t c memo united_states tax_court estate of franklin z adell deceased kevin r adell temporary co-personal representative petitioner v commissioner of internal revenue respondent docket no filed date steven spencer brown denis john conlon royal b martin jr and william gibbs sullivan for petitioner john w stevens and angela b reynolds for respondent memorandum findings_of_fact and opinion paris judge in a notice_of_deficiency respondent determined a federal estate_tax deficiency of dollar_figure with respect to the estate of franklin z adell estate respondent also determined a sec_6662 substantial estate_tax_valuation understatement penalty of dollar_figure due to a gross_valuation_misstatement as defined by sec_6662 after concessions the issue remaining for decision is the fair_market_value of franklin z adell’s mr adell interest in stn com inc stn com on date the date of his death the court must also decide whether the substantial estate_tax_valuation understatement penalty applies findings_of_fact some of the facts are stipulated and are so found the stipulation of facts the supplemental stipulation of facts the second supplemental stipulation of facts the exhibits attached thereto and the exhibits admitted at trial or admitted by order are incorporated herein by this reference unless otherwise indicated section references are to the internal_revenue_code in effect for the date of franklin z adell’s death and rule references are to the tax_court rules_of_practice and procedure in addition to making concessions the parties have further adjusted the valuation issue for purposes of trial on its form_706 united_states estate and generation-skipping_transfer_tax return filed on date the estate initially reported the value of mr adell’s interest in stn com as dollar_figure million at trial and on brief petitioner argues that the value of mr adell’s stn com interest on his date of death was dollar_figure million in the notice_of_deficiency respondent proposed a value of dollar_figure for a purported adjustment of dollar_figure but now respondent argues that the value of mr adell’s interest in stn com was dollar_figure mr adell died on date when he was a legal resident of michigan mr adell’s estate is being probated under the laws of the state of michigan kevin r adell kevin mr adell’s son and the estate’s co-personal representative resided in michigan when the petition was filed mr adell was married to sharon adell who died before him they had three children kevin julie verona and laurie fischgrund on date mr adell created the franklin z adell trust adell trust the trust instrument was amended and restated on date mr adell’s three children were equal beneficiaries of the adell trust the values of the adell trust’s assets are included in the value of mr adell’s gross_estate one of the assets and the in mr adell’s daughters julie verona and laurie fischgrund filed a lawsuit against kevin as the personal representative of the estate in the probate_court of oakland county michigan on date the oakland county probate_court appointed joseph ehrlich as the successor temporary personal representative of the estate on date the oakland county probate_court appointed ms verona and ms fischgrund as successor co-personal representatives of the estate after reaching a settlement with kevin regarding the probate of the estate ms verona and ms fischgrund were discharged as co- personal_representatives of the estate by a court order dated date kevin was appointed as the temporary co-personal representative of the estate on date in part to petition this court concerning the value of stn com subject of the dispute herein is mr adell’s interest in stn com inc stn com a cable uplinking company i background of stn com before mr adell became involved with cable uplinking he invented a car door edge guard in and ran a door guard manufacturing business with his brothers in mr adell decided to pursue an opportunity in television broadcasting he applied for a television license which he received years later in at that time mr adell’s son kevin was finishing his degree in communications at arizona state university mr adell who continued to work for his family’s automotive company during the day convinced his son to return home to michigan and help him build a television station with loans and money from his parents kevin built the television station wadl for his father mr adell wadl went on the air in and initially broadcasted infomercials in addition to his interest in stn com mr adell transferred the following property to the adell trust during his lifetime treasury bills and accrued interest with a date-of-death value of dollar_figure a dollar_figure million home mr adell’s interest in birmingham properties inc birmingham properties with a date-of- death value of dollar_figure and mr adell’ sec_86 interest in adell broadcasting corp inc adell broadcasting with a date-of-death value of dollar_figure million adell broadcasting a c_corporation owned and operated wadl mr adell owned an interest in adell broadcasting that he transferred to the adell trust during his life mr adell’s interest in adell broadcasting had a date-of- continued several years later after a competitor lost its affiliation with a local channel wadl was able to contract all of the religious programming that was previously broadcasted on the other channel in mr adell formed stn satellite television network inc stn satellite a nevada corporation that provided satellite uplinking services mr adell purchased a building for his uplinking business that was separate from the wadl location kevin hired a company to apply for an uplink license and the uplink license was issued to stn kevin handled the day-to-day operations and began to learn about the uplinking business by providing satellite uplinking services on a contract basis for various customers including hughes electronics corp a subsidiary of general motors stn satellite’s contract with hughes continued death value of dollar_figure million see supra note birmingham properties an s_corporation wholly owned by mr adell owned the building stn com paid birmingham properties dollar_figure a month in rent mr adell transferred his interest in birmingham properties to the adell trust during his life and as of his date of death birmingham properties had a value of dollar_figure see supra note at trial kevin testified that the name on the uplink license was stn referring to stn satellite but he could not remember whether he had changed the name on the license to stn com after stn com’s incorporation in mr adell and kevin used the names stn stn com and satellite television network inc interchangeably electronics corp lasted for two years from through and was terminated around the time kevin saw an opportunity to create stn com a new entity to operate mr adell’s uplinking business mr adell incorporated stn com on date as a c_corporation in the state of michigan mr adell was stn com’s sole shareholder until date when he transferred his interest in stn com consisting of big_number shares of common_stock to the adell trust from the date of incorporation through the date of mr adell’s death stn com’s board_of directors included mr adell kevin and ralph g lameti kevin served as stn com’s president but he never had an employment agreement or a noncompete agreement with stn com stn com’s sole business_purpose was to broadcast an urban religious program channel that kevin named the word network the word mr lameti who is a certified_public_accountant and has a law degree did all of the accounting work for mr adell and his family mr lameti’s firm provided accounting services for stn com on form_990 return of organization exempt from income_tax mr adell and kevin specified the broadcasting of urban religious programs as the word’s exempt_purpose for consistency the court will adopt the term from the form_990 when describing the programming of stn com ii stn com and the word before the word kevin was looking for programming content to create an entertainment channel he pitched various ideas for a channel such as a 24-hour channel documenting general motors cars and manufacturing since the company was headquartered in michigan but those ideas never got off the ground kevin was familiar with religious programming so he decided to create a 24-hour station broadcasting urban religious ministries and gospel music which he called the word to gain support for the word kevin met with religious leaders in the detroit area including bishop charles haywood ellis and reverend jesse jackson sr in chicago they agreed to help kevin launch the word in date mr adell kevin mr lameti rev jackson and bishop ellis went to los angeles to meet with the president of directv about the word kevin presented his idea for a 24-hour urban religious program channel and rev jackson and bishop ellis explained the need for urban ministries to reach a national audience the directv representatives were interested in broadcasting the word and asked kevin to prepare a business plan they also gave kevin a deadline for creating the word which had to be a nonprofit entity in order to use the available broadcast space on date kevin and mr adell incorporated world religious relief as a michigan nonprofit to operate as the word according to its articles of incorporation the word was organized exclusively for charitable educational and scientific purposes as described in sec_501 and no part of its assets or net_earnings could inure to the benefit of or be distributable to its directors officers or other private persons mr adell was the president and a director of the word and kevin was the treasurer secretary and a director of the word stn com purchased and operated the equipment used to uplink the word’s urban religious programming and provided to employees to broadcast the word on date the word and stn com signed a services and facilities agreement services agreement in which stn com agreed to provide such executive management legal technical supervisory administrative when kevin contacted ministers about programming content and cable companies for broadcasting opportunities he was often asked whether ownership in the word was available kevin indicated that because the word was a nonprofit the ministers and cable companies could not receive an ownership_interest until mr adell’s date of death in date mr adell and kevin were the only employees of the word according to its form_1023 application_for recognition of exemption under sec_501 of the internal_revenue_code the word represented that it would not provide compensation to its officers and directors however the word’s articles of incorporation provide that it may pay reasonable_compensation for services accounting clerical and other services and such facilities as the word may reasonably require in order to effectively run its operations as requested from time to time by the board_of directors or the president of the word in consideration the word agreed to pay stn com a monthly programming fee equal to the lesser_of actual cost or ninety-five percent of net programming revenue received by the word in a one month period the parties agreed that the programming fee would not exceed stn com’s actual direct costs and allowable indirect_costs dollar_figure the services agreement was scheduled to take effect on date and terminated upon the earliest of mutual written consent of the parties termination of the word’s right to use the directv channel the word’s failure to pay the monthly programming fee within five business days after the due_date or the word’s exercise of an option to