per share in however this stipulation is contrary to a buyer's mannon's testimony anda list of all the sales of willits shares from through which was offered into evidence as a joint exhibit the evidence in the continued selling_price of these shares was near their book_value the book_value of the willits stock on date was dollar_figure per share petitioner sold shares on date for dollar_figure dollar_figure per share the book_value of the shares on date was dollar_figure per share petitioner did not independently value the shares before the sale rather march and mannon used the book_value of the stock as a reference to set the sale price furthermore petitioner did not contact or engage any brokers or agents for this sale instead march asked mannon to find buyers for the stock mannon confined his search for buyers to the willits board_of directors rebecca brown an executive officer and shareholder bought shares bozarth a board member and shareholder bought shares in the name of his logging company and mannon bought shares of which he gave to a longtime employee d petitioner's sales and march's recognition of gain under decedent's will the big_number shares of savings stock and the shares of willits stock were distributed as follows big_number shares of savings stock in trust for the benefit of continued record demonstrates that the stipulation is incorrect we therefore find as a fact that decedent sold shares for dollar_figure per share between date and date see supra note decedent's widow during her life and upon her death the remainder to be distributed to march big_number shares of savings stock in trust for each of decedent's four grandchildren and the remaining big_number shares of savings stock and shares of willits stock to march as part of the residue of the estate the will provided that all estate_taxes were to be paid from the residue of the estate pursuant to a court order march was granted authority to sell big_number shares of savings stock at dollar_figure per share and shares of willits stock at dollar_figure per share march sold the shares and paid federal and state of california estate_taxes of dollar_figure and dollar_figure respectively march as executrix and residuary legatee assumed individual liability for any estate_taxes later found due from petitioner petitioner reported the value of the savings and willits shares as dollar_figure and dollar_figure respectively per share on its form_706 united_states estate and generation-skipping_transfer_tax return petitioner reported the capital_gain from the sales of the savings and willits shares on schedule d of its form_1041 u s fiduciary income_tax return which it filed on or about date petitioner calculated the gain by subtracting the value of the shares reported on the estate_tax_return from the amount received from their sale petitioner reported dollar_figure of gain from the sale of the savings shares and dollar_figure from the sale of the willits shares ’ petitioner however did not pay any_tax on these gains instead it reported a net_long-term_capital_gain distribution of dollar_figure to march on schedule_k-1 beneficiary's share of income deductions credits btc which it attached to the form_1041 march and her husband charles march filed their form_1040 u s individual_income_tax_return using the status of married filing joint_return on or about date and paid the tax due march reported the dollar_figure gain on line of schedule d which was attached to the form_1040 as net long- term gain_or_loss from partnerships s_corporations and fiduciaries br petitioner's claim for deductions after filing the form_706 petitioner paid dollar_figure of attorney's_fees dollar_figure of accountant's_fees and dollar_figure of appraisal costs to defend its reporting position in an audit by the internal_revenue_service petitioner filed form_843 claim_for_refund and request for abatement to claim a refund of the estate_tax paid on these amounts in addition petitioner filed a protective claim_for_refund of estate_tax for additional ‘petitioner also reported dollar_figure of long-term_capital_gain from the sale of big_number shares of pg e stock and a dollar_figure net long- term capital_loss_carryover from the value of the pg e shares and the loss carryover are not at issue in this case administrative expenses that it expects to incur in further defending its position opinion respondent determined a deficiency of dollar_figure in petitioner's federal estate_tax respondent's determination was based upon his contention that the date-of-death fair market values of the big_number savings shares and the willits shares were dollar_figure dollar_figure per share and dollar_figure dollar_figure per share respectively respondent now argues that the values of the savings and willits shares were no less than dollar_figure dollar_figure per share and dollar_figure dollar_figure per share respectively respondent's determination as to the fair_market_value of the subject property is presumptively correct and petitioner bears the burden of proving that the fair_market_value is lower see rule a 290_us_111 petitioner asserts that the values it reported on its return for the savings shares dollar_figure dollar_figure per share and the willits shares dollar_figure dollar_figure per share are correct however it argues that if this court decides that there is a deficiency it is entitled to equitable_recoupment of the tax paid on the gain recognized by march due to the lower bases provided by the values petitioner reported on its estate_tax_return finally petitioner asserts that it is entitled to deduct certain expenses from the value of the gross_estate the expenses are attorney's_fees accountant's_fees and appraisal costs which were incurred after the estate_tax_return was filed to prove the shares' reported values fair_market_value fair_market_value is defined as the price at which property would change hands between a willing buyer and a willing seller neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts see 411_us_546 680_f2d_1248 9th cir sec_20_2031-1 estate_tax regs this is an objective test and requires the property to be valued from the viewpoint of a hypothetical buyer and seller each of whom would seek to maximize his or her profit from any transaction involving the property see propstra v united_states supra pincite2 101_tc_412 profit maximization must be achieved in the context of the market conditions and the constraints of the economy existing at the valuation_date see 94_tc_193 for federal estate_tax purposes the fair_market_value of the subject property is generally determined as of the date of death of the decedent ordinarily no consideration is given to any unforeseeable future event that may have affected the value of the subject property on some later date see sec l b estate_tax regs see also 763_f2d_891 7th cir estate of newhouse v commissioner supra 88_tc_38 the question of valuation of stock for tax purposes is a matter of ‘pure fact ' 325_f2d_934 8th cir quoting 219_f2d_18 9th cir affg tcmemo_1961_347 estate of newhouse v commissioner supra pincite see also in re nathan's estate v commissioner 166_f2d_422 9th cir the question of fair_market_value for tax purposes is ever one of fact and not of formula affg a memorandum opinion of this court dated date while listed market prices are the benchmarks in the case of publicly traded stock in determining the value of unlisted stocks actual sales made in reasonable amounts at arm's length in the normal course of business within a reasonable_time before or after the valuation_date are the best criteria of market_value see 237_f2d_729 8th cir affg tcmemo_1955_269 79_tc_938 73_tc_266 estate of campbell v commissioner tcmemo_1991_615 sec_20_2031-2 estate_tax regs if it is established that the value of any share of stock determined on the basis of selling_price does not reflect the fair_market_value thereof then some reasonable modification of that basis or other relevant facts and elements of value are considered in determining the fair_market_value see sec_20_2031-2 estate_tax regs issue fair_market_value of the savings shares the parties agree that the best indication of the savings stock's market_value is the actual sale price of the shares petitioner however asserts that the actual sale price is just the starting point for deciding fair market value--that discounts should be applied to the sale price for minority interest lack of marketability and blockage respondent contends that the actual sale price reflects the discount for minority interest and lack of marketability respondent further contends that in view of the higher prices received for the shares sold in the post- death market no significant discount for blockage is appropriate we agree with respondent expert witnesses both sides submitted expert witness reports and presented expert witness testimony in regard to the value of decedent's shares of savings stock at the date of death expert witness testimony 1s appropriate to help the court understand an area requiring specialized training knowledge or judgment see fed r kvid 93_tc_529 the court however is not bound by an expert's opinion we weigh an expert's testimony in light of his or her gualifications and with respect to all credible_evidence in the record depending on what we believe is appropriate under the facts and circumstances of the case we may either reject an expert's opinion in its entirety accept it in its entirety or accept selective portions of it see 304_us_282 102_tc_149 moreover where experts offer divergent estimates of fair_market_value we decide what weight to give these estimates by examining the factors they used in arriving at their conclusions see 38_tc_357 we have broad discretion in selecting valuation methods see 640_f2d_249 9th cir affg on this issue and revg in part tcmemo_1978_191 and the weight to be given the facts in reaching our conclusion because finding market_value is after all something for judgment experience and reason see 202_f2d_105 2d cir affg a memorandum opinion of the court where necessary we may reach a determination of value based upon our own examination of the evidence in the record see - - 945_f2d_92 5th cir citing 538_f2d_927 2d cir affg t c memo finally because valuation is necessarily an approximation it 1s not required that the value we determine be one as to which there is specific testimony provided it is within the range of figures that properly may be deduced from the evidence see silverman v commissioner supra 250_f2d_242 sth cir affg in part and remanding in part tcmemo_1956_178 with these principles in mind we consider the experts opinions petitioner's expert's opinion petitioner's expert is john r gasiorowski gasiorowski gasiorowski is the director of arthur anderson co valuation services in northern california and he has had extensive experience in valuing businesses in his report gasiorowski used the market and income methods to value petitioner's savings shares the market method measures the value of an asset through an analysis of recent sales or offerings of comparable_property if comparable publicly traded companies can be found then the stock prices for those companies can be used to derive benchmarks such as financial ratios which can be applied to the corresponding financial measures of the subject company to derive a value for its stock in applying this method gasiorowski first selected eight publicly traded banks with overall characteristics similar to savings as guideline companies he then compared the guideline companies' operating results and financial positions from through the third quarter of with savings' operating results and financial positions for the same time period on the basis of this comparative analysis gasiorowski selected certain financial ratios to value the savings shares giving equal weight to the price-to-earnings ratios the price-to-book ratios and the price-to-dividend ratios gasiorowski concluded that the marketable minority value of the savings stock was dollar_figure per share before considering a discount for lack of marketability the marketable minority value is gasiorowski's best estimate of what the savings bank stock might sell for if it were publicly traded the income_method values an asset based upon the present_value of its future economic benefits to estimate the value of the savings shares with this method gasiorowski interviewed savings’ management concerning the bank's future and obtained its budget gasiorowski developed the discount rate used to calculate the present_value of savings' estimated net_income by reducing the rate of return that he thought an equity investor in savings would require by percent his estimate of savings' long-term growth rate using this method gasiorowski concluded that the shares were worth dollar_figure before considering a discount for lack of marketability because gasiorowski considered the market method data to be more reliable than the income_method data he gave the market method result greater weight and concluded that the marketable minority value of the stock was dollar_figure finally gasiorowski applied a to 45-percent discount to the estimated marketable minority value for lack of marketability and liquidity in selecting the size of the discount gasiorowski considered various studies of the differences between the private transaction prices for restricted shares of a corporation and the contemporaneous sales prices for publicly traded shares of the same corporation the restricted_stock studies and a series of initial_public_offering ipo studies that compared the prices of shares sold in an ipo to the prices of shares in the same corporation sold in relatively small amounts no more than months earlier in private transactions the ipo studies restricted_stock is stock acquired from an issuer in a transaction exempt from the registration requirements of the federal securities laws sales of restricted_stock are generally restricted within the first years after issuance this was a series of updates to a study by john d emory the most recent emory the value of marketability as tllustrated in initial public offerings of common stock---date through date bus valuation rev date was continued to narrow the range of the discount gasiorowski considered savings' revenues positive earnings history positive dividend growth history payout ratio and the expected long-term growth rates of its earnings and dividends gasiorowski concluded that these factors indicated that a discount at the lower end of the range would be appropriate before considering the size of the block held by petitioner in considering the appropriate discount for the size of the block gasiorowski estimated that based on the average number of shares traded in the prior years it would take petitioner more than years to dispose_of all its shares unless it was willing to sell them at a significant discount ’ accordingly gasiorowski tentatively concluded that a discount of to percent should be applied to the dollar_figure indicated value which resulted in a value of dollar_figure to dollar_figure per share continued the eighth in the series mat trial gasiorowski denied using the term blockage in his report however we note that in his written report gasiorowski opined that it would be difficult to sell the big_number shares held by the estate without incurring a significant discount for the sale of the entire block furthermore gasiorowski testified that after considering the size of the block we thought the discount for lack of marketability would be in the to percent range thus it is evident that when gasiorowski considered the marketability of the savings shares he considered the effect of blockage and that his estimate of the discount for lack of marketability includes a component for blockage however before reaching a definite conclusion of the stock's value gasiorowski interviewed several experts who value closely held bank