terminate the agreement if stn com failed to transmit the word’s programming to the directv channel for according to the services agreement the costs must be reasonable and include a reasonable amounts paid to all independent contractors b reasonable direct costs c a reasonable allocation of salaries wages employee_benefits and the employer’s share of payroll_taxes and d a reasonable allocation of overhead costs a specified length of time mr adell signed the services agreement as president of the word and kevin signed the agreement as president of stn satellitedollar_figure on or around date kevin and mr adell filed the word’s form_1023 according to the form_1023 the word received an oral commitment from directv to broadcast its nonprofit programming and it intended to offer its programming to other large cable companies according to the oral agreement the word was responsible for arranging all programming content including contacting ministers clergy and other religious leaders who had local television programs and offering to broadcast their programs for a reduced fee stn com was responsible for sending the word’s signal to a satellite and directv agreed to take the programs off the satellite and broadcast them nationally also on the form_1023 the word represented that its programming would be strictly noncommercial and would include educational and theological the service_contract gives the word an option to terminate the agreement if stn com fails to transmit programming to the directv channel for more than hours for seven or more consecutive days during the term of this agreement which the court finds ambiguous at trial kevin testified that it was a clerical mistake that stn satellite was listed instead of stn com from through mr adell’s date of death in mr adell was president of the word and kevin was president of stn com broadcasts the word also disclosed that mr adell and kevin who were officers and directors of the word were principals of two entities adell broadcasting and stn com that agreed to fund the word’s startup costs the word represented that any financial transactions with adell broadcasting and stn com would be at arm’s length and below cost to prevent any private_inurement and any unreimbursed expense incurred by stn com would be treated as a donation broadcasts of the word began on date and on date the word received its sec_501 tax-exempt status pursuant to the services agreement and continuing through mr adell’s date of death the word paid stn com at least of its revenue each month the word’s primary source of revenue was from broadcasting contracts that kevin as a representative of the word negotiated and entered into with ministers and their religious affiliates stn com’s primary source_of_income came from the program fees it received from the word stn com’s only customer in and the word’s programming payment to stn com exceeded of its reported programming revenues at trial mr lameti indicated that the one-month difference in tax yearends for the word and stn com--the word’s ended in may and stn com’s ended in june--could have caused the excess payments to stn com in and according to the notes to its financial statements for the tax years ending tye date through stn com derived its entire broadcast revenue continued the word and stn com filed returns for the years leading up to mr adell’s death the word filed forms for its tax years ending tye date through and reported the following amounts in broadcasting revenue and programming fees paid to stn com tye the word’s revenue stn com’s fee stn com’s gross_receipts dollar_figure big_number big_number big_number big_number dollar_figure big_number big_number big_number big_number dollar_figure big_number big_number big_number big_number in addition to paying stn com’s fee the word also reported compensation paid to its officers listed on its forms as mr adell ceo hours week devoted to position and kevin president hours week devoted to position continued from the word which pays of its broadcasting revenue to stn com the notes do not mention that stn com’s broadcasting revenue is limited to the lesser_of its costs or of the word’s broadcasting revenue as provided in the services agreement the parties sometimes use the term fiscal_year ending instead of tye the court will use tye for consistency compensation from the word mr adell ceo hrs wk devoted to position kevin president1 hrs wk devoted to position dollar_figure big_number big_number big_number big_number dollar_figure big_number big_number big_number big_number tye the discrepancy in form_990 officer titles ie mr adell ceo and kevin president was not addressed in testimony or other exhibits the original form_1023 listed mr adell as president and kevin as treasurer and secretary see supra pp and note for discussion on form_1023 application and service agreement stn com filed forms u s_corporation income_tax return for its tye date through based on financial statements prepared by mr lameti’s accounting firms according to its corporate returns and financial statements stn com reported the following amounts in gross_receipts retained earnings shareholder equity and assets tye gross_receipts retained earning sec_2002 dollar_figure big_number big_number dollar_figure big_number big_number shareholder equity assets dollar_figure big_number big_number dollar_figure big_number big_number - - big_number big_number big_number big_number big_number big_number big_number big_number the court will assume that minor differences between these numbers as they appear on the tax returns and on the financial statements are due to rounding stn com used the program fees it received from the word to pay its expenses stn com’s expenses included a monthly dollar_figure rent payment to mr adell’s wholly owned s_corporation birmingham properties and compensation to its officers and employees stn com’s largest expense was compensation_for mr adell and kevin during its tye in date through stn com paid mr adell and kevin the following amounts in compensation tye compensation from stn com kevin mr adell dollar_figure big_number big_number big_number big_number dollar_figure big_number big_number big_number big_number these amounts do not include notes receivable from kevin to stn com more specifically described infra note mr adell’s date of death was date so for its tye date stn com paid mr adell’s compensation of dollar_figure to the adell trust in tye date and stn com paid kevin compensation of dollar_figure and dollar_figure respectivelydollar_figure in addition to rent and compensation stn com made several miscellaneous payments that were primarily for the personal benefit of mr adell and kevin stn com leased luxury cars including bentleys and rolls-royces used for personal and work purposes by mr adell kevin and its other employees stn com also helped mr adell and kevin purchase and maintain real_estate for stn com amended its corporate returns for and to increase deductions on its original returns to recharacterize dividend payments as compensation to kevin thereby increasing his compensation_for those tax years see infra note during tye date through stn com had prepaid auto lease expenses of dollar_figure dollar_figure dollar_figure dollar_figure and dollar_figure respectively according to the estate’s return mr adell owned a bentley continental gt that had a date-of-death value of dollar_figure and two rolls-royces with date-of-death values of dollar_figure for the phantom and dollar_figure for the corniche as of date kevin received use of one company owned or leased luxury car that was not included as wage income and nine other luxury cars that were included as part of his compensation from stn com the estate objected to this evidence on the basis of relevancy the court reserved ruling on this objection and now overrules it to the extent that the evidence is relevant to show that stn com was indeed a profitable corporation during and immediately after mr adell’s life example stn com gave money to mr adell and kevin to purchase a condominium in los angeles california and guaranteed the mortgage stn com purchased high-end furnishings for the condominium and for mr adell’s home in michigan and paid all expenses including the mortgage interest and insurance related to kevin’s second home in florida in stn com paid dollar_figure toward kevin’s home in florida from date through date stn com paid between dollar_figure and dollar_figure of kevin’s personal legal fees for litigation involving a dispute with a home contractor in mr adell paid a dollar_figure million judgment entered against kevin using funds from mr adell’s salary at kevin claimed that the money received from stn com was reported as wage income to mr adell and kevin the estate did not provide evidence supporting kevin’s claims and instead objected on the grounds of relevancy the court overrules the estate’s objection and finds the evidence relevant to show that stn com was indeed a profitable corporation as of mr adell’s date of death the condominium had a reported value of dollar_figure these payments were later recharacterized as loans from stn com to kevin which the financial statements show were substantially repaid after mr adell’s death these loans to kevin were represented by demand promissary notes the maximum cumulative balance of the notes was dollar_figure and stn com’s financial statements showed yearend balances due from kevin in the following amounts for tye date through dollar_figure dollar_figure dollar_figure dollar_figure and dollar_figure respectively stn com kevin filed for bankruptcy and moved to florida in where he continues to maintain a residencedollar_figure mr adell’s daughters also personally benefited from stn com during through the adell trust made payments to ms verona and ms fischgrund which were funded by dividend payments made from stn com to the adell trust in addition although stn com never employed ms verona mr adell individually and as trustee of the adell trust directed stn com to pay ms verona’s health_insurance_coverage from approximately until mr adell’s death in stn com continued the payments until after mr adell’s death in kevin was appointed chief_executive_officer in addition to already being president of stn com and mr lameti was on the estate’s original form_706 the judgment was reported under schedule f other miscellaneous property as a loan receivable and asset of the estate with a value of dollar_figure on the estate’s first amended form_706 the judgment was recharacterized as a gift from mr adell to kevin in the amount of dollar_figure and reported under schedule g transfers during decedent’s life the parties have agreed to treat the dollar_figure million payment as a gift see infra p see also estate of adell v commissioner tcmemo_2014_89 in subsequent gift_tax litigation kevin claimed florida as the then-current residence of the personal representative the court recognizes that the related cases now lie in different appellate jurisdictions in these payments were recharacterized as compensation paid_by stn com to kevin who then loaned the funds to the adell trust named the chief financial officer of stn com kevin continued to operate stn com in the same manner as before mr adell died in fact stn com continued to generate significant gross_receipts for its tye date and and reported gross_receipts of dollar_figure and dollar_figure respectively in date ms verona and ms fischgrund filed a lawsuit in the probate_court of oakland county michigan against kevin as trustee of the adell trust in they filed a second lawsuit in the probate_court against