stocks from his discussions with these experts gasiorowski concluded that if a block of stock of the size held by petitioner were publicly traded it most likely would trade pincite to percent of book_value applying this discount to the date book_value of the savings stock suggested a public market_value of dollar_figure to dollar_figure per share thus gasiorowski concluded that the date-of-death fair_market_value of petitioner's shares was dollar_figure per share we do not find petitioner's opinion persuasive discounts for a minority interest and lack of marketability a minority interest discount reflects the minority shareholder's inability to compel either the payment of dividends or liquidation in order to realize a pro_rata share of a corporation's net_earnings or net asset value a lack of marketability discount reflects the fact that there is no ready market for shares ina closely_held_corporation thus discounts for a minority interest and for lack of marketability are conceptually distinct and the appropriate percentage rate of each of them is a question of fact see estate of newhouse v commissioner t c pincite gasiorowski concluded that if the stock were publicly traded the value of a minority interest would be dollar_figure per share this estimated value reflects the discount for a minority interest in savings therefore the percent discount that gasiorowski would apply to the estimated value must be for only the lack of marketability of petitioner's block of shares we find gasiorowski's reliance on the restricted_stock studies for the size of the discount factor to be misplaced since the studies analyzed only restricted_stock that had a holding_period of years the savings shares were not restricted either by law or by agreement the fact that savings maintained a waiting list of willing buyers is evidence that the stock's history of low trading volume is due to the shareholder's preference to hold savings shares for investment rather than for sale as the investment time horizon of an investor in savings stock evidently is long term we do not believe that marketability concerns rise to the same level as a security with a short-term_holding_period like a restricted_stock see furman v commissioner tcmemo_1998_157 therefore we find no persuasive evidence in the record to support reliance on the restricted_stock studies in determining an appropriate marketability discount furthermore we do not find gasiorowski's conclusions with respect to the ipo study persuasive the ipo study compared the sales prices of relatively small amounts of a corporation's shares before they were offered to the public to the sales prices of the same shares sold later in an ipo the study concluded that the sales prices in the nonpublic markets were to percent less than sales prices in the ipo's thus gasiorowski concluded that the estimated marketable minority value which he implicitly assumes is equal to an ipo value should be reduced by percent to reflect the nonpublic market_value of the shares we reject this conclusion for the following reasons petitioner offered no evidence that the value of the shares was affected by any change in the market conditions the constraints of the economy or the financial condition of savings between the date of decedent's arm's-length sale of big_number shares for dollar_figure per share in the nonpublic market and the valuation_date month later consequently if we apply the conclusions of the ipo study to the case at hand we find that it is more likely that dollar_figure i sec_40 to percent less rather than more than the price at which the same shares would sell in an ipo furthermore gasiorowski disregards the fact that the actual sales value of the shares is nearly identical to his estimated marketable minority value the near identity of values indicates that the marketability of the savings shares in the nonpublic market 1s essentially equal to that of a minority interest in the public market in which case no discount for marketability is required for a minority interest in savings -- p7 - discount for blockage finally gasiorowski considered the lack of marketability due to the size of the block of shares held by petitioner the discount for blockage is based upon the theory that a large block of stock cannot be marketed and turned into cash as readily as a few shares also where there is only a limited market for a stock offering a large block of the stock depresses the market and lowers the price that can be obtained see estate of sawade v commissioner tcmemo_1984_626 affd 795_f2d_45 8th cir 151_f2d_102 2d cir affg a memorandum opinion of this court 127_f2d_214 10th cir affg 43_bta_1010 35_bta_259 affd 95_f2d_806 4th cir sec_20_2031-2 estate_tax regs ’ however there is no ‘in this regard sec_20_2031-2 estate_tax regs provides in certain exceptional cases the size of the block of stock to be valued in relation to the number of shares changing hands in sales may be relevant in determining whether selling prices reflect the fair_market_value of the block of stock to be valued if the executor can show that the block of stock to be valued is so large in relation to the actual sales on the existing market that it could not be liquidated in a reasonable_time without depressing the market the price at which the block could be sold as such outside the usual market as through an underwriter may be a more accurate indication of value than market quotations presumption of blockage see 187_f2d_962 10th cir affg a memorandum opinion of this court 2_tc_246 safe deposit trust co v commissioner supra blockage is not a law of economics a principle of law or a rule_of evidence blockage is a guestion of fact see estate of sawade v commissioner supra estate of christie v commissioner tcmemo_1974_95 tf the price obtainable for a block of stock is influenced by the size of the block the existence and extent of this influence must be proven estate of christie v commissioner supra petitioner bears the burden_of_proof in this regard see rule a 290_us_111 sec_20_2031-2 estate_tax regs in valuing a block of stock we are not required to assume that the entire block was dumped on the market at one time on the valuation_date rather the inquiry must be directed to the effect upon the market based on the assumption that the block was being fed out into the market during a reasonable period of time see 78_tc_728 affd 720_f2d_1114 9th cir 3_tc_963 estate of sawade v commissioner supra what is a reasonable period of time depends upon all the facts and circumstances see estate of sawade v commissioner supra - - gasiorowski concluded that because of the stock's history of low trading volume it would be difficult to dispose_of petitioner's block of shares without incurring a significant discount or devaluing the holding by dribbling it into the local market over a period of time exceeding years we do not agree with this conclusion evidence of the quantity of shares that can be sold without depressing their price is relevant to determining the magnitude of the discount if any that should be applied to their value for blockage therefore we consider the number of shares that were sold within a reasonable_time of decedent's death as well as the price at which they sold indicative of the fair_market_value of the shares at the valuation_date gasiorowski based his estimate of the amount of time it would take petitioner to dribble its stock into the local market on the average number of shares sold per year during the years prior to decedent's death we have found that the waiting list of willing buyers maintained by savings is evidence that the stock's low trading volume is due to the shareholder's preference for holding the shares for investment not the lack of willing buyers by averaging the sales volumes of the prior years gasiorowski diluted the evidence of the number of shares that have been sold by willing sellers to willing buyers at any particular time with the total number of shares that were offered for sale over years ’ furthermore we have stated that later-occurring events that evidence fair_market_value may be taken into account see estate of jung v commissioner t c pincite see also estate of newhouse v commissioner t c pincite n in estimating the number of shares that could be sold per year gasiorowski did not consider petitioner's sale of big_number shares less than months after the date of decedent's death accordingly we find little in gasiorowski's methodology to support his opinion of the length of time it would take to dispose_of petitioner's shares as an alternative to dribbling petitioner's shares into the local market gasiorowski considered the consequences of disposing the block in the public market gasiorowski interviewed several experts who value closely held bank stocks for their opinion of the price at which petitioner's stock would trade if it were offered on the public market the experts' opinion was that the stock could be expected to trade at a price ranging from to percent of book_value and most likely at a 2for instance shares changed hands in big_number in and big_number in the average number of shares sold per year over this 3-year period is almost times the number sold in and is about one-half the number of shares sold in thus the average number of shares sold per year over the 3-year period does not necessarily represent the number of shares sold in any particular year or by a willing seller at any time --- - price of to percent of book_value ’ considering the nonpublic market that existed at the relevant time and the prices for which savings shares actually were sold we think it extremely unlikely that any willing seller not under any compulsion to sell and seeking to maximize his or her profit would choose to sell his or her shares in the public market at a 45-to 50-percent discount from book_value we reject this portion of petitioner's expert opinion respondent's expert's opinion respondent's expert is herbert t spiro spiro spiro is the president of american valuation group inc and he has performed many valuations for respondent in the past in his report spiro considered the actual sales values and used the market and income methods to value petitioner's savings shares spiro ultimately concluded that the fair_market_value of the stock was dollar_figure dollar_figure per share spiro found seven publicly traded bank companies that were sufficiently comparable to savings to use for the market method of valuation employing a methodology similar to that used by the experts assumed that only petitioner's shares would be offered on the public market the total number of shares that changed hands during the months beginning on date is big_number this amount includes the big_number shares sold by decedent and the big_number sold by petitioner all these shares sold for more than book_value petitioner's expert spiro selected certain financial ratios to value the savings shares placing primary weight on the price- to-earnings ratio secondary weight on the price-to-book ratio and little weight on the dividend yield measure spiro concluded that the indicated value of a minority interest in savings would be dollar_figure per share if the shares were liquid and freely traded because the shares are not quickly convertible into cash spiro applied a liquidity discount to the indicated value to determine the size of the liquidity discount spiro considered several studies ’ and reviewed opinions of this court that were decided after in which we found a discount separately and specifically for either lack of marketability or restrictions on transfer with respect to a closely held company the discounts in the studies and cases ranged from to percent ‘we note that in this case a liquidity discount anda discount for lack of marketability are conceptually indistinguishable ‘dollar_figurespiro relied on the following studies pratt discounts and premia valuation of closely held companies and inactively traded securities maher discounts for lack of marketability for closely_held_business interests taxe sec_562 date moroney most courts overvalue closely held stocks taxe sec_144 date emory the value of marketability as illustrated in initial public offerings of common_stock bus valuation rev date and emory the value of marketability as illustrated in initial public offerings of common_stock date through date bus valuation rev date spiro next considered the particular facts and circumstances of the savings stock including the existing market for the stock the rising price trend of the traded shares savings' history of paying increasing dividends and the lack of restrictions on trading the shares spiro concluded that a liquidity discount of percent was appropriate and that under the market method the fair_market_value of the stock was dollar_figure per share to incorporate the actual sales value into his analysis and to reflect the amount of time it would take to sell a block of shares the size of petitioner's spiro assumed that the shareholder could go to a lender and hypothecate the block fora loan to repay the loan the shareholder would sell the shares over the next years and months at a rate equal to the number of shares that were sold on average per month during the first months of spiro estimated the prices for which the shares would sell in future years by increasing the actual price at which decedent sold big_number shares in by a factor that was a conservative reflection of the historic growth rate of the stock's book_value in this calculation spiro included his estimation of the cash-flow from future dividends_paid finally spiro assumed that the shareholder would pay percentage points above the prime rate which was percent at the date of valuation for the loan therefore he calculated the present_value of the cash-flow from the stock sales and dividends using percent as a discount factor using this piecemeal sales_method spiro concluded that the implied price per share was dollar_figure this amount represents an illiquid minority value and requires no further adjustment to value the shares by the income_method spiro capitalized savings’ pro forma cash-flow to make this determination spiro made certain assumptions regarding savings' net_interest_income provision for loan losses other operating income and expenses income taxes and additions to equity_capital spiro developed the discount rate he used to calculate the present_value of the estimated cash-flow by reducing the rate of return that he thought an equity investor in savings would require by percent his estimate of savings' long-term growth rate using this method spiro concluded that the minority value of the stock was dollar_figure per share before considering a liquidity discount after applying the 20-percent liquidity discount spiro concluded that the fair_market_value of the stock was dollar_figure per share to reconcile the results of the different methods spiro calculated the weighted average of the different values spiro assigned the results of the piecemeal sales_method percent of the total the market method percent and the income_method percent spiro concluded that the fair market values of petitioner's stock was dollar_figure per share we reject part of respondent's expert's opinion and accept part in the market method section of his written report spiro stated that the p e ratio is principally influenced by earnings growth with higher-growth companies trading on average at higher p e ratios spiro chose a price-to-earnings ratio for savings by comparing savings' l-year and 3-year growth trends to the average of the selected companies' growth trends and derived a share price of dollar_figure from that ratio in analyzing the data spiro used to derive this value we find no statistically significant correlation between the seven selected companies' growth trends and their price-to-earnings ratios ’ using the average of these companies' growth trends to price-to-earnings ratio '8the selected