kevin as personal representative in administration of the estate because the probate_court litigation affected stn com kevin testified that he created a new company international broadcasting services inc international broadcasting to provide the uplinking services the word needed to continue its business kevin filed articles of incorporation for international broadcasting on date he is the sole owner on or around date almost four years after mr adell’s death kevin resigned from stn com and all of stn com’s employees except for one resigned and became employees of international notably kevin continued to use stn com for his personal benefit in date using a dollar_figure million bank loan stn com purchased an 85-foot yacht which kevin kept at his home in florida and used for personal purposes stn com also paid for the captain and crew of the yacht in stn com advanced dollar_figure to kevin to set up his company novi trade center llc stn com advanced a total of dollar_figure to novi trade center llc from date through date broadcasting beginning in date the word changed its uplinking provider from stn com to international broadcasting on date the word and international broadcasting signed a new services and facilities agreement that was identical to the one between stn com and the word mr lameti signed the new agreement on behalf of the word and kevin signed on behalf of international broadcasting at this time all of the uplinking equipment owned by stn com was transferred to the word without consideration and stn com ceased operations as of iii estate_tax_return mr adell died on date kevin was appointed personal representative of the estate and trustee of the adell trust on date respondent received the estate’s form_4768 application_for extension of time to file a return and or pay u s estate and generation-skipping_transfer taxes requesting a six-month extension to pay its estate_tax liability mr lameti was the appointed trustee of the adell trust on date but he resigned and appointed kevin as trustee on date kevin served as trustee of the adell trust until date the estate expected to make a sec_6166 election computing the deferred and nondeferred portions of the estate_tax on the basis of the portion attributable to the closely held businesses and was waiting for the valuations of mr adell’s closely held businesses adell broadcasting birmingham properties and continued on date the estate filed a form_706 reporting an estate_tax due of dollar_figure included with the form_706 was a statement in which the estate elected under sec_6166 to defer dollar_figure of the total estate_tax attributable to the closely held businesses’ assets for five years and then pay the deferred estate_tax in annual installments the estate paid the nondeferred estate_tax of dollar_figure when it filed the form_706 on november dollar_figure attached to the estate’s return was inter alia a schedule g showing mr adell’s transfers to the adell trust during his life among the transfers were mr continued stn com the parties have not addressed whether any estate_tax lien provisions required under sec_6166 and sec_6324a were violated when stn com transferred all of its uplinking equipment without consideration for a discussion of the estate’s sec_6166 election and its petition to the court regarding the same see estate of adell v commissioner tcmemo_2013_228 stn com executed a dollar_figure capital stock_redemption to pay the nondeferred portion of the estate_tax in addition on or around date stn com loaned the adell trust dollar_figure million to pay the estate’s income_tax_liability the payment was originally intended to be a stock_redemption but in it was recharacterized as compensation paid_by stn com to kevin which kevin then loaned to the adell trust the parties have not addressed the tax consequences under sec_303 in regard to distributions in redemption_of_stock_to_pay_death_taxes versus recharacterizing the amount as compensation the original estate_tax_return reflected a dollar_figure-per-unit value of stn com the trust owned big_number shares for a dollar_figure million value the shareholder equity reflected on stn com’s financial statement was dollar_figure million adell’s shares of stock in birmingham properties with a reported date-of- death value of dollar_figure adell broadcasting with a reported date-of-death value of dollar_figure million and stn com with a reported date-of-death value of dollar_figure million the stn com stock’s reported value was based on a valuation report prepared by stout risius ross inc stout risius ross and certified by jeffrey m risius one of the estate’s expert witnessesdollar_figure the estate amended its estate_tax_return twice the estate’s form_706 was amended for the first time on date over a year after the filing of its original return on the first amended_return the dollar_figure million payment mr adell made on behalf of kevin to discharge a judgment in was recharacterized by the estate from a note payable to mr adell or a loan receivable to the estate to a taxable gift from mr adell to kevin by recharacterizing the receivable as a gift the estate reduced its total transfer_taxes from dollar_figure as originally reported for a discussion of mr risius’ valuation report attached to the estate’s original form_706 see infra pp to dollar_figure the first amended estate return did not adjust the stn com stocks’s date-of-death value from the originally reported dollar_figure million respondent received the estate’s second amended form_706 on date almost four years after mr adell died on the second amended_return the estate changed its original return position and reported that the stn com stocks’s date-of-death value was zero instead of dollar_figure million the estate’s total transfer_taxes were reduced to dollar_figure and the value attributable to the closely_held_business assets was reduced from dollar_figure to dollar_figure on date respondent issued a notice_of_deficiency to the estate in which respondent determined an estate_tax deficiency of dollar_figure in the notice respondent determined inter alia that the date-of-death value of the stn com stock that mr adell had transferred to the adell trust was over dollar_figure million instead of dollar_figure million reported on the original form_706 filed on the first amended estate_tax_return requested that the previously remitted estate_tax payment of dollar_figure paid in date be reallocated to apply dollar_figure to the amended_return balance of dollar_figure the first amended_return also indicated that the remaining dollar_figure of the dollar_figure payment made with the original return should be applied to mr adell’s taxable_gifts the court previously decided that because there was not an available overpayment of estate_tax the dollar_figure previously remitted as estate_tax could not be applied to the gift_tax liability see estate of adell v commissioner tcmemo_2014_89 see also supra note sec_23 and sec_29 date kevin as the estate’s representative timely filed a petition with the court iv valuation reports a mr risius’ date valuation report mr risius was primarily responsible for preparing the first valuation report of the stn com stock that was attached to the estate’s original return in preparing the report mr risius considered the factors listed in revrul_59_60 1959_1_cb_237 he relied on stn com’s financial statements for the tye date through the services agreement between the word and stn com the word’s bylaws and a schedule of compensation paid to stn com’s officers for the tye date through mr risius also spoke with stn com’s management regarding its business industry history and prospects the notice_of_deficiency did not reference the estate’s second amended_return in which it reported a zero value for the stn com stock and it does not appear from the record that the second amended form_706 was accepted although it does reflect the estate’s original position taken on the petition the notice_of_deficiency however included a dollar_figure gross-up to the estate to account for the additional gift_tax payable with respect to mr adell’s corrected taxable_gifts for reflected on the first amended_return the estate received a separate notice_of_deficiency for the delinquent gift_tax_return and subsequent gift_tax liability accrued as a result of the recharacterization the estate’s gift_tax petition is the subject of estate of adell v commissioner tcmemo_2014_89 using this information mr risius described stn com as a company that generates revenue by uplinking network television broadcasting for its sole customer the word pursuant to a services and facilities agreement mr risius reported that stn com received of the revenue generated by the word as consideration although mr risius acknowledged that stn com’s single contract with its single customer posed significant risks he concluded that the risk could be accounted for by adding a company risk adjustment of mr risius’ financial statement analysis began with a balance_sheet analysis that included consideration of stn com’s net working_capital property and equipment interest-bearing debt and stockholders equity because stn com’s historical working_capital which included accounts_receivable and accounts_payable demonstrated an upward trend except for mr risius projected that stn com’s net working_capital current_assets less current liabilities was expected to gradually increase from approximately dollar_figure million to dollar_figure million remaining constant at approximately of sales stn com’s overall assets as noted supra pp and note stn com’s financial statements for its tye through and upon which mr risius relied to prepare his valuation report also described stn com’s consideration as of the revenue generated by the word mr risius defined the historical period as the five tye date continued including gross fixed assets of leasehold improvements uplinking and broadcasting equipment office furniture and one or more vehicles increased from dollar_figure million in to dollar_figure million in and then decreased to dollar_figure million as of stn com had approximately dollar_figure of interest-bearing debt and stockholders equity that increased from approximately dollar_figure to dollar_figure million during the historical period in his income statement analysis mr risius noted that sales increased rapidly during the historical period from approximately dollar_figure million in to dollar_figure million in and were projected to increase from approximately dollar_figure million to dollar_figure million during the projection period due to several unusual or nonrecurring expense items however mr risius made a number of adjustments to stn com’s reported financial results to more accurately reflect stn com’s continued through and the projection period as the five tye date through and the residual period ending date on the basis of his conversations with management mr risius projected net capital expenditures to range from approximately dollar_figure to dollar_figure million over five years according to management stn com budgeted significant capital expenditures in the future to purchase a tour bus in and equipment upgrades in in or stn com purchased a bus that cost about dollar_figure normalized ongoing operating performance among the adjustments was a reduction in officers salaries and wages to reflect market rates mr risius also adjusted stn com’s operating_expenses to include an economic charge for kevin’s personal_goodwill mr risius explained that the adjustment was appropriate because the success of stn com depended heavily on kevin’s