companies and their growth trends and price- to-earnings ratios are as follows growth trends company 1-year 3-year p e ratios california bancshares inc -dollar_figure dollar_figure dollar_figure civic bancorp -dollar_figure dollar_figure dollar_figure first commercial bancorp -dollar_figure dollar_figure dollar_figure the pacific bank dollar_figure -dollar_figure dollar_figure redwood empire bankcorp dollar_figure dollar_figure dollar_figure university national bank dollar_figure dollar_figure dollar_figure westamerica bancorporation dollar_figure dollar_figure dollar_figure there is no significant correlation between the companies' growth rates and price-to-earnings ratios spiro's data does not continued determine a price earnings multiple for savings is akin to a navigator averaging compass points chosen at random to plot a course we reject this part of spiro's opinion because the data he used does not support his conclusion we reject spiro's reliance on the restricted sales and ipo studies for the same reasons we have already expressed in addressing the opinion of petitioner's expert we do not agree with the implied share value that spiro obtained using his piecemeal sales_method to calculate this value spiro assumed that a lender would make the same assumptions as he did regarding the future values of the shares the amount of the dividends and the number of shares that could be sold per year and that the lender would make a loan equal to percent of the present_value of the future cash-flow which would be secured in total only by the shares we think that a lender would require the entire block of stock as security for a loan equal to only a part of the stock's value therefore a loan for the total amount of the value of scontinued support his premise that the price-to-earnings ratio is principally influenced by earnings growth or that knowledge of a company's net_income growth trend helps to predict its price-to- earnings ratio see freund smith statistics a first course 4th ed kroeber laforge the manager's guide to statistics and quantitative methods spiro conceded at trial that the stock would not secure continued -- - the shares would in part have to be otherwise secured the interest rate charged the borrower for the portion of the loan not secured_by the savings shares the unsecured portion would depend upon the creditworthiness of the borrower the actual interest rate would thus be a weighted average of the rates charged for the secured and unsecured portions of the loan consequently the actual interest rate would vary depending upon the creditworthiness of the particular borrower by using a valuation method that is dependent upon the interest rate available to a particular borrower instead of the market rate of return required by investors in this type of security spiro calculated the value of the stock to a particular borrower not the fair_market_value of the shares finally we disagree with spiro's estimate of the amount of time it would take to dispose_of the shares for the same reason we disagreed with petitioner's estimate we think that the actual sales value of the big_number shares sold at arm's length to unrelated partie sec_1 month before decedent's death provides the best indication of the value of the shares the price at which these shares sold reflects the continued the entire amount of the loan spiro noted in his written report that his estimate is conservative in light of the fact that petitioner sold big_number shares in market's appreciation of the value of a minority interest in savings stock and its awareness of the stock's limited marketability moreover no evidence was offered of any change in the market conditions the constraints of the economy or the financial condition of savings between the date of decedent's sale of big_number shares and the date of petitioner's sale of big_number shares that would have affected the demand for the shares thus the fact that decedent's block of shares sold quickly once it was offered and that approximately months later petitioner's larger block of shares sold equally quickly indicates that the market for savings' shares is considerably more liguid than either petitioner or respondent opined however although mannon testified that after petitioner's sale some of the buyers expressed an interest in purchasing more shares he also testified that others could have bought no more furthermore although the blocks of stock sold by decedent and petitioner sold quickly and the shares in petitioner's sale sold for a higher price than the shares in decedent's earlier sale the amount by which the actual sales_price exceeded book_value was slightly less in the later sale than in the earlier sale 1necedent sold big_number shares at dollar_figure percent above book_value petitioner sold big_number shares at dollar_figure percent above book_value therefore the number of savings shares that can be sold without affecting price is uncertain but not unlimited the facts and circumstances of this case indicate that a percent discount for blockage is appropriate accordingly we find that the fair_market_value of petitioner's savings stock is dollar_figure per share issue fair_market_value of the willits shares respondent determined that the value of petitioner's willits stock was dollar_figure per share however he now contends that the date- of-death fair_market_value of petitioner's willits stock is dollar_figure per share respondent bases his contention on the results of petitioner's sale of all its shares approximately months after decedent's death petitioner asserts that the value of the stock is dollar_figure per share but concedes on brief that the evidence supports a valuation in the range of dollar_figure to dollar_figure per share petitioner further asserts that the sales history of willits' stock is evidence that there is no market for the shares and that the price it received for the shares is not representative of their fair_market_value because the shares were not sold at arm's length petitioner sold its shares of willits stock for dollar_figure per share of the shares were purchased by mannon at the time he purchased the shares mannon owned more than percent of -- - willits' outstanding shares and was a director and chairman of the board_of willits march's cousin and decedent's nephew mannon testified that he bought the shares even though he did not want them because march was a family_member the estate_taxes were due and he could not find another buyer we previously have held that forced sales of stock to family members to enable them to pay estate_taxes are in no way reflective of fair_market_value because the sales occurred under unusual circumstances see estate of oman v commissioner tcmemo_1987_71 see also estate of miller v commissioner tcmemo_1959_235 considering the relationship of the parties and petitioner's need for funds to pay the estate_taxes we find that mannon was an accommodating buyer not a willing buyer therefore we do not consider the sale to mannon in deciding the fair_market_value of petitioner's shares however at the time petitioner sold the shares to mannon petitioner also sold shares to bozarth and shares to brown bozarth is a director of willits and brown is an executive officer both had their positions with willits and were shareholders before they purchased these shares furthermore neither one has any relationship with either petitioner or march we consider the price bozarth and brown paid evidence of the value of a minority interest in willits petitioner argues that a discount is warranted for the gloomy state of the economy willits' past history of economic loss the absence of any real market for the shares and the extended holding_period required to dispose_of petitioner's block only petitioner's last two assertions have any basis in fact willits' annual report to shareholders stated that it will show a sizeable increase in profits even though the economy was such that the increase in deposits was very meager in fact willits showed a 15-percent increase in net_income compared to thus willits appeared to be weathering the gloomy state of the economy rather well furthermore petitioner's assertion that willits has a history of economic loss is not supported by the record mannon testified that he thought willits actually may have suffered a negative income year in either or but that willits performed well in the late 1980's we do not find mannon's testimony supports a finding that willits has a history of loss and petitioner offered no other evidence to support this assertion accordingly we do not consider either of these assertions in deciding the value of petitioner's shares both sides submitted expert witness reports and presented expert witness testimony in regard to the value of decedent's shares of willits stock at the date of death petitioner's expert's opinion petitioner's expert is jeffrey t tarbell tarbell tarbell is a senior associate of willamette management associates and was a qualified expert at the time he prepared his report tarbell's testimony at trial was cryptic and unhelpful we therefore rely upon only the written report for his opinion tarbell did not consider petitioner's sale of its stock in his analysis tarbell selected nine publicly traded banks comparable to willits as guideline companies and used the market method to value the willits shares tarbell compared willits' earnings per share for the last months to the guideline companies' earnings per share for the same period and selected four companies that had earnings growth rates similar to willits using the companies' ratios for guidance tarbell selected a multiple to apply to willits' earnings per share and derived an indicated value of dollar_figure per share he repeated the same process with willits' 5-year average earnings per share and derived an indicated value of dollar_figure per share tarbell compared the guideline companies' dividend payout ratios to their dividend yields he found that there was a relationship between the payout ratios and the dividend yields and that the companies with higher payout ratios have higher dividend yields tarbell selected one company from the guideline -- - companies that had a payout ratio and an increase in its 12-month earnings similar to those of willits and applied its dividend yield rate to willits' current dividend this process produced an indicated value of dollar_figure per share tarbell analyzed the price-to-book value ratios and the current returns on equity of the guideline companies and found that there was a strong relationship between the ratios he selected two companies that had returns on book_value similar to willits and determined that a multiple of dollar_figure was appropriate to apply to willits' book_value this process resulted in an indicated value of dollar_figure per share finally tarbell weighted the indicated values derived from the various valuation methods according to his opinion of their relative significance and concluded that the publicly traded minority value of willits stock was dollar_figure per share before considering a discount for lack of marketability tarbell opined that a 45-percent discount for lack of marketability was appropriate due to the limited market for willits stock and the size of petitioner's block and concluded that the fair_market_value of the stock was dollar_figure per share petitioner's report does not state separately the amounts of the limited market and blockage components of the discount tarbell cited the usual restricted_stock and ipo studies and revrul_77_287 1977_2_cb_319 to support his opinion of the discount rev_rul supra sets forth guidelines for valuing securities that cannot be immediately resold because they are restricted from resale pursuant to federal securities law the willits shares are not restricted from trading by either law or agreement petitioner offered no evidence of any shareholders who were unable to sell their shares once offered for sale therefore there is no evidence that the low trading volume is due to any reason other than the shareholder's preference to hold the shares for long-term investment rather than sale accordingly we find no persuasive evidence in the record to justify reliance on the restricted_stock studies in determining an appropriate marketability discount 2in addition to the emory ipo studies earlier cited by gasiorowski and spiro see supra notes and tarbell cited the following restricted_stock studies gelman an economist-- financial analyst's approach to valuing stock of a closely held company j taxn date moroney most courts overvalue closely held stocks taxe sec_144 date moroney why percent discount for nonmarketability in one valuation percent in another taxe sec_316 date maher discounts for lack of marketability for closely_held_business interests taxe sec_562 date trout estimation of the discount associated with the transfer of restricted securities taxe sec_381 date revenue_ruling revisited src quarterly reports spring bolten discounts for the stocks of closely held corporations trs ests date furthermore in considering the trading history of the shares tarbell did not consider petitioner's arm's-length sale of approximately dollar_figure percent of willits' issued and outstanding shares at a price near book_value to unrelated parties less than months after decedent's death therefore tarbell did not consider all the evidence relevant to deciding the size of the discount accordingly we give little weight to this portion of petitioner's opinion respondent's expert's opinion respondent's expert is spiro in his report spiro used the market and income methods and considered the actual sales to value petitioner's willits shares spiro ultimately concluded that the fair_market_value of the stock was dollar_figure per share spiro found five publicly traded bank companies that were sufficiently comparable to willits to use as guideline companies for the market method of valuation employing the same methodology that he used to value the savings shares spiro selected certain financial ratios to value the willits shares weighting the price-to-earnings ratio percent the price-to- book ratio percent and the dividend yield measure percent spiro derived an indicated value of dollar_figure per share for a minority interest in willits if the shares were liquid and freely traded this amount does not include the shares sold to mannon spiro applied a liquidity discount to the indicated value to determine the size of the discount spiro relied on the same studies and opinions that he relied upon in determining the size of the discount to apply to the savings stock he also considered the particular facts and circumstances of the willits stock including the level of willits' public recognition in the local community its history of paying increasing dividends the lack of restrictions on trading the shares the existing market for the stock and the stock's trading history spiro concluded that a liguidity discount of percent was appropriate and that the fair_market_value of the stock was dollar_figure per share spiro used his piecemeal sales_method to estimate the present_value of the willits shares in the same way that he used it to estimate the value of the savings shares except he assumed that willits shares could be sold each year for the next years at a price approximating their book_value at the time of sale using this method spiro concluded that the implied price per share was dollar_figure to value the shares by the income_method spiro capitalized willits' pro forma cash-flow to calculate the pro forma cash- flow spiro made certain assumptions regarding willits' net_income provision for loan losses other operating income and expenses income taxes and additions to equity_capital he developed the discount rate to calculate the present_value of the pro forma cash-flow by reducing the rate of return that he thought an equity investor in willits would require