personal relationships with the board_of directors of the word moreover kevin did not have a noncompete agreement with stn com and as a result a potential buyer would acquire stn com only to the extent that the company retained kevin the economic charge for kevin’s personal_goodwill ranged from to of sales over the historical period and from to of sales over the projection period mr risius added the economic charge to stn com’s projected operating_expenses thereby increasing the expenses to mr adell and kevin’s combined compensation increased from approximately dollar_figure million to dollar_figure million because mr adell was the owner of stn com in addition to being an employee and kevin was his son mr risius explained that only the market rate that would be paid to a third party to perform their duties should be considered as officers salary as adjusted mr risius estimated stn com’s annual base market compensation_for management to be dollar_figure because mr risius described stn com’s revenue as of the word’s revenue without being capped at stn com’s cost of services provided mr risius did not address whether any reduction in stn com compensation would mean a reduced programming fee paid_by the word approximately dollar_figure million for the tye to dollar_figure million for the residual period ending in stn com’s other operating_expenses which included programming expenses satellite fees legal and professional fees and other administrative expenses increased during the historical period from approximately dollar_figure million to dollar_figure million in line with stn com’s overall growth as adjusted stn com’s earnings before interest taxes depreciation and amortization generally increased over the historical period in line with overall sales and was projected to reflect of sales or approximately dollar_figure million in the first year of the projection period to dollar_figure million in the residual period on the basis of the foregoing mr risius determined that stn com was an operating entity that was expected to produce positive cashflows in the future in other words the value of stn com as a going concern exceeded the value of its underlying assets in liquidation accordingly mr risius used a discounted mr risius explained that the highest_and_best_use of a company is either as a going concern or in liquidation depending on which generates the higher value and with respect to stn com its highest_and_best_use was as a going concern the asset approach in valuing an entity may be used in the valuation of operating companies where the value of the underlying assets in liquidation--as reduced to reflect associated tax liabilities--exceeds the value of the business as a continued cashflow analysis of the income approach when valuing the stn com stock first mr risius calculated the total weighted average rate of return which he noted is the combination of the return on both debt and equity the rate of return was based on an assumed capital structure of debt and equity mr risius determined that the required rate of return on equity wa sec_26 which includes a company risk adjustment of to account for the risk associated with losing stn com’s only customer the word he then calculated that the estimated after-tax required rate of return on debt wa sec_4 by adjusting a known pretax return on debt rate of to reflect an effective federal_income_tax rate of mr risius calculated the total weighted average rate of return--around continued going concern see estate of smith v commissioner tcmemo_1999_368 in his first valuation report mr risius determined that the income approach as opposed to the asset approach was appropriate to value the stn com stock the discounted cashflow method is one valuation method under the income approach which values a company on the basis of its earning capacity estate of true v commissioner tcmemo_2001_167 aff’d 390_f3d_1210 10th cir the estimated value of a company is based on the present_value of its expected future economic benefits ie its distributable cashflow the method evaluates a company’s earnings and dividend-paying capacity available to investors and may consider reinvestment required for the company’s growth --by summing the products of each portion of the capital structure with its respective rate of returndollar_figure mr risius applied the rounded rate of return to a stream of annual net cash projected for stn com to calculate an enterprise value of dollar_figure million the enterprise value includes the present_value of stn com’s residual cashflow dollar_figure plus the present_value of its cashflows for the projection period dollar_figure after making adjustments to the enterprise value to account for stn com’s cash and cash equivalents interest-bearing debt and nonoperating assets mr risius concluded that the fair_market_value of the stn com stock on mr adell’s date of death was approximately dollar_figure million this valuation was included in the original estate_tax_return filed in date b mr risius’ date valuation report more than five years after his first valuation report mr risius on behalf of stout risius ross prepared a second valuation report for the stn com stock which the estate submitted at trial in the second valuation report mr risius valued the stn com stock using the adjusted book_value method reflecting liquidation or sale of assets instead of a discounted cashflow method he determined that the fair_market_value on mr adell’s date of death was dollar_figure million mr risius’ valuation of the stn com stock decreased primarily because he used the asset approach instead of the income approach mr risius changed his valuation approach because of a new understanding of the services agreement in his first valuation report mr risius did not account for the limitation imposed on stn com’s programming fee to the lesser_of its cost or of the word’s revenue whereas in his second valuation report he accounted for the limitation mr risius testified that he realized his mistake when testifying for a hearing during the oakland county probate litigation in on the basis of his new understanding of the services agreement mr risius explained that the income approach which requires positive cashflow to be available for distribution to shareholders was not appropriate for valuing the stn com stock because the services agreement did not allow stn com to generate a profit according to mr risius although stn has generated in making his determination mr risius relied in part on an expert opinion prepared by kenneth kolmin regarding the terms of the services agreement on date respondent filed a motion in limine to exclude mr kolmin’s expert report from evidence and to exclude any portion of the other expert reports that relied on mr kolmin’s report in an order dated date the court granted respondent’s motion to the extent that it sought to exclude mr kolmin’s continued profits in the historical period a hypothetical buyer of a company would not place any weight on the historical performance of the company given the terms of the agreement with the word under the asset approach mr risius accounted for stn com’s lack of ability to generate a profit from its sole customer and the fact that stn com did not have any other source of revenue or other customers from which stn com could generate income accordingly mr risius valued the stn com stock using the adjusted book_value method of the asset approach using the adjusted book_value mr risius determined the stn com stock was worth dollar_figure million on mr adell’s date of deathdollar_figure continued report from evidence but it denied respondent’s motion with respect to the expert reports that relies on adopts or references mr kolmin’s report notwithstanding the foregoing to the extent mr risius’ conclusion that stn com lacked any legal right to earnings under the services agreement is based on mr kolmin’s report he is in error as described in mr risius’ first valuation report stn com historically earned a profit under the terms of the services agreement and continued to do so well after mr adell’s death mr risius’ second valuation report relied on an independent valuation report by accuval associates inc accuval associates dated date for his estimation of the fair market value-installed of stn com’s tangible_personal_property assets as of date the accuval associates report used the term fair market value-installed c alex w howard’s date valuation report the estate’s second expert witness mr howard used the net asset value method of the asset approach to value the stn com stock and concluded that its fair_market_value on mr adell’s date of death was dollar_figure million like mr risius mr howard was also an employee of stout risius ross when he prepared his valuation report but he did not work on his report with mr risius in his valuation analysis mr howard concluded that the income approach was not appropriate in determining the stn com stock’s fair_market_value due to the lack of earnings that could be generated by stn com under the provisions of the services agreement while mr howard acknowledged that stn com generated net_income historically he determined that a hypothetical buyer would not reasonably expect to generate profits because under the services agreement stn com should have been only reimbursed for costs incurred effectively making it a zero profit situation another reason mr howard determined that the income approach was inappropriate was that stn com’s executive compensation model restricted the unlike mr risius mr howard did not rely on mr kolmin’s expert report and testified that he did not know it existed although an employee of stout risius ross when he prepared his report mr howard had left stout risius ross and had his own firm when he testified company’s earning potential mr howard explained that analysts and buyers typically adjust historical and projected cashflows to account for high salaries paid to executives when determining the fair_market_value of a controlling_interest in a company he cited the provision of the services agreement that defined reimbursable costs to include a reasonable allocation of salaries wages employee_benefits and the employer’s share of payroll_taxes of all employees employed by stn in providing services under the agreement according to the terms of the services agreement however any reduction in salaries would result in a dollar for dollar reduction in revenue for stn com preventing a hypothetical purchaser of the shares from generating profits by reducing salaries to market levels further mr howard determined that an unrelated party would find stn com’s executive compensation unreasonable preventing a hypothetical purchaser from increasing earnings by increasing executive compensation accordingly mr howard found the income_method was inappropriate because the services agreement would restrict a hypothetical buyer from increasing profits by cutting executive compensation and the hypothetical buyer could not increase profits by giving himself a high salary because stn com’s already unreasonable executive compensation would not be approved by a third party in addition to lacking a contractual guaranty of a specific return mr howard noted that stn com’s projected cashflow streams from its only customer the word were uncertain because kevin did not have a noncompete agreement with stn com and could create a new company to replace stn com he explained that the goodwill associated with the relationship between kevin and the word was personal to kevin without an employment agreement with kevin mr howard concluded that an income approach was not appropriate to determine the fair_market_value of the stn com stock mr howard determined that the net asset value method was the appropriate valuation method because stn com had assets with values that could be determined using this valuation method mr howard determined that on mr adell’s date of death the fair_market_value of of the stn com stock was dollar_figure million d francis x burns’ date valuation report respondent’s expert witness mr burns valued the stn com stock using the discounted cashflow method of the income approach and determined that the mr howard’s valuation report relied on the independent valuation report of accuval associates dated date for his valuation of the fair_market_value of stn com’s fixed assets value on mr adell’s date of death was dollar_figure in his valuation he reviewed stn com’s business operations ownership structure and financial performance between tye and he also reviewed the services agreement and like mr risius and mr howard noted that the monthly program fee payable from the word stn com’s only customer to stn com was limited to the lesser_of actual cost or of net programming revenue received by the word in a one month period on the basis of his analysis of the foregoing mr burns determined that the appropriate valuation method for the stn com stock on mr adell’s date of death in was the discounted cashflow method of the income approach in support of his conclusion mr burns explained that stn com was a fairly young company as of the valuation_date that had been profitable in each of the fiscal years preceding the valuation_date as a source for his projected cashflow assumptions mr burns used the management discussions cited in mr risius’ first valuation report mr burns adopted mr risius’ projected sales for stn com for the five years plus a residual period after the valuation_date which ranged from by contrast respondent’s valuation in the notice_of_deficiency was greater than dollar_figure million approximately dollar_figure million to dollar_figure million during the projection period mr burns noted that the sales projections assumed that the word would continue its practice of paying stn com according to its revenues rather than stn com’s actual costs he also adjusted officers compensation to market rates explaining that a hypothetical investor would maximize stn com’s cashflow by paying compensation at market rates mr burns did not however address whether his adjustment to officers compensation would reduce stn com’s program fee pursuant to the terms of the services agreement mr burns also addressed the importance of kevin’s relationship with the word to stn com’s continued business operations instead of applying an economic charge for kevin’s personal_goodwill similar to the one found in mr risius’ first valuation report mr burns concluded that a hypothetical investor would anticipate retaining kevin as an officer of stn com and would need to compensate kevin at an acceptable rate of of sales mr burns noted that his assumed compensation level for kevin of nearly dollar_figure million in was significantly higher than mr risius’ estimate of dollar_figure in his first valuation report on the basis of stn com’s existing level of interest-bearing debt and estimates of its equity value mr burns assumed a capital structure of debt and equity and calculated a weighted average cost of capital or discount rate of mr burns’ discount rate was higher than the used by mr risius and according to mr burns led to a lower valuation of the stn com stock however mr burns applied the discount rate to a stream of annual net cashflow that was substantially higher than the net cashflow calculated by mr risius in his first report mr risius’ calculation of distributable cash was substantially lower than that calculated by mr burns primarily because mr risius reduced stn com’s projected sales which were the same numbers used by mr burns by the economic charge for kevin’s personal_goodwill the result was a net present_value of total invested capital of dollar_figure which was much higher than mr risius’ enterprise value of approximately dollar_figure after making adjustments to the value of total invested capital to account for stn com’s cash and cash equivalents interest-bearing debt and nonoperating assets mr burns applied a discount for lack of marketability and concluded that the fair_market_value of the stn com stock on mr adell’s date of death was dollar_figure opinion the court is asked to determine the fair_market_value of mr adell’s interest in stn com on his date of death and whether the estate is liable for the substantial estate_tax_valuation understatement penalty with respect to the stn com stock the parties have both substantially changed their positions reflected in the notice_of_deficiency the original petition and the answer to the court the estate now argues that the fair_market_value of the stn com stock it held on the valuation_date was dollar_figure million respondent now asserts that the fair_market_value of the stock was dollar_figure i burden_of_proof during the trial the estate filed a motion to shift the burden_of_proof to respondent under sec_7491 in an order entered on date the court found that the estate’s substantially inconsistent positions regarding the valuation of the stn com stock demonstrated a failure to meet the requirements of sec_7491 and therefore the burden_of_proof remained with the estate the court noted that notwithstanding its declining to shift the burden_of_proof to respondent the case will ultimately be decided on the preponderance_of_the_evidence in its posttrial brief the estate again argues that the burden_of_proof should shift to respondent with respect to the valuation of the stn com stock the estate asserted the stn com stock was worth dollar_figure million on its original estate_tax_return and on its second amended estate_tax_return on the original petition filed with the court the estate asserted the stn com stock had zero value the estate’s position at trial was that stn com stock should be valued at dollar_figure million after review of the estate’s posttrial brief the court sustains the order denying the motion to shift the burden of proofdollar_figure in general the commissioner’s determinations in the notice_of_deficiency are presumed correct and the taxpayer has the burden of proving that the commissioner’s determinations are incorrect see rule a 290_us_111 sec_7491 allows a taxpayer to shift the burden_of_proof to the commissioner with respect to a factual issue if the taxpayer introduces credible_evidence regarding that issue relevant to ascertaining the taxpayer’s liability for a tax under subtitle a or b ‘credible evidence is evidence which after critical analysis the court would find sufficient to base a decision on the issue’ in the taxpayer’s favor absent any contrary evidence 116_tc_438 quoting h_r conf rept no pincite 1998_3_cb_747 the estate did not present evidence which after critical analysis the court would find sufficient to base a decision on the issue on because the evidence was inconsistent see id inconsistent evidence is not credible and is not persuasive to shift the burden under sec_7491 see gutierrez v commissioner t c memo the parties briefed a number of evidentiary objections that the court had reserved ruling on at trial those objections not dealt with in this opinion have been dealt with by order dated date the estate presented conflicting expert reports and three different values of the stn com stock the three different positions taken highlight the lack of credible_evidence necessary to shift the burden instead of one position on which the court could base a decision according to the standard in higbee the estate presented three different views that may each have some merit accordingly the inconsistent evidence presented is not credible under sec_7491 and the burden remains with the estate further the parties have stipulated the operative facts and documents and specifically the terms of the services agreement between stn com and its only customer the word the parties dispute however the impact of the services agreement on the valuation of the stn com stock as of the date of mr adell’s death in these circumstances there is no need to analyze or decide which party has the burden_of_proof or whether the estate met the credible_evidence requirement as the finder of fact the court considers the underlying facts agreed upon by the parties and presented at trial and looks to the experts’ reports for guidance on deciding the valuation issue ii valuation of the stn com stock after concessions by the parties the remaining issues for decision are the value of the stn com stock included in the gross_estate and the related penalty the value of property is a question of fact 94_tc_193 during the trial the estate asserted that the value of the stn com stock was dollar_figure million and respondent asserted that the value was dollar_figure a fair_market_value the transfer of the taxable_estate on mr adell’s death is subject_to estate_tax sec_2001 estate of deputy v commissioner tcmemo_2003_176 the taxable_estate is the gross_estate less allowable deductions sec_2051 the gross_estate includes the value of all property that mr adell owned on the date of death sec_2031 generally the value of the gross_estate is the fair_market_value of the included_property as of the date of death sec_20_2031-1 estate_tax regs fair_market_value is the price at which property would change hands between a willing buyer and a willing seller neither under any compulsion to buy or sell and both having knowledge of relevant facts id the willing buyer and seller are hypothetical and valuation does not take into account the personal characteristics of the actual buyer or the actual seller 706_f2d_1424 7th cir estate of noble v commissioner tcmemo_2005_2 the hypothetical willing buyer and seller are presumed to be dedicated to achieving the maximum economic advantage namely the maximum profit from the hypothetical sale estate of noble v commissioner tcmemo_2005_2 the determination of fair_market_value is a question of fact and the trier of fact must weigh all relevant evidence of value and draw appropriate inferences 323_us_119 see also estate of newhouse v commissioner t c pincite while listed prices of publicly traded stock are usually representative of the fair_market_value of that stock for federal tax purposes special rules apply when valuing stock of a closely_held_corporation estate of noble v commissioner tcmemo_2005_2 the fair_market_value of stock of a closely_held_corporation is best determined by considering actual sales at arm’s length in the normal course of business within a reasonable_time before or after the valuation_date id if the value of the stock cannot be determined by using arm’s-length sales fair_market_value is generally determined by considering all relevant factors that would affect fair_market_value id these factors include the corporation’s net_worth prospective earning power dividend-paying capacity and other factors sec_20_2031-2 estate_tax regs revrul_59_60 sec_4 c b pincite these factors cannot be applied with mathematical precision and must be considered in the light of the particular facts of each case 79_tc_938 kohler v commissioner tcmemo_2006_152 in the absence of arm’s-length sales the fair_market_value of nonpublicly traded stock is generally determined by using three approaches--market income and asset based estate of noble v commissioner tcmemo_2005_2 the market approach values a company’s nonpublicly traded stock by comparing that stock to the same or comparable stock that has sold in arm’s-length transactions in the same timeframe id the income approach values a company’s nonpublicly traded stock by converting anticipated economic benefits into a single present amount id the asset-based approach values a company’s nonpublicly traded stock by looking to the company’s assets net of its liabilities id b expert opinions both parties submitted expert reports providing valuations of the estate’s stn com stock as of mr adell’s date of death the expert reports used different valuation methods resulting in two proposed valuations dollar_figure million as proposed by the estate and dollar_figure as proposed by respondent when considering expert testimony the court is not required to follow the opinion of any expert if it is contrary to the court’s judgment estate of deputy v commissioner tcmemo_2003_176 citing helvering v nat’l grocery co u s and 538_f2d_927 2d cir aff’g t c memo the court may adopt or reject expert testimony in whole or in part 110_tc_530 the court is not obligated to pay any regard to an expert opinion that lacks credibility 92_tc_312 the court may find evidence of valuation provided by one of the parties to be more credible than that of the other party rather than a compromise between the two see 74_tc_441 c the estate’s expert witnesses jeffrey risius and alex howard before the estate submitted mr risius’ and mr howard’s expert testimony at trial it filed its original form_706 on date with a valuation report of the estate’s stn com stock that was prepared primarily by mr risius on date months after mr adell’s death and before the probate litigation in the valuation report mr risius used the discounted cashflow analysis of the income approach to determine that the fair_market_value of stn com’s stock was dollar_figure million on the basis of mr risius’ valuation the estate reported that the date-of-death value of the stn com stock was dollar_figure million the estate now asserts that the fair_market_value was less than dollar_figure million relying on mr risius’ second valuation report and on mr howard’s valuation report both of which are dated date the expert reports prepared by mr risius and mr howard came to the same conclusion the appropriate valuation method of the stn com stock on mr adell’s date of death was the asset approach and under that approach the fair_market_value of the stn com stock was dollar_figure million the reported value on the estate’s original return however was an admission by the estate and the lower value of dollar_figure million cannot be substituted without cogent proof that the reported value was erroneous see estate of hall v commissioner t c pincite as proof that the reported value on the estate’s original return was erroneous the estate relies on the terms of the services agreement specifically the estate cites the provision in the services agreement that limits stn com’s programming fee to the lesser_of its actual cost or of the word’s revenue the estate argues that this provision prevents stn com from being profitable and therefore any valuation of stn com must be based on the liquidation of its assets its highest and best usedollar_figure in his first and second valuation reports mr risius explained that the highest_and_best_use of a company is on either a going concern or a liquidation continued in his first valuation report mr risius did not mention the limitation on stn com’s programming fee rather he described stn com’s sales as of the word’s broadcasting revenue relying on the description reflected on stn com’s financial statements for the years reviewed in his second valuation report however mr risius relied on the limitation to stn com’s programming fee under the terms of the services agreement to conclude that stn com could not legally make a profit if the agreement with the word was strictly construed therefore notwithstanding stn com’s profitability during the five years preceding mr adell’s date of death mr risius found that stn com’s highest value was not as a going concern but as the liquidation of its assets mr risius’ second valuation report determined that the asset approach to valuation was therefore appropriate continued basis depending on which generates the higher value mr adell’s date of death was date stn com’s tax_year ended in june and the financial statements reflected dollar_figure million in shareholder equity stn com accordingly paid the adell trust dollar_figure for a total compensation paid to mr adell of dollar_figure that was reported on the return for the tye in date the same return shows that kevin received dollar_figure in compensation in tye date and stn com paid kiven compensation of dollar_figure and dollar_figure respectively see supra p to the extent that mr risius’ determination that stn com could not legally make a profit relied on mr kolmin’s excluded expert report regarding the same his determination and the conclusion drawn thereon ie that stn com’s highest value was the liquidation of its assets is mistaken even if mr risius did not rely on mr kolmin’s excluded expert report which is plausible since he testified that he realized his mistake at a probate hearing before mr kolmin prepared his expert report he incorrectly assumed that stn com was not a profitable company despite the limitation of stn com’s programming fee stn com was a profitable company on the date of mr adell’s death and it was reasonable to conclude that it would continue to be profitable thereafter the profitability of stn com was supported by five years of stn com’s financial statements which were prepared by mr lameti’s accounting firm and by discussions with stn com’s management during the year after mr adell’s date of death although the word could have enforced the limitation on stn com’s programming fee it did not do so for the five years preceding mr adell’s date of death or the four years thereafter moreover management made no indication the same financial statements reported the contractual arrangement as being of the revenue generated by the word see supra p and note that the word would enforce the limitation and in fact predicted that its sales would increase resulting in expected capital expenditures that would enhance the value of stn com such as the purchase of an dollar_figure tour bus and substantial expenditures_for additional broadcasting equipment management’s discussions during the first year after mr adell’s death were particularly important because management mainly kevin controlled the word and could therefore give mr risius an accurate picture of stn com’s historical and projected profitability as of the date of mr adell’s deathdollar_figure furthermore even if the word decided to enforce the limitation on stn com’s programming the limitation did not necessarily mean that stn com could not be profitable the company would continue to collect sales revenue from its contract with the word and with its broadcasting equipment and expertise could potentially expand its operations to provide uplinking services for other customers in addition if a hypothetical investor participated in management as mr adell and kevin had stn com would not only be profitable the parties do not address and the court will not discuss whether the word’s sec_501 exemption was at risk of revocation because of the unenforced contractual limitation or the potential issue of private_inurement both topics are outside the scope of the estate’s notice_of_deficiency in fact stn satellite stn com’s predecessor provided uplinking services to other companies but would also be valuable as evidenced by the compensation paid to management and the provision of other_benefits such as luxury cars the biggest risk to profitability and stn com’s value was the word’s ability to choose a different uplink provider for any reason thereby terminating stn com’s contract with its only customer this risk however did not make stn com unprofitable and could be accounted for by applying a company risk adjustmentdollar_figure the court therefore finds that a hypothetical willing seller and a hypothetical willing buyer could not ignore the historical performance of stn com’s profits on mr adell’s date of death and notwithstanding the programming fee limitation stn com was indeed a profitable company thus an income approach is the most appropriate method to determine the value of the stn com stock because the business’ best value is as a going concern see smith v commissioner tcmemo_1999_368 revrul_59_60 supra in his first valuation report mr risius correctly assumed stn com was profitable and therefore correctly applied the discounted cashflow method of the income mr risius for example applied a company risk adjustment of in his first valuation report in addition kevin testified that many ministers who currently purchase programming had inquired as to purchasing the word it is not a great leap of faith to conclude they could merely purchase stn com and its uplinking license and broadcast themselves and skip the middleman’s programming fees especially since the urban religious program broadcasters were typically nonprofit churches already approach to value stn com accordingly the court finds that mr risius’ second valuation report and mr howard’s valuation report both of which use the asset approach to value the stn com stock are not creditable to determine the total value of stn com d respondent’s expert witness francis burns respondent’s expert witness mr burns used the same discounted cashflow analysis of the income approach that mr risius used to value the stn com stock in his first valuation in addition mr burns substantially relied on mr risius’ determinations in his first valuation report including his projected sales for stn com which were based on the company’s historical performance and on conversations with management during the first year after mr adell’s date of death mr burns however determined that the date-of-death value of the stn com stock was dollar_figure whereas mr risius determined that its date-of- death value was dollar_figure million the most significant difference between mr risius’ first valuation report and mr burns’ valuation report is their treatment of the intangible value that kevin provided stn com while both mr risius and mr burns recognized that the success of stn com depended on kevin’s relationships with the word and its customers they accounted for that value differently in his first report mr risius applied an economic charge for kevin’s personal_goodwill that ranged from dollar_figure million to dollar_figure million over the projection period thereby increasing stn com’s projected operating_expenses and decreasing its net cashflow mr burns however determined that a hypothetical willing investor would be able to retain kevin for an acceptable salary which he determined to be of sales or approximately dollar_figure million in mr burns’ approach resulted in a higher estimate of stn com’s projected net cashflow and thus a higher valuation of the stn com stock goodwill is often defined as the expectation of continued patronage by existing customers network morning ledger co v united_states 507_us_546 a key_employee may personally create and own goodwill independent of the corporate employer by developing client relationships 110_tc_189 the corporation may benefit from using the personally developed goodwill while the key_employee works for the entity but the corporation does not own the goodwill and therefore it is not considered a corporate asset id pincite the employee may however transfer any personal_goodwill to the employer through a covenant_not_to_compete or other agreement that transfers the relationships to the employer see id pincite h m inc v commissioner tcmemo_2012_290 absent such an agreement the employer cannot freely use the asset and the value of the goodwill should not be attributed to the corporation kevin’s goodwill was personally owned independent of stn com stn com’s success was heavily dependent on the word because of their symbiotic relationship to launch the word it was kevin who contacted religious leaders in the detroit area and rev jackson in chicago along with his notable contacts and his father he went to los angeles to meet with directv representatives about broadcasting the word his meeting was successful and it eventually led to the national broadcasting of the word on cable television kevin was the face of the operation because he was the individual soliciting content and pursuing broadcast opportunities kevin’s personal_goodwill was further displayed when ministers chose to contribute to the word after learning that the word was a nonprofit organization when contributing ministers asked about ownership opportunities kevin responded that the word was a nonprofit organization and could not be sold it appeared to the contributing ministers that there was not a corporation employing kevin the ministers conducted business with kevin because they trusted him personally not because he was a representative or employee of stn com in other words stn com could not own kevin’s goodwill because the customers did not readily realize that kevin actually worked for stn com thus he cultivated personal_goodwill with these professionals and he independently owned the asset of personal_goodwill not stn com although mr adell was a board member and officer of both stn com and the word kevin operated both companies kevin had the education and background to perform uplinking broadcast services after graduating with a communications degree he built mr adell’s first television station wadl and on account of his experience with wadl became interested in the uplinking business using stn com’s predecessor stn satellite kevin learned about the uplinking business by providing uplink services to various customers including hughes electronics corp a major customer brought on by kevin kevin who continued to explore business opportunities that would capitalize on his background decided to combine his success with religious programming on wadl with his uplinking services from stn satellite by creating the word and its uplink service provider stn com further kevin did not transfer his goodwill to stn com through a covenant_not_to_compete or other agreement kevin was free to leave stn com and use his relationships to directly compete against his previous employer if kevin quit stn com could not exclusively use the relationships that kevin cultivated thus the value of those relationships should not be attributed to stn com accordingly mr risius properly adjusted stn com’s operating_expenses to include an economic charge of dollar_figure million to dollar_figure million for kevin’s personal_goodwill at an amount high enough to account for the significant value of kevin’s relationships see derby v commissioner tcmemo_2008_45 mr burns on the other hand not only failed to apply an economic charge for kevin’s personal_goodwill but also gave too low an estimate of acceptable compensation_for kevin ie dollar_figure million in this was especially so because kevin had stepped into the position of mr adell who had previously made between over dollar_figure million and dollar_figure million of compensation in each of the five years before his death iii valuation of the estate’s stn com stock as stated above the court gives no weight to the expert valuations that the estate submitted at trial except for the consistent treatment of the underlying value of stn com’s assets the court also finds that respondent’s expert valuation is not persuasive because it did not reasonably account for kevin’s personal_goodwill the court therefore finds that the estate failed to introduce any evidence or present any arguments to persuade the court that the value reported on its original tax_return was incorrect thus the court concludes that mr risius’ first valuation report on the stn com stock included with the original estate_tax_return was the most creditable because it properly accounted for kevin’s personal_goodwill and appropriately used the discounted cashflow analysis of the income approach to value the stn com stock accordingly on the basis of the court’s review of all of the valuation evidence giving due regard to our observation at trial of the witnesses for both parties and considering their testimony and the expert reports the court concludes that the fair_market_value of the stn com stock owned by the estate on date was dollar_figure million iv substantial estate_tax_valuation understatement penalty the court has found that the value of the stn com stock held by the estate is the value the estate reported on its original form_706 therefore the court need not address whether the estate is liable for the substantial estate_tax_valuation understatement penalty under sec_6662 or h for the stn com stock an accuracy-related_penalty under sec_6662 may still be applicable to other items found in the stipulation of settled issues and from parties’ concessions further sec_6662 is inapplicable because there was not an underpayment_of_tax shown on the original form_706 from the stn com stock the accuracy-related penalty under sec_6662 for substantial estate_tax_valuation understatements of the balance of the notice_of_deficiency will be calculated separately on all items found in the stipulation of settled issues and from the parties concessions the court has considered the parties’ arguments and to the extent not addressed herein concludes that they are moot irrelevant or without merit to reflect the foregoing and the concessions of the parties decision will be entered under rule


number release date id office uilc cca_2013011712065170 ------------------------------ from ---------------------- sent thursday date pm to --------------------------- cc subject employment_tax regarding employment_tax on amounts employees received if taxpayer does not agree the tax is assessed taxpayer can pay the income_tax_withholding and fica tax on form_941 and file a claim_for_refund on form 941-x if the irs does not act on the claim within months or if the irs issues a notice of claim disallowance taxpayer can file a refund_suit in a united_states district_court or the court of federal claims the irs does not issue a notice_of_deficiency for employment_tax on amounts employees received that should have been characterized as wages taxpayer cannot file a petition in tax_court


t c memo united_states tax_court maurice h sochia and beatrice m sochia petitioners v commissioner of internal revenue respondent docket no filed date maurice h sochia and beatrice m sochia pro sese t richard sealy iii for respondent memorandum opinion körner judge respondent determined deficiencies in and additions to petitioners' federal income taxes for the years and in the amounts as follows additions to tax_year deficiency sec_6651 sec_6654 dollar_figure dollar_figure dollar_figure big_number big_number all statutory references are to the internal_revenue_code in effect for the years in issue and all rule references are to the tax_court rules_of_practice and procedure except as otherwise noted in the petition as originally filed herein petitioners alleged that they were residents and citizens of texas and were not subject_to united_states taxes that they filed fifth_amendment returns of income and were justified in doing so that the u s tax system is voluntary and petitioners have not elected to file returns thereunder that petitioners do not understand the legal requirements of filing income_tax returns and petitioners further alleged certain amounts with respect to their gross_receipts adjustments to gross_receipts deductions and exemptions for the years and finally petitioners alleged respondent owes them the total of dollar_figure for both years respondent filed a motion to dismiss herein for failure to state a claim the court ordered a new petition with specific errors of respondent alleged therein and specific allegations of facts and the grounds which petitioners rely upon petitioners replied to respondent's motion to dismiss asserting generally the same protester claims as in the petition and adding a few others including allegations that the federal government was engaged in plundering petitioners after a hearing by the court all petitioners' lengthy protester rhetoric was ordered stricken by the court except for paragraph of petitioners' response to respondent's motion which was ordered to be filed as an amended petition on date said paragraph contained allegations by petitioners as to their gross_receipts gross_income adjustments to income deductions exemptions and net taxable_income for and respectively respondent filed an answer denying all material parts of the amended petition and the case was at issue on date thereafter on date petitioners filed a motion for summary_judgment in which petitioners repeated again the tax_protester rhetoric that had been struck from the first petition eg a that respondent's statutory notice was defective as a matter of law b that respondent had no jurisdiction to determine deficiencies against petitioners and c whether respondent could convert a voluntary noncompulsory tax system as enacted by congress into a nonvoluntary compulsory tax system the court answered the contentions of petitioners in an order dated date in which after summarizing petitioners' contentions the court denied the motion for summary_judgment by petitioners and quoted 661_f2d_71 5th cir affg tcmemo_1981_122 which said appellant's contentions are stale ones long settled against them as such they are frivolous bending over backwards in indulgence of appellant's pro_se status we today forbear the sanctions of damages for frivolous appeals we publish this opinion as notice to future litigants that the continued advancing of these long-defunct arguments invites such sanctions however undeterred on date petitioners moved for reconsideration of the court's order dated date advancing many of the same arguments theretofore rejected in a document of some pages it was denied on date prior to petitioners' motion for summary_judgment the order in connection therewith petitioners' motion for reconsideration thereof and prior to trial herein on date the united_states court_of_appeals for the fifth circuit affirmed this court in petitioners' tax case involving the year reported at 23_f3d_941 in the tax_court in that earlier case petitioners argued as here that their fifth_amendment returns were valid that the u s tax system was voluntary not mandatory that the determination of deficiencies against them violated their due process rights as citizens of texas and that respondent had no jurisdiction over them the tax_court had dismissed petitioners' claim therein as failing to state a cause of action the court_of_appeals for the fifth circuit agreed with the tax_court and characterized petitioners' arguments as stale protester rhetoric long since discredited and now frivolous the court_of_appeals affirmed the tax court's determination of deficiencies and additions to tax against petitioners and consolidating petitioners' appeals from the district_court also affirmed the approval by that court of a penalty imposed by respondent for filing a frivolous_return finally the court_of_appeals imposed double costs and damages against petitioners for bringing such frivolous appeals all this was known to petitioners well in advance of trial and briefing in the instant case as though it had never happened petitioners went right ahead in the matter before us repeating the same stale and discredited protester arguments and consuming valuable time of the court as well as respondent's counsel in reading and responding to them in the stipulation of facts executed by the parties and filed at trial herein and on brief respondent made certain concessions as to the amount of deductible expenses_incurred by petitioners and as to the correct amount of gross_income of petitioners for the years and and such concessions will be given effect under rule in arriving at the decision which is to be entered herein as for the rest of it we see no need to catalog petitioners' contentions and painstakingly address them we have dealt with most of them before moreover as the court_of_appeals for the fifth circuit has remarked we perceive no need to refute these arguments with somber reasoning and copiou sec_1 respondent made the concessions herein after having examined petitioners' books_and_records which had been made available to her by petitioners only after the statutory notice herein was issued citation of precedent to do so might suggest that these arguments have some colorable merit 737_f2d_1417 5th cir petitioners have not shown that they incurred additional expenses beyond those allowed by respondent or that their gross_income as determined in the notice_of_deficiency should be reduced by any amount greater than that which respondent has agreed to and conceded it was petitioners' burden to make such a showing rule a 290_us_111 thus respondent's determinations of the deficiency as modified to give effect to respondent's concessions herein must stand the additions to tax for failure_to_file returns under sec_6651 for each of the years must likewise be approved a form_1040 which contains only object fifth_amendment entries is not a federal_income_tax return 82_tc_766 affd 793_f2d_139 6th cir this is true even where information forms are attached to the form 77_tc_1169 finally petitioners have not alleged let alone shown that they had any credible fear of prosecution that could remotely justify claiming the fifth_amendment with respect to the reporting of any given item on their returns reiff v commissioner supra we also approve respondent's imposition of the addition_to_tax for failure to pay estimated income_tax under sec_6654 for each of the years in issue the addition_to_tax is mandatory in the absence of specified exemptions 75_tc_1 and petitioners have not shown that any of the exemptions apply to them we turn now to respondent's request that a penalty against petitioners under sec_6673 be awarded as relevant herein sec_6673 authorizes the tax_court to require a taxpayer to pay to the united_states not in excess of dollar_figure whenever it appears that proceedings have been instituted or maintained by the taxpayer primarily for delay or that the taxpayer's position in such proceeding is frivolous or groundless the record in this case convinces us that petitioners were not interested in disputing the merits of either the deficiencies in income_tax or the additions to tax determined by respondent in the notice_of_deficiency rather the record demonstrates that petitioners regarded this case as a vehicle to protest the tax laws of this country and espouse their own misguided views a petition to the tax_court is frivolous if it is contrary to established law and unsupported by a reasoned colorable argument for change in the law 791_f2d_68 7th cir petitioners' position as set forth in the petition motion for summary_judgment and other filings consists solely of stale and time-worn tax_protester rhetoric based on well-established law petitioners' position is frivolous and groundless we also are convinced that petitioners instituted and maintained this proceeding primarily if not exclusively for purposes of delay having to deal with this matter wasted the court's time as well as respondent's moreover taxpayers with genuine controversies were delayed we find all of this particularly egregious when we consider that petitioners were aware of the outcome of their case in the fifth circuit on much the same grounds prior to the time the trial herein occurred as we have recounted above cf 898_f2d_455 5th cir affg tcmemo_1989_189 and tcmemo_1989_56 in view of the foregoing we will exercise our discretion under sec_6673 and require petitioners to pay a penalty to the united_states in the amount of dollar_figure for each of the years here in issue coleman v commissioner supra pincite crain v commissioner supra pincite8 coulter v commissioner 82_tc_580 82_tc_403 in order to reflect the foregoing decision will be entered under rule


internal_revenue_service number release date index number --------------------------------- ----------------------------------------------------- ------------------------------------------ ------------------------------ 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 b01 plr-122018-14 date date legend x ------------------------------------------- ---------------------------------------------- date1 ------------------------ date2 ---------------------- state ------------ dear ---------------- this responds to a letter dated date submitted on behalf of x requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations to file an election under sec_301_7701-3 to be treated as a corporation for federal tax purposes and relief to file a late s_corporation_election under sec_1362 of the internal_revenue_code facts according to the information submitted x was incorporated on date1 as a limited_liability_company under the laws of state x‘s sole member intended to treat x as an s_corporation for federal tax purposes effective date2 however neither form_8832 entity classification election nor form_2553 election by a small_business_corporation was timely filed for x plr-122018-14 x represents that it acted reasonably and in good_faith x further represents that hindsight is not involved in seeking relief to file a late election finally x represents that the interests of the government will not be prejudiced by granting the requested relief law and analysis sec_301_7701-3 provides that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes elections are necessary only when an eligible_entity does not want to be classified under the default classification or when an eligible_entity chooses to change its classification sec_301_7701-3 provides that except for certain existing entities described in sec_301_7701-3 unless a domestic eligible_entity elects otherwise the entity is a a partnership if it has two or more members or b disregarded as an entity separate from its owner if it has a single owner sec_301_7701-3 provides that an eligible_entity may elect to be classified other than as provided under sec_301_7701-3 by filing form_8832 with the appropriate service_center under sec_301_7701-3 this election will be effective on the date specified by the entity on form_8832 or on the date filed if no such date is specified the date specified on form_8832 cannot be more than days prior to the date on which the election is filed and no more than months after the date the election is filed sec_301_9100-1 provides that the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301 b provides that the term regulatory election includes an election whose due_date is 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 the election sec_301_9100-2 provides the rules governing automatic extensions of time for making certain elections sec_301_9100-3 provides the standards the commissioner will use to determine whether to grant an extension of time for the regulatory elections that do not meet the requirements of sec_301_9100-2 under sec_301_9100-3 a request for relief will be granted when a taxpayer provides evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and granting relief will not prejudice the interests of the government plr-122018-14 sec_1362 provides that a small_business_corporation may make an election to be an s_corporation sec_1362 provides the rule as to when an s election will be effective sec_1362 provides in relevant part that if an s election is made within the first two and one-half months of a corporation's taxable_year then the corporation will be treated as an s_corporation for the year in which the election is made under sec_1362 an s election made after the first two and one-half months of a corporation's taxable_year results in the corporation not be treated as an s_corporation until the taxable_year following the year in which the s election is filed sec_1362 provides that if a an election under sec_1362 is made for any taxable_year after the date prescribed by sec_1362 for making the election for the taxable_year or no sec_1362 election is made for any taxable_year and b the secretary determines that there was reasonable_cause for the failure to timely make the election then the secretary may treat the election as timely made for such taxable_year and sec_1362 shall not apply conclusion based solely on the facts submitted and representations made we conclude that x has satisfied the requirements of sec_301_9100-1 and sec_301_9100-3 accordingly x is granted an extension of time of one hundred twenty days from the date of this letter to elect to be treated as an association_taxable_as_a_corporation for federal tax purposes effective date2 the election should be made by filing a properly executed form_8832 with the appropriate service_center a copy of this letter should be attached to the election in addition we conclude that x has established reasonable_cause for failing to timely make an election to be an s_corporation and thus is eligible for relief under sec_1362 provided that x otherwise qualifies as an s_corporation we conclude that x will be recognized as an s_corporation effective date2 if x files a completed form_2553 effective date2 with the appropriate service_center within one hundred and twenty days from the date of this letter a copy of this letter should be attached to the election except as expressly set forth herein no opinion is expressed or implied concerning the federal tax consequences of the facts described above under any other provision of the code including whether x is otherwise eligible to be an s_corporation for federal tax purposes this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent plr-122018-14 pursuant to a power_of_attorney on file with this office a copy of this letter is being sent to x's authorized representative sincerely associate chief_counsel passthroughs special industries by ____________________________ joy c spies senior technician reviewer branch office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy of this letter for sec_6110 purposes


id office uilc cca_2012082009511855 ---------------------------- number release date from --------------------- sent monday date am to ---------------- cc subject re questions in advance of ro advanced training this is a late response but yes the irs can seize property from the innocent spouse if the spouse is holding property as a nominee for the liable spouse or jointly with the liable spouse to the extent that the tax_lien for the liable spouse's tax_liability attaches to that property as far as intellectual_property i am not aware of any specific issues or cases maybe you can give me more details