by percent his estimate of willits' long-term growth rate using this method spiro concluded that the minority value of the stock was dollar_figure per share before considering a liquidity discount after applying the 20-percent liquidity discount spiro concluded that the fair_market_value of the stock was dollar_figure per share to reconcile the results of the different methods spiro weighted the results of the piecemeal sales_method percent the market method percent and the income_method percent and concluded that the fair_market_value of the stock was dollar_figure per share we accept part of respondent's expert's opinion and reject part we reject the portion of the market method analysis in which spiro calculated willits' price-to-earnings multiple from the guideline companies' multiples because there is no statistically significant correlation between the selected companies' net_income growth trends and their price-to-earnings multiples ’ the selected companies and their growth trends and price- to-earnings ratios are as follows growth trends company 1-year 3-year p e ratios redwood empire bankcorp dollar_figure dollar_figure dollar_figure continued in deciding the size of the discount spiro reviewed the conclusions of restricted_stock and ipo studies and considered the facts and circumstances of the willits stock we find no persuasive evidence in the record to support reliance on the restricted_stock studies in determining an appropriate marketability discount in considering the particular facts and circumstances of the stock spiro found that willits' publication of its annual report addressed to shareholders and other constituents is evidence that willits has a high level of public recognition we do not find that publishing its annual report supports a finding that willits enjoyed a high level of public recognition spiro concluded that there was an established market for the shares the trading history of willits stock does not support this conclusion the evidence shows that except for decedent's sales few shares were traded on an occasional basis and most of the transactions were between family members and willits’ directors officers and employees we accord this part of spiro's opinion little weight continued first commercial bancorp -dollar_figure dollar_figure dollar_figure civic bancorp -dollar_figure dollar_figure dollar_figure california bancshares inc -dollar_figure dollar_figure dollar_figure university national bank dollar_figure dollar_figure dollar_figure finally we reject the value spiro obtained with his piecemeal sales_method because we think the method results in the value of the stock to a particular borrower not the fair_market_value we think that petitioner's sale of shares at arm's length to unrelated parties after decedent's death provides the best indication of the value of a minority interest in willits in this transaction the shares were purchased by persons whom we presume have knowledge of the limits of the market and the value of a minority interest in willits moreover willits shares have historically traded at or near book_value in petitioner's sale the shares sold for approximately percent less than their book_value at the time of sale the book_value provided this court nearest the date of valuation was dollar_figure accordingly we find that the value of a minority interest on the date of valuation was dollar_figure before applying a discount for blockage the market for the willits' shares was limited and petitioner could not have sold its block of shares ina reasonable period of time without depressing the market and lowering the price accordingly we apply a 20-percent discount for blockage and find that the fair_market_value of the willits stock is dollar_figure per share -- - issue whether petitioner may deduct the expense of defending its reporting position petitioner asserts by amended petition that certain expenses it incurred defending its reporting position with regard to the value of the savings and willits shares are administration_expenses deductible from the value of the gross_estate respondent did not address this issue at trial or on brief sec_2053 provides that administration_expenses shall be deducted from the value of the gross_estate if they are allowable_by_the_law_of_the_jurisdiction under which the estate is being administered administration_expenses include attorney's_fees and miscellaneous expenses see sec a estate_tax regs miscellaneous administration_expenses include accountant's_fees and appraiser's fees see sec_20_2053-3 estate_tax regs the amounts deductible as administration_expenses are limited to such expenses as are actually and necessarily incurred in the administration of the decedent's_estate see sec_20_2053-3 estate_tax regs however expenditures not essential to the proper settlement of the estate but incurred for the individual benefit of the heirs legatees or devisees may not be taken as deductions see id attorney's_fees incurred by beneficiaries incident to litigation as to their respective interests are not deductible if the litigation is not essential to the proper settlement of the estate see sec_20_2053-3 estate_tax regs california law allows the personal representative to employ tax experts in negotiations or litigation that may be necessary for the final_determination and payment of taxes and to pay the experts from the funds of the estate the litigation undertaken by petitioner in this case was in response to respondent's determination_of_a_deficiency in petitioner's federal estate_tax the litigation did not relate to the respective interests of the heirs nor was it incurred for their individual benefit accordingly we conclude that the administrative expenses petitioner claims are of the type that are allowable under california law and the regulations respondent's regulations provide that a deduction for attorney's_fees incurred in contesting an asserted deficiency or california law provides the personal representative may also employ or retain tax counsel tax auditors accountants or other tax experts for the performance of any_action which such persons respectively may lawfully perform in the computation reporting or making of tax returns or in negotiations or litigation which may be necessary for the final_determination and payment of taxes and pay from the funds of the estate for such services cal prob code ann sec b west these amounts are in addition to the compensation allowed under sec for all ordinary services of the personal representative see cal prob code ann sec a west in prosecuting a claim_for_refund should be claimed at the time the deficiency is contested or the refund claim is prosecuted see sec_20_2053-3 estate_tax regs furthermore a deduction for these fees shall not be denied and the sufficiency of a claim_for_refund shall not be questioned solely by reason of the fact that the amount of the fees to be paid was not established at the time that the right to the deduction was claimed see id petitioner has met the requirements for claiming the deductions petitioner paid dollar_figure of attorney's_fees dollar_figure of accountant's_fees and dollar_figure of appraisal costs to defend its reporting position in an audit by the internal_revenue_service petitioner filed form_843 claim_for_refund and request for abatement to claim a refund of the estate_tax paid on these amounts soon after filing its petition in this case at that time petitioner also filed a protective claim_for_refund of estate_tax for additional administration_expenses that it expects to incur in further defending its position respondent did not address this issue either at trial or on brief accordingly we find that petitioner may deduct the reasonable administration_expenses incurred in settlement of the estate to reflect the foregoing decision will be entered under rule


department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------------- id no ------------- telephone number --------------------- refer reply to cc psi b1 plr-146377-06 date date --------------------------------------------------------- ------------------------------------------------------------------- -------------------------------------------------------------------------- internal_revenue_service number release date index number ------------------------------------------------------------ --------- -------------------------------------------------------- --------------------------------------------------------- ---------------------------------------- ---------------------------------- ---------------------------------- ----------------------------- ---------------------------- ----------- legend x y z s t u v -------------------------------------------------- w country sport date date year year ------------------- ------------ ----------- ------- ------- -------------------------- --------------------------------- ---- -------- ---------- ------------ ------------- plr-146377-06 state state a b c d e dear -------------------- this is in response to a letter dated date requesting an extension of time pursuant to sec_301_9100-3 of the procedure and administration regulations to file an election to treat v as a partnership for federal tax purposes under sec_301_7701-3 facts --------- ------ ------ according to the information submitted x has had ----------------------------------as members at all times since date the members of x have owned a of the limited_partnership interests in y these limited_partnership interests constitute b of the total membership interests in y z a state corporation wholly owned by the members has owned a of the general_partnership interest in y which consists of c of the total membership interests in y in year the members decided to establish an international -------------------------- in year s a state corporation directly and or indirectly through various related entities joined with the members as a partner in the -------------------------- to effect the partnership the members through y and s formed two new entities in year - t and u both t and u were state limited_liability companies treated as partnerships for federal tax purposes at that time y owned d of the membership interests in each t and u and s owned the other e of the membership interests in each entity on date t and u combined to purchase v from two unrelated parties at the time of the purchase transaction v was an existing country limited_liability_company and since it had two owners it was eligible to be treated as a partnership for federal tax purposes under the check-the-box_regulations on date all of the interests in t and u plr-146377-06 each became wholly owned by w a disregarded_entity wholly owned by y therefore on date under the check-the-box rules t and u each became a disregarded_entity for federal tax purposes then once t and u became disregarded entities v was treated as wholly owned by y v t and u represent that as of date and up until date v was eligible to make an election under sec_301_7701-3 to be a partnership for federal tax purposes however the form_8832 entity classification election was not timely filed since v was unaware that such a filing was necessary for a foreign limited_liability_company to be treated as a partnership for federal tax purposes law and analysis sec_301_7701-3 provides guidance on the classification of a foreign eligible_entity for federal tax purposes generally unless the entity makes an election to be treated otherwise a foreign eligible_entity is treated as an association_taxable_as_a_corporation if all members have limited_liability if a foreign eligible_entity has only one owner it may elect to be treated as a disregarded_entity pursuant to the rules in sec_301_7701-3 if a foreign eligible_entity has more than one owner it may elect to be treated as a partnership pursuant to the rules in sec_301_7701-3 sec_301_7701-3 further provides that an entity classification election must be filed on form_8832 entity classification election and can be effective up to days prior to the date the form is filed or up to months after the date on which the form is filed under sec_301_9100-1 the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the code except subtitles e g h and i sec_301_9100-1 defines the term regulatory election as including an election with a deadline prescribed by a regulation published in the federal_register sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make an election sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides extensions of time for making elections that do not meet the requirements of sec_301_9100-2 requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and plr-146377-06 that granting relief will not prejudice the interests of the government sec_301_9100-3 based solely upon the information submitted we conclude that the requirements conclusion of sec_301_9100-1 and sec_301_9100-3 have been satisfied as a result an extension of days from the date of this letter is granted to elect to treat v as a partnership for federal tax purposes effective for the period from date until date the entity classification election should be made by filing form_8832 with the appropriate service_center a copy of this letter should be attached to the form_8832 a copy is enclosed for that purpose except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer s requesting it sec_6110 of the internal_revenue_code provides that it may not be used or cited as precedent sincerely william p o’shea associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc psi b01 plr-124089-01 date date legend x state d1 requesting relief under sec_1362 of the internal_revenue_code this responds to the letter dated date submitted on behalf of x facts x was incorporated under state law x’s shareholder intended that x be a subchapter_s_corporation effective d1 however an s_corporation_election under sec_1362 was not timely filed s_corporation sec_1362 provides that a small_business_corporation may elect to be an law and analysis sec_1362 provides the rule on when an s election will be effective if an s election is made within the first two and one-half months of a corporation’s taxable_year then that corporation will be treated as an s_corporation for the year in which the election is made if an s election is made after the first two and one-half months of a corporation’s taxable_year then that corporation will not be treated as an s_corporation until the taxable_year after the year in which the s election is made sec_1362 provides that if an election under sec_1362 is made for any taxable_year after the date prescribed for making such election for such taxable_year and the secretary determines that there was reasonable_cause for the failure plr-124089-01 to timely make the election then the secretary may treat the election as timely made for such taxable_year x did not timely file an election under sec_1362 to be treated as an s_corporation effective d1 x however has established reasonable_cause for not making a timely election and is entitled to relief under sec_1362 conclusion based solely on the facts submitted and representations made and assuming that x otherwise qualifies as a subchapter_s_corporation as of d1 we conclude that x will be recognized as an s_corporation effective as of d1 x should file a completed form_2553 with a copy of this ruling attached reflecting its election of subchapter_s_corporation status as of d1 with the applicable service_center within days of the date of this letter except as specifically set forth above no opinion is expressed concerning the federal tax consequences of the facts described above under any other provision of the code specifically no opinion is expressed concerning whether x otherwise satisfies the s_corporation eligibility requirements this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent s david r haglund sincerely senior technician reviewer branch associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes