t c no united_states tax_court estate of artemus d davis deceased robert d davis personal representative petitioner v commissioner of internal revenue respondent docket no filed date held in determining the fair_market_value on a valuation_date after the repeal of the doctrine established in 296_us_200 of each of two minority blocks of common_stock of company a the court is not precluded on the record presented from giving consideration to a’s built-in capital_gains_tax as of that date of about dollar_figure million held further the fair_market_value on the valuation_date of each block of stock at issue is dollar_figure determined by first ascertaining a’s net asset value on that date without regard to any discount or adjustment attributable to blockage and or c f_r sec or a’s built-in capital_gains_tax reducing that value by a 15-percent minority discount to which the parties agree and reducing the resulting value by a lack-of- marketability discount of dollar_figure million which the court arrived at by giving consideration to inter alia a’s built-in capital_gains_tax and including as part of that discount dollar_figure million attributable to such tax gregory v nelson john w porter and richard a husseini for petitioner victoria j sherlock norman n pickett and harve m lewis for respondent chiechi judge respondent determined a deficiency of dollar_figure in the federal gift_tax of artemus d davis decedent who died on date after he made the two gifts to which that deficiency pertains the sole issue for decision is the fair_market_value on date of each of two blocks of shares of common_stock of a d d investment and cattle company addi c one of which decedent gave to his son robert d davis robert davis and the other of which decedent gave to his son lee w davis lee davis findings_of_fact some of the facts have been stipulated and are so found decedent who was one of the founders of winn-dixie stores inc winn-dixie died testate on date while he was a legal resident of florida robert davis the personal representative of decedent's_estate resided in jacksonville florida at the time the petition was filed on or about date the valuation_date addi c a closely held florida corporation that was incorporated on date had a total of shares of common_stock issued and outstanding all of which were owned by a_trust davis trust for the benefit of decedent and none of which was subject_to any restrictive sale provisions or buy-sell agreements on the valuation_date decedent transferred shares of such stock to his son robert davis and shares of such stock to his son lee davis on that date each of those two blocks of addi c common_stock constituted dollar_figure percent of the issued and outstanding common_stock of addi c as of the valuation_date addi c was primarily a holding_company for various assets of decedent although addi c also had certain cattle operations both feeder and breeding cattle as of that date specifically on the valuation_date addi c owned big_number shares or percent of the issued and outstanding common_stock of winn-dixie which was at all relevant times traded on the new york stock exchange nyse big_number shares or percent of the issued and outstanding common_stock of d d i inc ddi which was a holding_company for various assets of decedent and his family and the stock of which was at all relevant times not publicly traded various feeder and breeding cattle certain equipment and certain other unidentified assets as of the valuation_date addi c's management group consisted of the following individuals who were serving in the positions indicated artemus d davis chairman of the board_of directors president and director james e davis executive vice president and director robert davis vice president assistant secretary and director h j skelton vice president treasurer and director harry d francis vice president and assistant secretary and g p bishop jr secretary and assistant treasurer on or before the valuation_date decedent james e davis and robert davis were directors of winn-dixie for the 12-month_period prior to the valuation_date the average daily trading volume of winn-dixie stock was big_number shares for the 4-week period prior to the valuation_date the average weekly trading volume of winn-dixie stock was big_number shares as of the valuation_date decedent addi c and the davis trust were affiliates within the meaning and for purposes of c f_r sec with respect to the sale of winn- dixie stock pursuant to sec rule shares of winn-dixie stock held by affiliates were subject_to certain restrictions including restrictions on the sale of such shares prescribed by sec rule e addi c received the following dividends during its fiscal years ended date and we shall refer to c f_r sec which was promulgated by the securities_and_exchange_commission sec as sec rule all references to sec rule are to the code_of_federal_regulations in effect on the valuation_date fiscal_year ended october dividends received dollar_figure big_number big_number big_number big_number over dollar_figure million of the dividends that addi c received during its fiscal_year ended date were dividends received on the winn-dixie stock that it owned ddi declared and paid dividends with respect to all of its issued and outstanding_stock including the shares of such stock owned by addi c in the following aggregate amounts during its fiscal years ended date fiscal_year ended november aggregate dividends_paid dollar_figure big_number big_number big_number subject_to the caveats stated below the following table shows as of the valuation_date addi c's assets and liabilities the historical_cost basis and the fair_market_value of each such asset and addi c's net asset value asset feeder cattle cost breeding herd net winn-dixie stock ddi stock total equipment net other assets total assets total liabilities net asset value historical_cost basis dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number fair_market_value dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number the fair_market_value of addi c's winn-dixie stock and its net asset value that are shown in the foregoing table do not reflect any type of discount or adjustment with respect to that stock which is attributable to blockage and or sec rule blockage and or sec rule discount nor do the fair_market_value of each of addi c's assets and its net asset value that are shown in the foregoing table reflect any type of discount or adjustment which is attributable to inter alia lack of a controlling_interest lack of marketability or the federal and state_income_tax addi c's built-in capital_gains_tax that addi c would have incurred at a combined tax_rate of dollar_figure percent on the gains as of the valuation_date on addi c's assets ie the difference between the historical_cost basis and the fair_market_value of each of its assets hereinafter referred to as addi c's built-in- capital_gains if on that date each such asset had been sold or otherwise_disposed_of or addi c had liquidated during addi c paid dollar_figure to an affiliated company as reimbursement for_the_use_of an airplane by one of its shareholders for federal_income_tax purposes addi c reported that payment as a shareholder dividend with the exception of that dividend addi c has not declared or paid any dividends to its shareholders on the valuation_date addi c had not adopted a formal plan_of_liquidation nor was there any intention by that corporation or decedent to liquidate addi c or to dispose_of its winn-dixie stock on date addi c's net_operating_loss carry- forwards totaled dollar_figure on or about date decedent timely filed for form_709 united_states gift and generation-skipping_transfer_tax return gift_tax_return in that return decedent reported that the value on the valuation_date of each of the two 25-share blocks of addi c stock that he transferred to his sons was dollar_figure or dollar_figure a share the value reported by decedent in the gift_tax_return was based on an appraisal by alex w howard mr howard of howard frazier barker elliott inc mr howard's appraisal respondent determined in the notice_of_deficiency notice that on the valuation_date the fair_market_value of each of the two 25-share blocks of addi c stock that decedent transferred to his sons was dollar_figure or dollar_figure a share opinion petitioner modified the position reflected in decedent's gift_tax_return as to the value on the valuation_date of each of the two blocks of stock in question and now claims that the fair_market_value of each of those blocks on that date was dollar_figure or dollar_figure per share respondent modified the determination in the notice as to that value and now contends that the fair_market_value on the valuation_date of each of the two blocks of addi c stock in question was dollar_figure or dollar_figure per share if a gift is made in property its value at the date of the gift is considered the amount_of_the_gift sec_2512 sec_25_2512-1 gift_tax regs the value of the property for federal gift_tax purposes is the price at which such property would change hands between a willing buyer and a willing seller neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts all relevant facts and elements of value as of the time of the gift shall be considered sec_25_2512-1 gift_tax regs the willing buyer and the willing seller are hypothetical persons rather than specific individuals or entities and the individual respondent is not however claiming an increased gift_tax deficiency all section references are to the internal_revenue_code in effect on the valuation_date unless otherwise indicated all rule references are to the tax_court rules_of_practice and procedure characteristics of these hypothetical persons are not necessarily the same as the individual characteristics of the actual seller or the actual buyer 706_f2d_1424 7th cir 658_f2d_999 5th cir the hypothetical willing buyer and the hypothetical willing seller are presumed to be dedicated to achieving the maximum economic advantage estate of curry v united_states supra pincite 94_tc_193 in the case of unlisted stock like the addi c stock in question the price at which sales of stock are made in arm's- length transactions in an open market is the best evidence of its value 303_f2d_887 5th cir revg and remanding tcmemo_1960_51 in the instant case the record does not disclose any such sales of addi c stock where the value of unlisted stock cannot be determined from actual sale prices its value generally is to be determined by taking into consideration the company's net_worth prospective earning power and dividend-paying capacity as well as other_relevant_factors including the company's good will its position in the industry its management the degree of control of the business represented by the block of stock to be valued and the values of securities of corporations engaged in the same or similar lines of business that are listed on a stock exchange sec_25_2512-2 gift_tax regs sec_4 of revrul_59_60 1959_1_cb_237 sets forth criteria that are virtually identical to those listed in sec_25_2512-2 gift_tax regs and has been widely accepted as setting forth the appropriate criteria to consider in determining fair_market_value estate of newhouse v commissioner supra pincite sec_5 of revrul_59_60 c b pincite which addresses the determination of the fair_market_value of the stock of a closely held investment_company provides in pertinent part b the value of the stock of a closely held investment or real_estate_holding_company whether or not family owned is closely related to the value of the assets underlying the stock for companies of this type the appraiser should determine the fair market values of the assets of the company operating_expenses of such a company and the cost of liquidating it if any merit consideration when appraising the relative values of the stock and the underlying assets the market values of the underlying assets give due weight to potential earnings and dividends of the particular items of property underlying the stock capitalized at rates deemed proper by the investing public at the date of appraisal a current appraisal by the investing public should be superior to the retrospective opinion of an individual for these reasons adjusted net_worth should be accorded greater weight in valuing the stock of a closely held investment or real_estate_holding_company whether or not family owned than any of the other customary yardsticks of appraisal such as earnings and dividend paying capacity there is no fixed formula for applying the factors that are to be considered in determining the fair_market_value of unlisted stock see 391_f2d_775 8th cir vacating and remanding tcmemo_1965_154 the weight to be given to the various factors in arriving at fair_market_value depends upon the facts of each case sec_25 f gift_tax regs as the trier of fact we have broad discretion in assigning the weight to accord to the various factors and in selecting the method of valuation 640_f2d_249 9th cir affg on this issue and revg in part tcmemo_1978_191 sec_25_2512-2 gift_tax regs the determination of the value of closely held stock like each of the two 25-share blocks of addi c stock at issue is a matter of judgment rather than of mathematics 325_f2d_934 8th cir affg tcmemo_1961_347 moreover since valuation is necessarily an approximation it is not required that the value that we determine be one as to which there is specific testimony provided that it is within the range of figures that properly may be deduced from the evidence 538_f2d_927 2d cir affg tcmemo_1974_285 250_f2d_242 5th cir affg in part and remanding in part tcmemo_1956_178 as is customary in valuation cases the parties rely extensively on the opinions of their respective experts to support their differing views about the fair_market_value on the valuation_date of each of the two 25-share blocks of addi c stock in question the estate relies on mr howard who is an accredited senior appraiser of the american society of appraisers and a principal in the business valuation firm of howard frazier barker elliott inc and shannon pratt mr pratt who is an accredited senior appraiser and fellow of the american society of appraisers and a founder and managing director of the business valuation firm of willamette management associates respondent relies on john a thomson mr thomson who is an accredited senior appraiser of the american society of appraisers and a vice president and the managing director of the long beach california office of the business valuation firm of klaris thomson schroeder inc each of the experts prepared an initial expert report expert report and a rebuttal expert report rebuttal report we evaluate the opinions of experts in light of the demonstrated qualifications of each expert and all other evidence in the record anderson v commissioner supra pincite 86_tc_547 we have broad discretion to evaluate 'the overall cogency of each expert's analysis ' 838_f2d_330 9th cir quoting 783_f2d_906 9th cir affg in part and revg in part t c memo affg in part and the expert report of petitioner's expert mr howard is identical to mr howard's appraisal on which the value reported in the gift_tax_return for each of the two gifts in question was based hereinafter we shall refer to mr howard's appraisal as his expert report each of petitioner's experts prepared a rebuttal report with respect to the expert report of respondent's expert and respondent's expert prepared separate rebuttal reports with respect to the expert reports of petitioner's two experts revg in part tcmemo_1986_318 we are not bound by the formulae and opinions proffered by expert witnesses especially when they are contrary to our judgment silverman v commissioner supra 97_tc_496 instead we may reach a determination of value based on our own examination of the evidence in the record 945_f2d_92 5th cir citing silverman v commissioner supra pincite affg ames v commissioner tcmemo_1990_87 the persuasiveness of an expert's opinion depends largely upon the disclosed facts on which it is based see 337_f2d_432 7th cir affg tcmemo_1963_244 where experts offer divergent estimates of fair_market_value we shall decide what weight to give those estimates by examining the factors used by those experts to arrive at their conclusions 38_tc_357 while we may accept the opinion of an expert in its entirety 74_tc_441 we may be selective in the use of any part of such an opinion parker v commissioner supra pincite we also may reject the opinion of an expert witness in its entirety 523_f2d_1308 8th cir affg 62_tc_684 parker v commissioner supra pincite for convenience the following chart chart shows the respective positions of the experts6 and the parties on brief with respect to the net asset value of addi c on the valuation_date and the discounts or adjustments that each believes should be applied to such value in order to arrive at the fair_market_value on that date of each of the two 25-share blocks of addi c stock in question the respective positions of the experts that are shown in the chart reflect the agreement of the parties as to the fair_market_value of each of addi c's assets and the aggregate amount of its liabilities as of the valuation_date without taking into account any type of discount or adjustment attributable to blockage and or sec rule lack of a controlling_interest lack of marketability or addi c's built-in capital_gains_tax however those positions do not reflect the agreement of the parties at trial that the applicable minority discount should be percent despite that agreement the respective dollar amounts of a percent minority discount urged on brief by petitioner and by respondent differ that is because of the differences between them as to whether a blockage and or sec rule discount and a discount or adjustment attributable to addi c's built-in capital_gains_tax should be taken into account in arriving at addi c's net asset value on the valuation_date all dollar amounts in the chart are rounded to the nearest dollar petitioner's expert mr howard blockage and or sec rule discount percent or dollar_figure petitioner's expert mr pratt percent or dollar_figure respondent's expert mr thomson -dollar_figure- discount or adjustment attributable to addi c's built-in capital_gains_tax big_number factored in as part of lack-of- marketability discount factored in as part of lack-of- marketability discount petitioner1 respondent percent or dollar_figure big_number -dollar_figure- net asset value of addi c big_number big_number big_number big_number big_number minority discount lack-of-marketability discount portion of lack-of- marketability discount attributable to addi c's built-in capital_gains_tax total dollar amount of discounts or adjustments fair_market_value of each 25-share block of addi c common_stock fair_market_value of each share of each 25-share block of addi c common_stock percent or big_number percent or big_number percent or big_number percent or big_number percent or big_number percent or big_number percent or percent or big_number big_number percent or percent or big_number big_number percent or big_number percent or big_number -0- big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number this column reflects petitioner's position on brief regarding all of the items reflected in the chart except for addi c's net asset value the court had to calculate petitioner's position with respect to the amount of addi c's net asset value because nowhere on brief does petitioner state what that figure should be the court calculated petitioner's position as to that amount which is shown in the chart based on petitioner's contentions that a 10-percent blockage and or sec rule discount on the nyse price of addi c's winn-dixie stock viz dollar_figure and a discount or adjustment equal to the full amount of addi c's built-in capital_gains_tax which petitioner calculates to be dollar_figure should be applied in determining addi c's net asset value on the valuation_date even assuming arguendo that petitioner's contentions regarding a blockage and or sec rule discount and a discount or adjustment for the full amount of addi c's built-in capital_gains_tax were correct we believe that petitioner erroneously calculated the amount of that tax to be dollar_figure it appears that in calculating that amount petitioner improperly failed to take into account the dollar_figure of net_operating_loss carryforwards that addi c had as of date that error had a domino effect as a result the dollar amounts of the minority and the lack-of-marketability discounts that petitioner advocates are slightly less than they would have been if petitioner had not made that error the parties and all of the experts agree that the initial step in ascertaining the fair_market_value on the valuation_date of each of the two 25-share blocks in question is to determine as of that date the fair_market_value of each of addi c's assets and the aggregate amount of its liabilities in order to calculate its net asset value on that date all of them also are in agreement that without taking into account any discounts or adjustments including but not limited to a blockage and or sec rule discount a minority discount for lack of a controlling_interest a lack-of-marketability discount and a discount or adjustment attributable to addi c's built-in capital_gains_tax on the valuation_date the aggregate fair_market_value of addi c's assets was dollar_figure its liabilities totaled dollar_figure and its net asset value was dollar_figure petitioner and petitioner's experts agree that in determining the fair_market_value of addi c's winn-dixie stock and its net asset value on the valuation_date it is necessary to reduce the fair_market_value of that stock and addi c's net asset value to which the parties in this case have stipulated by applying a blockage and or sec rule discount to that stock petitioner and petitioner's expert mr pratt believe that a blockage and or sec rule discount of percent is proper and petitioner's expert mr howard concludes that such a discount of percent is appropriate respondent and respondent's expert maintain that no blockage and or sec rule discount is warranted the parties and their experts agree that the winn-dixie stock held by addi c on the valuation_date was subject_to the volume limitation on the sale of that stock prescribed by sec rule e sec rule e volume limitation that rule limited the amount of restricted or other_securities that could have been sold by an affiliate during a given 3-month period generally to the greater of a one percent of the shares of the outstanding class of stock or b the average weekly reported trading volume during the 4-week period preceding the filing of a notice of proposed sale which was required under sec rule h the parties and their respective experts also are in agreement that as of the valuation_date there were two ways in which addi c could have disposed of its winn-dixie stock one such method was for addi c to have sold its entire block of that stock in a private_placement to a nonaffiliated investor unless that block of stock were registered that investor would have been subject_to a 2-year holding_period for that stock under sec rule d and thereafter would have been subject for year to the volume in his rebuttal report mr howard modified the amount of the blockage and or sec rule discount that he believed should be applied in determining as of the valuation_date the fair_market_value of addi c's winn-dixie stock and its net asset value mr howard made that change because of matters brought to his attention after he had prepared his expert report see infra note limitation on the sale of that stock prescribed by sec rule e see sec rule k the other method by which addi c could have sold its winn-dixie stock was through the sale of that stock over a period of time consistent with the sec rule e volume limitation dribble-out method the parties and their respective experts further agree that because of the size of the block of winn-dixie stock owned by addi c on the valuation_date addi c could not have disposed of all of its winn-dixie stock at the same time without depressing the market_value of such stock and a in order to dispose_of its winn-dixie stock without depressing its market_value and at the same time selling that stock in compliance with the restrictions in sec rule it would have taken addi c to months after the valuation_date to dispose_of its winn-dixie stock under the dribble-out method and b a purchaser of that stock would not have been subject_to the 2-year holding_period under sec rule d or the volume limitation in sec rule e see sec rule petitioner's expert mr howard and respondent's expert mr thomson agree that addi c probably would have sold its winn-dixie stock pursuant to the dribble-out methoddollar_figure mr pratt opined that the volume limitation in sec rule e is identical to the sec rule e volume limitation mr howard opined in his expert report that a sale by private_placement would have been a more efficient way for addi c to have disposed of its winn-dixie stock than the dribble-out continued it was likely that addi c would have disposed of its winn-dixie stock through a private_placement on the record before us we find that addi c probably would have used the dribble-out method to sell its winn-dixie stock since it was likely that such a sale would have resulted in a higher value for addi c’s winn-dixie stock than would have been yielded if that stock had been sold in a private_placement that is because a nonaffiliated investor who purchased that stock in a private_placement would have been subject_to a 2-year holding_period under sec rule d and thereafter would have been subject for one year to the volume limitation in sec rule e see sec rule k although respondent's expert mr thomson acknowledges that addi c's winn-dixie stock was subject_to the sec rule e volume limitation and that as we have found addi c probably continued method however after mr howard prepared that report he learned that a purchaser of addi c's winn-dixie stock in a private_placement would have been required to hold that stock for years under sec rule d and thereafter would have been subject for year to the volume limitation in sec rule e consequently mr howard changed the view reflected in his expert report regarding addi c's sale of its winn-dixie stock by private_placement and took the position in his rebuttal report and at trial that it was more likely that addi c would have disposed of its winn-dixie stock through the dribble-out method because that method would have yielded a greater value for that stock than would have been obtained through its sale by private_placement we reject any contention by respondent that mr howard should not be permitted to change in his rebuttal report and at trial the position that he had taken in his expert report with respect to addi c's winn-dixie stock see rule f the court is interested in reaching the proper result aided by witnesses who will recognize and correct an error we are not interested in attempts to force a party to maintain an erroneous or unreasonable position for strategic advantage would have used the dribble-out method to sell its winn-dixie stock over a 5-to-6 month period he did not discount or adjust the nyse price of that stock on the valuation_date in order to arrive at its fair_market_value and addi c's net asset value on that date that is because inter alia winn-dixie's nyse price was on a rising trend line from date through date the valuation_date and in fact increased percent during that period to counter mr thomson’s view that no blockage and or sec rule discount is warranted because inter alia the nyse price of winn-dixie stock was on a rising trend line during the 10-month period preceding the valuation_date petitioner points out that a value line investment survey report value line report dated date which was approximately months before the valuation_date reported that the nyse price of winn-dixie stock has risen about in the past few months as a result long-term total return prospects have been diminished we do not believe that the opinion expressed in the value line report nor did mr thomson apply a premium to the nyse price of addi c winn-dixie stock that is because even though addi c owned big_number shares of the outstanding winn-dixie stock mr thomson considered that block of stock which represented only about dollar_figure percent of the total outstanding shares of winn-dixie to be too small to represent a swing block of shares it is noteworthy that petitioner's expert mr pratt acknowledges that addi c's stock interest in winn-dixie on the valuation_date is generally considered to be a significant investment an investor would likely find it difficult to quickly accumulate such a large investment without some typically upward affect sic on the quoted market price on the subject security regarding long-term total return prospects for winn-dixie stock addressed the short-term prospects as of the valuation_date regarding the nyse price of that stock over the relatively short 5-to-6 month period after that date over which the parties and all the experts agree it would have taken addi c to sell its winn- dixie stock under the dribble-out method mr pratt determined that a 10-percent blockage and or sec rule discount should be applied to the nyse price of winn- dixie on the valuation_date however as stated above we disagree with mr pratt's view that it was likely that addi c would have sold its winn-dixie stock in a private_placement rather than under the dribble-out method in addition mr pratt did not explain in his expert report as required by rule f how he arrived at a 10-percent blockage and or sec rule discount and we did not find his limited explanation in his rebuttal report and at trial of how he determined the amount of that discount to be particularly helpful see rule f on the record before us we shall not rely on mr pratt's opinion as to whether a blockage and or sec rule discount should be applied to the nyse price of addi c's winn-dixie stock on that date nor shall we rely on his view regarding the amount of any such discount that should be applied in the event that we were to find that use of such a discount is warranted in the instant case mr howard determined in his rebuttal report that a percent blockage and or sec rule discount should be applied to winn-dixie's nyse price on the valuation_date in determining the fair_market_value of addi c's winn-dixie stock and its net asset value on that date he arrived at that percentage discount based on the black-scholes options pricing model black-scholes model which is used to calculate the cost of a call or put option mr howard used the black-scholes model to value a put option which gives the holder the right to sell a specified_asset at a specified price on or before a specified date mr howard explained in his rebuttal report that the cost of a put option can be used to determine the cost of locking-in the price of a stock when the future price of that stock cannot be known with certainty mr howard determined that the black-scholes model was a good measure of the discount associated with addi c's exposure to the market risk that the nyse price of its winn-dixie stock would have fallen during the 5-to-6 month period that would have been required to sell that stock under the dribble-out method mr howard explained in his rebuttal report that the black- scholes model takes into account the following variables in arriving at the value of an option current stock price per share exercise price per share time to maturity risk-free interest rate volatility and continuous dividend yield using the black-scholes model mr howard calculated that the cost of a 3-month put option on winn-dixie stock as of the valuation_date would be dollar_figure or percent of winn-dixie's nyse price on that date respondent argues that use of the black-scholes model will always result in a blockage and or sec rule discount mr howard agrees and so do we the black-scholes model takes into account inter alia a risk-free interest rate variable mr howard acknowledges in his rebuttal report that there is always a cost to locking-in the value of a stock price to protect against market risk no matter what the specific inputs of the model and he testified at trial that it would have taken to months for addi c to sell its winn-dixie stock under the dribble-out method without moving the market thereby exposing that stock to market risks which always results in a decreased value if for no other reason than present_value purposes on the instant record we are not persuaded by mr howard’s use of the black-scholes model that a blockage and or sec rule discount is warranted or that even if such a discount were warranted the amount of any such discount should be percent petitioner has the burden of establishing that a blockage and or sec rule discount should be applied to the nyse price on the valuation_date of addi c’s winn-dixie stock and the amount of any such discount based on our examination of the entire record before us we find that petitioner has failed to satisfy that burden we further find that on the valuation_date the fair_market_value of addi c's winn-dixie stock was dollar_figure and the net asset value of addi c without taking into account any other discounts or adjustments was dollar_figure petitioner and all of the experts including respondent's expert agree that in determining the fair_market_value on the valuation_date of each of the two blocks of addi c stock at issue it is necessary to reduce addi c's net asset value on that date by applying a discount or adjustment attributable to addi c's built- in capital_gains_tax however there are disagreements as to the amount of such a discount or adjustment in addition petitioner and petitioner's expert mr howard disagree with petitioner's expert mr pratt and respondent's expert mr thomson as to the point at which such a discount or adjustment should be taken into account in the valuation process petitioner and petitioner's expert mr howard believe that in calculating addi c's net asset value on the valuation_date the full amount of addi c's built-in- capital_gains_tax should be subtracted before any minority and lack-of-marketability discounts are applied petitioner's expert mr pratt and respondent's expert mr thomson believe that a percent discount or adjustment attributable to addi c's built-in capital_gains_tax should be taken into account as part of the lack-of-marketability discount that each agrees should be applied to addi c's net asset value on the valuation_date after that net asset value has been reduced by a minority discount of the percent lack-of-marketability discount equal to dollar_figure that mr pratt determined should be applied dollar_figure is attributable to addi c's built-in capital_gains_tax of the 38-percent lack- of-marketability discount equal to dollar_figure that mr thomson determined should be applied dollar_figure is attributable to that taxdollar_figure it is respondent's position that no discount or adjustment attributable to addi c's built-in capital_gains_tax should be applied in determining the fair_market_value on the valuation_date of each of the two blocks of stock in question respondent thus not only rejects the views of petitioner and petitioner's two experts but also the opinion of respondent's expert mr thomson that such a discount or adjustment is warranted in support of respondent's rejection of mr thomson's opinion respondent asserts on brief respondent recognizes that her own expert included the potential capital_gains in his determination of an appropriate marketability discount nevertheless this inclusion is contrary to federal tax law in support of respondent's position that a discount or adjustment attributable to addi c's built-in capital_gains_tax is contrary to federal tax law respondent advances the following argument in respondent's opening brief there are differences between the respective dollar amounts of the 15-percent discount or adjustment attributable to addi c's built-in capital_gains_tax which both petitioner's expert mr pratt and respondent's expert mr thomson included as part of the respective lack-of-marketability discounts that they concluded should be applied to addi c's net asset value on the valuation_date after that net asset value has been reduced by a minority discount that is because of the differences between those two experts as to whether a blockage and or sec rule discount is warranted and as to the amount of the minority discount that each believed should be applied see chart above showing inter alia those differences in an established line of cases this court has held that projected capital_gains taxes do not reduce the value of closely held stock when liquidation is speculative 87_tc_78 79_tc_938 72_tc_1062 9_tc_162 estate of luton v commissioner tcmemo_1994_539 68_tcm_1044 estate of bennett v commissioner tcmemo_1993_34 65_tcm_1816 these cases reach that conclusion for two reasons first prior to former sec_336 and sec_337 allowed the tax-free_liquidation of a corporation the corporation could thereby completely avoid capital_gains taxes upon a subsequent sale of all its assets courts reasoned that the corporation's ability to avoid taxes upon liquidation rendered the projected liability so speculative as to be irrelevant estate of piper t c pincite the repeal of those provisions in the tax_reform_act_of_1986 p l stat as reprinted in c b vol did not foreclose the possibility of avoiding capital_gains taxes at the corporate level upon sale of all assets a subchapter_c_corporation can convert to a corporation described in subchapter_s sec_1361 et seq and avoid recognition of any gain if the corporation retains the assets for a period of ten years from the date of conversion to an s_corporation see sec_1374 one of petitioner's experts recognized this possible alternative since artemus d davis was a long term investor in winn-dixie stock electing subchapter_s appears to be a reasonable method to avoid the corporate level capital_gains_tax although the willing buyer might incorporate a reduction in his price for costs of a subsequent liquidation the willing seller has no incentive to accommodate that reduction why would the willing seller knowing that the capital_gains taxes can be deferred or avoided agree to that reduction why would the willing seller knowing further that the buyer controls the incidence_of_tax agree to any reduction based on the buyer's purely speculative tax burden see mandelbaum v commissioner tcmemo_1995_254 69_tcm_2852 aff'd 91_f3d_124 3d cir second and more importantly when the actual facts do not suggest that the shareholders intended to liquidate the corporation this court has refused to assume that the hypothetical buyer would do so estate of ford v commissioner tcmemo_1993_580 66_tcm_1507 aff'd 53_f3d_924 8th cir estate of bennett v commissioner tcmemo_1993_34 65_tcm_1816 here petitioner stipulated that no liquidation was contemplated at the time of the subject gifts petitioner will no doubt argue that the tax_court has not unequivocally stated that the potential capital_gains taxes cannot be considered as a legal matter respondent recognizes that valuation is inherently a factual consideration nevertheless this court has consistently held that when liquidation is speculative projected capital_gains taxes do not reduce value 87_tc_78 estate of luton v commissioner tcmemo_1994_539 estate of ford v commissioner tcmemo_1993_580 and that unforeseen future events cannot affect value 48_tc_502 mandelbaum v commissioner tcmemo_1995_255 the only proper construction of this conclusory language is that consideration of these speculative future events including capital_gains taxes is improper as a legal matter fn ref omitted we reject respondent's position that as a matter of law no discount or adjustment attributable to addi c's built-in capital_gains_tax is allowable in the instant case indeed it appears that even respondent abandons or at least contradicts that position when respondent acknowledges in respondent's answering brief that if a sale or liquidation of addi c's assets was in fact contemplated on the valuation_date or if in fact avoidance of a corporate level capital_gains_tax was not available some reduction in value would be appropriate emphasis added respondent thus concedes that irrespective of whether a liquidation of addi c or sale of its assets was planned or contemplated on the valuation_date some reduction in value would be appropriate if in fact avoidance of a corporate level capital_gains_tax was not available however respondent argues that although addi c would have been required under the federal_income_tax law in effect on the valuation_date to recognize gains on its assets if it had liquidated and distributed those assets sec_336 made a nonliquidating_distribution of one or more of those assets sec_311 or sold or otherwise_disposed_of those assets sec_1001 it could have avoided the tax on such gainsdollar_figure that is because according to respondent addi c could have converted to s_corporation status and retained its assets for years from the date of such conversion see sec_1374 d and petitioner's expert mr pratt acknowledged that possibility in his expert report the tax_reform_act_of_1986 act publaw_99_514 sec stat inter alia modified sec_336 in effect prior to passage of the act thereby repealing the doctrine general_utilities_doctrine that had been established in 296_us_200 under the general_utilities_doctrine corporations generally did not recognize gain on certain distributions of appreciated_property to their shareholders and on certain liquidating sales of property see h rept pincite c b vol the change to sec_336 that was effected by the act was intended to require the corporate level recognition of gain on a corporation’s sale or distribution of appreciated_property irrespective of whether it occurs in a liquidating or nonliquidating context h conf rept 1986_3_cb_204 although mr pratt recognized in his expert report that as of the valuation_date it would have been possible for addi c to convert to an s_corporation he did not consider conversion to s_corporation status to be likely as of that date for several reasons first according to mr pratt it is improper to assume as respondent does that addi c would have been able to make an s_corporation_election that is because such an assumption would have impermissibly limited the hypothetical willing buyer of each of the two blocks of stock at issue to certain individuals and entities who were permitted as of the valuation_date to be shareholders of an s_corporation see sec_1361 and c thereby improperly excluding as a hypothetical willing buyer of each such block for example a c_corporation see sec_1361 in addition mr pratt believes that the assumption by respondent that none of addi c’s assets would be sold for years would have reduced the marketability of each block of addi c stock at issue and such a requirement would have made it unlikely that addi c’s stockholders would have consented to an s_corporation_election mr pratt also notes that sec_1362 could be a problem for an investment_company like addi c unless addi c were to retain its cattle operations or engage in some other operating business that generated substantially more gross_income than the passive_income generated by addi c's other assets that is because pursuant to sec_1362 an otherwise valid s_corporation_election will be terminated if addi c had earnings_and_profits at the close of each of consecutive taxable years that had been accumulated prior to the s_corporation_election see sec_1362 and b and had more than percent of its gross_receipts for each of those taxable years from passive_investment_income which includes dividend income see sec_1362 d i although we agree with mr pratt that sec_1362 could have caused an otherwise valid s_corporation_election by addi c to be terminated if addi c were not to maintain its cattle operations or engage in some other operating business there are no facts established by the record to indicate that as of the valuation_date addi c intended to curtail or eliminate its cattle operations nonetheless we agree with the other two reasons advanced by mr pratt in support of his view that as of the valuation_date it was unlikely that addi c would have converted to an s_corporation based on the record before us we reject respondent's unwarranted assumptions that addi c could have avoided all of addi c's built-in capital_gains_tax by having it elect s_corporation status and by not permitting it to sell any of its assets for years thereafter and the record does not establish that there was any other way as of the valuation_date by which addi c could have avoided all of such tax we turn now to respondent's position in respondent’s opening brief which as discussed above we believe was contradicted by the position in respondent’s answering brief the former position was that irrespective of whether as of the valuation_date addi c could have avoided all of addi c's built-in capital_gains_tax no discount or adjustment attributable to that tax is permissible as a matter of law because as of that date no liquidation of addi c or sale of its assets was planned or contemplated the record shows that as of the valuation_date addi c's built-in capital_gains_tax relating to addi c's built-in capital_gains on all its assets was dollar_figure the record also establishes that as of the valuation_date addi c's winn-dixie stock constituted more than percent of the aggregate fair_market_value of all of its assets the portion of addi c’s built-in capital_gains attributable to that stock viz dollar_figure constituted more than percent of such gains and the portion of addi c’s built- in capital_gains_tax attributable to that stock viz approximately dollar_figure constituted more than percent of such tax petitioner and all of the experts believe that a hypothetical willing seller and a hypothetical willing buyer of each of the two 25-share blocks of addi c stock at issue would have taken addi c’s built-in capital_gains_tax into account in we calculated addi c's built-in capital_gains_tax by multiplying the stipulated combined federal and state capital_gains_tax rate of dollar_figure percent by addi c's built-in capital_gains reduced by dollar_figure of net_operating_loss carryforwards that addi c had as of the valuation_date in computing the amount of such gains we utilized the stipulated historical_cost basis and the fair_market_value of each of addi c's assets including its winn-dixie stock as of the valuation_date since we have found on the instant record that petitioner has not established that any blockage and or sec rule discount to the nyse price on the valuation_date of that stock is permissible arriving at the price on the valuation_date at which each such block of stock would have changed hands and that therefore a discount or adjustment attributable to that tax should be applied in determining the fair_market_value of each such blockdollar_figure on the record before us we agree we are convinced on the record in this case and we find that even though no liquidation of addi c or sale of its assets was planned or contemplated on the valuation_date a hypothetical willing seller and a hypothetical willing buyer would not have agreed on that date on a price for each of the blocks of stock in question that took no account of addi c's built-in capital_gains_tax we are also persuaded on that record and we find that such a willing seller and such a willing buyer of each of the two blocks of addi c stock at issue would have agreed on a price on the valuation_date at which each such block would have changed hands that was less than the price that they would have agreed upon if there had been no addi c's built-in capital_gains_tax as of that date respondent’s position to the contrary is inconsistent with the record in this casedollar_figure we have found as discussed herein there are disagreements as to the amount of any such discount or adjustment and the point at which such a discount or adjustment should be taken into account in the valuation process moreover it is contrary to the record in this case to assume as respondent apparently does that a hypothetical willing seller and a hypothetical willing buyer would not have been aware on the valuation_date that winn-dixie stock which constituted over percent of addi c's assets on that date continued nothing in the following cases on which respondent relies that requires us as a matter of law to alter our view 87_tc_78 79_tc_938 72_tc_1062 9_tc_162 estate of luton v commissioner tcmemo_1994_539 supplemented by tcmemo_1996_181 estate of ford v commissioner tcmemo_1993_580 affd 53_f3d_924 8th cir estate of bennett v commissioner tcmemo_1993_34 we note initially that one of the cases on which respondent relies estate of bennett v commissioner supra involved a valuation_date that preceded the repeal of the general_utilities_doctrine and did not involve a request by the taxpayer for a reduction in valuing the stock interest in question for the capital_gains_tax that would have been due upon liquidation of the corporation whose stock was at issue absent tax planning to avoid that tax which was permissible as of the valuation_date in that case instead the taxpayer in the estate of bennett case asked the court to reduce the value of the stock interest in question there by the estimated costs of liquidation which consisted of a discount for commissions a discount for losses on continued could be sold and bought on the open market with none of addi c’s built-in capital_gains_tax being applicable to that stock and that that knowledge would not have affected the price to which they would have agreed on the valuation_date for each of the blocks of stock at issue liquidation and a discount for the costs of overhead and sales costs estate of bennett v commissioner supra turning to the remaining cases on which respondent relies it is significant to us that except for estate of luton v commissioner supra none of the cases on which respondent relies indicates that any of the expert witnesses who testified in those cases considered corporate built-in capital_gains_tax as a factor in appraising the respective stock interests at issue in those cases in the estate of luton case one of the taxpayer's experts but not respondent’s expert reduced the asset value of each of the corporations at issue by liquidation costs that included inter alia federal and state capital_gains taxes that would have been incurred on liquidation of those corporations estate of luton v commissioner supra in contrast in the present case all of the experts for both parties are of the view that addi c’s built-in capital_gains_tax must be taken into account as a factor in ascertaining the fair_market_value of each of the two blocks of addi c stock in question except for estate of luton v commissioner supra and estate of ford v commissioner supra the other cases on which respondent relies like estate of bennett v commissioner supra involved valuation dates that preceded the repeal of the general_utilities_doctrine as we read all of those cases including estate of luton and estate of ford the taxpayers requested the court for a reduction in valuing the respective stock interests in question equal to the full amount of capital_gains taxes that would have been due upon liquidation of the respective corporations whose stock was at issue in those cases absent tax planning to avoid those taxes which was permissible as of the respective valuation dates in those cases the court denied each of those requests for a reduction for the full amount of such capital_gains taxes where there was no evidence as of those respective valuation dates that a liquidation of the corporation in question or sale of corporate assets was planned or contemplated or that the full amount of such taxes could not have been avoideddollar_figure in the present case petitioner and all of the experts including respondent's expert believe and we have found that in determining the fair_market_value on the valuation_date of each of the blocks of stock at issue it is necessary to apply a discount or adjustment attributable to addi c's built-in capital see estate of welch v commissioner tcmemo_1998_167 and eisenberg v commissioner tcmemo_1997_483 which were decided after the parties filed their briefs in this case and which involved valuation dates that occurred after the repeal of the general_utilities_doctrine in neither of those cases was a liquidation of the corporation in question or a sale of its assets planned or contemplated as of the respective valuation dates in valuing the respective stock interests at issue in those cases the taxpayers asked the court for a reduction equal to the full amount of capital_gains taxes that would have been due upon liquidation of the respective corporations involved there absent tax planning to avoid those taxes which was permissible as of the respective valuation dates in neither of those cases does the court indicate that any expert believed that such a reduction was warranted the court denied the taxpayers' requests gains tax because that is what a hypothetical willing seller and a hypothetical willing buyer would have done under the facts and circumstances existing on that date petitioner adopts the view of petitioner's expert mr howard and argues that the full amount of such tax should reduce addi c's net asset value in making that determination on the record before us we reject petitioner's position and mr howard’s opinion on that record we find that where no liquidation of addi c or sale of its assets was planned or contemplated on the valuation_date the full amount of addi c's built-in capital_gains_tax may not be taken as a discount or adjustment in determining the fair_market_value on that date of each of the two blocks of stock in question even though we have found that as of that date it was unlikely that addi c could have avoided all of addi c’s built-in capital_gains_tax and the record does not show that there was any other way as of that date by which addi c could have avoided all of such tax see 87_tc_78 79_tc_938 72_tc_1062 we thus are in agreement with petitioner's expert mr pratt and respondent's expert mr thomson that in the present case it is not appropriate in valuing each of the two blocks of addi c stock in question to apply a discount or adjustment equal to the full amount of addi c's built-in capital_gains_tax nonetheless on the instant record we find that on the valuation_date there was even less of a ready market for each of those two blocks because of addi c's built-in capital_gains_tax than there would have been for each such block without such a tax we thus also agree with and accept the views of petitioner's expert mr pratt and respondent's expert mr thomson that a discount or adjustment for some amount of addi c's built-in capital_gains_tax should be taken into account in valuing each block of stock at issue and that such a discount or adjustment should be part of the lack-of- marketability discount that the parties and all of the experts concluded should be applied in that valuation processdollar_figure petitioner's expert mr pratt included dollar_figure of the total addi c's built-in capital_gains_tax as part of the lack-of- marketability discount that he applied in valuing each of the see estate of luton v commissioner tcmemo_1994_539 which involved inter alia valuation of a stock interest in a corporation for which an election to be taxed as an s_corporation had been made and which was subject_to the transitional rules in the subchapter_s_revision_act_of_1982 publaw_97_354 96_stat_1669 consequently that corporation was required to recognize certain of its net_capital_gain for the taxable years immediately following the date of that s_corporation_election although we refused to allow a reduction equal to the full amount of the federal and state capital_gains taxes that would have been incurred if that corporation had liquidated on the valuation_date involved in the estate of luton case we found accordingly with the exception of the 14-month period from the valuation_date until date rsj inc 's built-in capital_gains could be recognized without a corporate level tax notwithstanding the potential elimination of any corporate level tax we do recognize that some discount is in order we believe such discount is appropriately considered in the discount for lack of marketability discussed below emphasis added estate of luton v commissioner supra blocks of stock at issue and respondent's expert mr thomson included dollar_figure of that total_tax as part of the lack-of- marketability discount that he applied in that valuation process although those dollar amounts vary because of other differences that those experts have in the valuation process see chart above each of those experts independently concluded that a 15-percent discount or adjustment attributable to addi c's built-in capital_gains_tax should be included as part of the respective lack-of- marketability discounts that they determined we have examined the manner in which petitioner's expert mr pratt and respondent's expert mr thomson determined the respective amounts attributable to addi c's built-in capital_gains_tax that they believe should be included as part of the total lack-of-marketability discount which should be applied in valuing each of the blocks of stock at issue we are satisfied on the record before us that those amounts ie dollar_figure to dollar_figure set the appropriate range from which we may determine the amount attributable to addi c’s built-in capital_gains_tax that should be included as part of the lack-of- marketability discount to be applied in determining the value of each such block bearing in mind that valuation is necessarily an approximation and a matter of judgment rather than of mathematics hamm v commissioner f 2d pincite on which petitioner has the burden_of_proof rule a we find on the instant record that dollar_figure million which is attributable to addi c's built-in capital_gains_tax should be included as part of the lack- of-marketability discount that is to be applied in valuing each of the two blocks of addi c's stock at issue we now turn to the balance of the lack-of-marketability discount attributable to factors other than addi c's built-in capital_gains_tax that the parties and all of the experts agree should be applied in ascertaining the fair_market_value on the valuation_date of each of the blocks of stock in question petitioner and petitioner's experts believe that the percentage amount thereof should be percent while respondent's expert mr thomson believes that it should be percent because of other differences among them see chart above the dollar amount of the lack-of-marketability discount that each determined without regard to any amount included therein that is attributable to addi c's built-in capital_gains_tax ranges from dollar_figure mr howard's determination to dollar_figure mr pratt's determination mr thomson's determination thereof was dollar_figure mr howard determined to apply a 35-percent lack-of- marketability discount19 by relying on a number of so-called restricted_stock studies that are cited in his expert report those studies show the amounts of discounts at which private transactions in restricted_stock ie stock of public companies hereinafter unless otherwise stated all references to a lack-of-marketability discount are to such a discount determined without regard to addi c's built-in capital_gains_tax that we have found should be taken into account in arriving at the total amount of the lack-of-marketability discount that should be applied in this case that is restricted from trading on the open market for a certain period took place compared to the prices on the open market of identical but unrestricted stock ie stock of public companies that is freely tradable on the open market mr howard also relied on one so-called initial_public_offering ipo study cited in his expert report that shows the amounts of discounts at which private transactions in stock occurring shortly before an ipo took place compared to the prices of such stock after an ipo in other words that ipo study analyzed the prices of stock in private transactions compared to the prices of subsequent public offerings of stock of the same companies mr pratt determined to apply a 35-percent lack-of- marketability discount by relying on the same restricted_stock studies and the same ipo study on which mr howard relied as well as on an additional restricted_stock study and an additional ipo studydollar_figure in addition mr pratt considered addi c's history as of the valuation_date of not paying dividends in determining that discount in order to ascertain whether the aggregate amount of the minority discount and the lack-of-marketability discount that he separately determined was reasonable mr pratt also examined certain transactions involving the trading of units of various publicly registered limited_partnerships limited_partnership units that were not trading on a formal exchange such as the in his rebuttal report mr howard also considered the additional restricted_stock and ipo studies on which mr pratt relied in his expert report nyse most of those partnerships were making distributions to their partners distributing limited_partnerships as of the valuation_date in examining the trading transactions of the limited_partnership units mr pratt focused on those transactions involving publicly registered limited_partnerships that like addi c were not making distributions to partners nondistributing limited_partnerships as of the valuation_date after studying the data relating to the trading transactions of the limited_partnership units mr pratt made a number of different calculations regarding the amounts of discounts from net asset value at which those units were trading including separate calculations of the median amounts of the discounts from net asset value at which limited_partnership units of distributing limited_partnerships and nondistributing limited partners were trading although mr pratt reproduced in an exhibit to his expert report the data from the document source document that he had used in making those calculations he did not use the average discount that was printed in the source document and that was based on the average of the range of trading prices for each of those units that were reflected in that document instead mr pratt admitted mr thomson included in his rebuttal report a copy of the source document from which mr pratt obtained data with respect to the publicly registered limited_partnership units that he examined that document provided the name of the limited_partnership the value per limited_partnership unit the range of prices at which that unit traded and the average discount reflected in the trading price from the value of that unit which was computed by using the average of that range of prices at trial that he calculated the amounts of discounts from net asset value at which the limited_partnership units were trading based on the lowest trading prices listed in the source document which resulted in his generating slightly higher discounts about percent higher than would have been produced if he had used the average of the range of trading prices for each limited_partnership unit that were reflected in the source document mr thomson determined to apply a 23-percent lack-of- marketability discount he stated in his expert report and at trial that the starting point for that discount wa sec_33 to percent base range which he identified as the discount for lack of marketability applicable to relatively small minority interests in companies that were for the most part operating companies in arriving at the base range for his lack-of-marketability discount mr thomson reviewed certain but not all of the restricted_stock studies considered by mr howard and or mr pratt mr thomson found that the restricted_stock studies that he examined showed that the discounts for restricted_stock ranged from percent to percent and he used the upper end of that range ie to percent as the base range for determining the lack-of- marketability discount for each of the blocks of addi c stock at issue mr thomson also relied on the following factors to determine the specific lack-of-marketability discount applicable to each of those blocks the size of each block of addi c stock at issue and its ability to influence management decisions the swing block potential of each such block the public awareness or exposure of the business or assets of addi c the type of business in which addi c was engaged and the composition and relative attractiveness of its assets the financial strength of addi c and its potential for paying dividends the basis of value and the method of value used to determine the asset value of addi c and any other_relevant_factors that could influence the marketability of each of the blocks of stock at issue mr thomson concluded that the first six of the foregoing factors tended to lower the lack-of-marketability discount that should be applied to each of those blocksdollar_figure consequently he lowered the base range of to percent that he had used as a starting point to to percent he then selected percent as an appropriate lack-of-marketability discountdollar_figure respondent points out that neither mr howard nor mr pratt specifies in their respective expert reports and rebuttal reports how each used the restricted_stock and ipo studies as well as factors specific to addi c and each of the blocks of stock in question in order to arrive at a 35-percent lack-of-marketability mr thomson determined that the seventh and last factor which gives consideration to addi c's built-in capital_gains_tax should increase the lack-of-marketability discount that he otherwise determined by dollar_figure taking account of all the factors including addi c's built- in capital_gains_tax that mr thomson concluded were proper in arriving at the lack-of-marketability discount to be applied in valuing each of the two blocks of stock at issue he determined a 38-percent lack-of-marketability discount discount we agree nonetheless we found those reports and the additional testimony at trial of mr pratt to be quite helpful in ascertaining the lack-of-marketability discount that we shall apply in this case petitioner contends that the 23-percent lack-of-marketability discount determined by mr thomson is too low because inter alia mr thomson failed to consider the ipo studies relied on by mr howard and or mr pratt in mr thomson's rebuttal report and at trial he explained that to the extent that the ipo studies examined data with respect to stock prices subsequent to the valuation_date he believed that those data could not be considered in valuing each of the two blocks of stock at issue because the uniform standards of professional appraisal practice provide that the cutoff date for data used in a retrospective appraisal is the valuation_date we agree however mr thomson admitted at trial that to the extent that the ipo studies considered data with respect to stock prices prior to the valuation_date those data were readily available on the valuation_date and could have been considered in valuing each such blockdollar_figure we agree and find that mr thomson should have considered the pre- at trial mr thomson indicated that he believes that at least one of the ipo studies may be biased because it was based on insider transactions however mr thomson’s rebuttal report which was submitted to the court well before trial did not reflect any such criticism of that ipo study or of the other ipo study which means to us that mr thomson does not consider his criticism at trial about the possible bias of one of the ipo studies to be significant valuation_date price data reflected in those ipo studies because they together with the restricted_stock studies would have provided a more accurate base range and starting point for determining the appropriate lack-of-marketability discount than the base range that he determined mr howard and mr pratt both explained in their rebuttal reports that the restricted_stock studies examine stock that although restricted for a period of time is freely tradable after that period expires they point out that the ipo studies rather than the restricted_stock studies may be more indicative of the lack-of-marketability discount to be applied in the present case because the ipo studies examine the price differences between stock like addi c stock that is not freely tradable and stock of the same corporations after it becomes freely tradable in an ipo the average median_price discount adjusted for industry price earnings multiples for years prior to the valuation_date viz through only based upon an ipo study undertaken by willamette management associates for those years as well as and was approximately percent the average median_price discount for years prior to the valuation_date viz through only based upon an ipo study undertaken by robert w baird company for those years as well as through was approximately percent on the record before us we find that in determining the lack-of-marketability discount that is applicable here without regard to addi c's built-in capital_gains_tax the prevaluation date data in the ipo studies are relevant and provide some insight into the price differences between stock that is freely tradable and stock like addi c stock that is not freely tradable mr thomson stated in his expert report that because each block of addi c stock at issue represented dollar_figure percent of the outstanding_stock of addi c no shareholder had control of that corporation on the valuation_date however mr thomson concluded that each of those blocks could influence management and represented a swing block petitioner contends mr pratt believes and mr thomson acknowledged at trial that in deter- mining the value of each of the two blocks of stock in question the actual owner of the other such block and the actual owner of the remaining addi c stock on the valuation_date should be considered we agree on that date one of decedent's sons who received the other block of stock from his father and decedent respectively were the actual owners of that other block and that remaining stock petitioner contends that as of the valuation_date it was unlikely that a member_of_decedent's_family would join with an outsider to compel addi c to act or not to act in a specified matter we agree on the record before us we find that mr thomson made invalid assumptions about and gave undue weight to the ability of each 25-share block of addi c stock in question to influence management and to be a swing block both mr howard and mr pratt criticize mr thomson for inter alia his emphasis in determining a lack-of-marketability discount on addi c's capacity to pay dividends and his disregard of its year history as of the valuation_date of not paying dividendsdollar_figure as of that date each of those blocks of stock constituted a minority interest and neither represented a swing block on the instant record we find that a hypothetical willing seller and a hypothetical willing buyer would have no reason to believe on the valuation_date that addi c's 45-year history of not paying dividends was likely to change see also revrul_59_60 sec_5 c b pincite adjusted net_worth should be accorded greater weight in valuing the stock of a closely held investment_company whether or not family owned than any of the other customary yardsticks of appraisal such as earnings and dividend paying capacity on the record before us we are satisfied that the respective amounts of the lack-of-marketability discounts determined by the experts without regard to addi c's built-in capital_gains_tax ie dollar_figure determined by mr howard dollar_figure determined by mr thomson and dollar_figure determined by mr pratt set the appropriate range from which we may determine the lack-of-marketability discount without regard to such tax in making that determination we bear in mind that valuation is necessarily an approximation and a matter of judgment rather than both of petitioner's experts point out that except for a shareholder's use of an airplane during that was treated for that year as a dividend for federal_income_tax purposes addi c had neither declared nor paid any dividends to its shareholders throughout its 45-year history as of the valuation_date of mathematics hamm v commissioner f 2d pincite on which petitioner has the burden_of_proof rule a based on our examination of the entire record in this case and using the figures in the restricted_stock and ipo studies cited in the expert reports of mr howard and mr pratt as benchmarks of the lack-of-marketability discount without regard to addi c's built-in capital_gains_tax and evaluating various factors specific to addi c and each of the blocks of stock in question including the factors listed in the expert report of mr thomson we find that the lack-of-marketability discount without regard to that tax should be dollar_figure million we further find that the total lack-of- marketability discount that should be applied in this case and that we have found should include dollar_figure million which is attributable to addi c's built-in capital_gains_tax is dollar_figure million based on our examination of the entire record in this case we find that on the valuation_date the fair_market_value of each of the two 25-share blocks of addi c stock in question was dollar_figure or dollar_figure per share to reflect the foregoing decision will be entered under rule


department of the treasur internal_revenue_service ‘9 y washington d c tax_exempt_and_government_entities_division uil index date may contact person identification_number telephone number tf gb employer_identification_number legend l a b c d e f g _ h i i k dear sir or madam this letter is in response to your ruling_request under sec_501 and sec_512 of the internal_revenue_code facts you have been recognized by the internal_revenue_service as tax-exempt under sec_501 of the code by reason of being described in sec_501 in addition you are not a private_foundation by reason of being described in sec_509 and sec_170 pursuant to an agreement dated a you sold your general acute care facility hospital to l an unrelated third party the sale was effective on b after the sale your primary function was to continue to provide basic medical_care to indigent persons through five medical clinics ‘-you operate-which are strategically located in various parts of your service area as defined below the operation of these clinics enables you to continue to provide healthcare services to the uninsured and to those who would not otherwise have access to healthcare services through a private physician your service area consists of your primary service area which is the geographical area and population residing in the ten zip codes immediately surrounding your principal offices and your secondary service area which is the geographical area and population encompassed by all of the zip codes any part of which are within a ten-mile radius of your principal offices but excluding the primary service area most of the residents in the service area are extremely poor consisting primarily of minorities many of whom speak little or no english and who have recently immigrated to the united_states many of these individuals do not have any healthcare insurance or qualify for medicare or medicaid in addition many residents are unable to obtain adequate healthcare because they are culturally and linguistically isolated homeless elderly hiv-positive or excluded from traditional avenues of healthcare pursuant to the law of the state of c the attorney_general approved the terms of the in addition the attorney_general is required to regulate the use of proceeds from the sale sale of significant assets by a c nonprofit institution and to approve a plan developed by the selling organization describing the future use of such proceeds in the case of your organization the law requires that the proceeds be held and used for the continuing healthcare benefit of the community in compliance with c law you developed a pian hereafter the plan which was approved by the attorney_general establishing the basis upon which you would continue to use the sales proceeds together with your other investment_assets to provide healthcare to residents of your service area an integral part of the plan was that you will earmark funds from which you will make income distributions on or after d to fund emergency room care and related inpatient care provided to medically indigent persons residing in close proximity to the hospital will earmark dollar_figuree for this fund known as the emergency medical services fund ems fund initially you in consultation with professional investment advisers it is your policy to invest the resources of the ems fund to maximize total return through balancing current income opportunities with long term capital appreciation potentials in each case consistent with traditional views of prudence and diversity to this end the ems fund is primarily invested in marketable_securities that are readily_tradable on established securities exchanges and which yield current dividend or interest_income with the possibility of principal appreciation over a long time horizon secondarily to achieve greater diversity the resources of the ems fund may be invested to a limited extent in real_property private equity offerings and other alternative investments that provide higher than traditional total return opportunities where deemed prudent and opportune for purposes of the plan a medically indigent person is an adult person or emancipated minor whose family has an annual gross household_income at or below percent of the federat income level applicable to him or her based on the size of his or her - family as set forth in the poverty income guidelines published in the federal_register where the medical_care required does not qualify for reimbursement from any payor including governmental reimbursement programs under the plan you will pay for emergency room medical_care provided to medically indigent persons by annually distributing the income earned by the ems fund to certain general acute care hospitals located within the service area who request reimbursement for uncompensated care that they provided through their basic or comprehensive emergency medical services rooms in the prior year hereafter eligible hospitals for this purpose uncompensated care is the uncompensated emergency room care provided by eligible hospitals to medically indigent persons residing in the service area plus the uncompensated inpatient care eligible hospitals provided to these persons which arose from admissions to the eligible hospitals due to emergency room care provided by eligible hospitals to such persons eligible hospitals include the hospital other for-profit hospitals and nonprofit hospitals you intend to notify the eligible hospitals in the service area that operate a basic or comprehensive emergency room about the existence of the ems fund and about the method of applying for disbursements from the ems fund the income from the ems fund available for distribution will be allocated to each requesting eligible hospital in the ratio of a the number of emergency room visits by medically indigent residents of the service area to the eligible hospital requesting disbursements to b the total number of emergency room visits by medically indigent residents of the service area to all eligible hospitals requesting disbursements however no eligible hospital requesting disbursements will be entitled to receive an amount greater than the total amount of uncompensated care it provided to medically indigent persons residing in the service area for purposes of determining recipients and amounts of disbursements from the ems fund you do not intend to discriminate in favor of nonprofit hospitals over the hospital or any other for- profit eligible hospital in order for an eligible hospital to receive disbursements from the ems fund it must provide on a timely basis specific information which will allow you to evaluate the request and if the request is approved to allocate a share of the income of the ems fund you intend to use all reasonable commercial efforts to pay the amounts allocated to the hospitals no later than december of each year if the total amount of disbursements requested by eligible hospitals for a year is less than the income of the ems fund for that year you will retain the income of the ems fund that exceeds the amount of the disbursements requested and you will add this excess to the principal of the ems fund so as to potentially increase the income of the ems fund available to eligible hospitals in future years if the total amount of disbursements requested by eligible hospitals for a years exceeds the income of the ems fund for that year the requesting eligible hospitals will receive a portion of the amount requested as determined by the formula described above for each of the first three years beginning d you estimate that the amount of expenditures you will make for the operation of the five medical clinics and for distributions from the ems fund to-eligible hospitals for providing-healthcare services to medically-indigent - persons residing in the service area will be as follows - ‘oo ee _ ae wae pres aiid re te wane veer wee percent 1b ‘o medical clinics ems fund total wae re eee prea approximately f hospitals qualify as eligible hospitals of which approximately g are for- profit hospitals including the hospital and the remaining hospitals are either nonprofit or city or county hospitals collectively the f eligible hospitals have approximately h emergency stations or beds of which i are located in for-profit hospitals including in the hospital for each of the first three years beginning d you estimate that the ems fund will earn approximately dollar_figurek each year which you estimate will be distributed as follows hospital other for-profit hospitals nonprofit or city county hospitals total dollar_figuredollar_figure wee wee dollar_figure for each of the first three years beginning d you estimate that the eligible hospitals will provide healthcare services to approximately medically indigent persons as follows nee hospital other for-profit hospitals wee nonprofit or city county hospitals ae total week rulings requested distributions of income from the ems fund to nonprofit and for-profit hospitals including the hospital for reimbursement of uncompensated care they provided to medically indigent persons residing in the service area pursuant to the plan described above will not adversely affect your status as an organization described in sec_501 of the code pursuant to sec_512 of the code dividends interest royalties rents and capital_gains earned by the ems fund will be excluded from unrelated_business_taxable_income under sec_512 except to the extent provided in sec_512 applicable law sec_501 of the code provides in part for the exemption from federal_income_tax of corporations organized and operated exclusively for charitable scientific or educational_purposes provided no part of the organization's net_earnings inures to the benefit of any private_shareholder_or_individual sec_1_501_c_3_-1 of the income_tax regulations provides that an organization will be regarded as operated exclusively for one or more exempt purposes only if it engages primarily in activities which accomplish one or more of such exempt purposes specified in sec_501 c an organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt_purpose under sec_1_501_c_3_-1 of the regulations for an organization to qualify for exemption under sec_501 of the code it must not confer any of its net_earnings on persons who have a personal or private interest in the activities of the organization as defined in sec_1_501_a_-1 and commonly referred to as insiders sec_1_501_c_3_-1 provides that an organization is not organized or operated exclusively for exempt purposes unless it serves a public rather than a private interest states that to meet the requirement of this subdivision it is necessary for an organization to establish that it is not organized and operated for the benefit of private interests it further in 92_tc_1053 the tax_court defined private benefit as nonincidental benefits conferred on disinterested persons that serve private interests benefits are not incidental if they are both qualitatively and quantitatively incidental qualitatively incidental means that the private benefit is a mere byproduct of the public benefit see eg revrul_70_186 1970_1_cb_128 revrul_75_286 1975_2_cb_210 for private benefit to be quantitatively incidental it must be insubstantial in amount the private benefit must be compared to the public benefit of the specific activity in question not the public benefit provided by all the organization's activities sec_1_501_c_3_-1 provides that the term charitable is used in sec_501 in its generally accepted legal sense the promotion of health has long been recognized as a charitable purpose see restatement second of trusts sec_368 sec_372 4a austin w scott and william f fratcher the law of trusts sec_368 sec_372 4th ed in evaluating whether a nonprofit_hospital qualifies as an organization described in sec_501 of the code revrul_69_545 1969_2_cb_117 compares two hospitals the first hospital discussed is controlled by a board_of trustees composed of independent civic leaders in addition the hospital maintains an open medical staff with privileges available to all qualified physicians it operates a full-time emergency room open to all regardless of ability to pay and it otherwise admits all patients able to pay either themselves or through third party payers such as private health insurance or government programs such as medicare in contrast the second hospital is controlled by physicians who have a substantial economic_interest in the hospital this hospital restricts the number of physicians admitted to the medical staff enters into favorable rental agreements with the individuals who control the hospital and limits emergency room and hospital admission substantially to the patients of the physicians who control the hospital revrul_69_545 notes that in considering whether a nonprofit_hospital is operated to serve a private interest the service will weigh all the relevant facts and circumstances in each case including the use and control of the hospital the revenue_ruling concludes that the first hospital continues to qualify as an organization described in sec_501 and the second hospital does not because it is operated for the private benefit of the physicians who control the hospital _6- thus under revrul_69_545 a hospital must satisfy a community benefit standard to qualify for exemption under sec_501 of the code the community benefit standard focuses on a number of factors to determine if a hospital operates to benefit the community as a whole the community benefit standard applies to other health care provider organizations in addition to hospitals see 506_f2d_1278 d c cir vacated on other grounds 426_us_26 and 71_tc_158 acg 1981_2_cb_2 - revrul_83_157 1983_2_cb_94 held that a nonprofit_hospital identical to the hospital in revrul_69_545 except it did not operate an emergency room can still qualify under r c c if other significant factors establish that it operates exclusively to benefit the community as a whole sec_509 of the code provides that an organization which normally receives more than one-third of its support from various sources including gross_receipts from the performance of services which are in furtherance of the organization’s tax-exempt purposes and which normally receives less than one-third of its support from certain other sources is excluded from private_foundation_status see sec_1_509_a_-3 of the regulations sec_511 of the code imposes a tax on the unrelated_business_income of organizations described in sec_501 sec_512 of the code defines unrelated_business_taxable_income as the gross_income derived by an organization from any unrelated_trade_or_business regularly carried on by it less the allowable deductions which are directly connected with carrying on the trade_or_business both computed with the modifications provided in sec_512 these modifications are the exclusion of dividends and interest royalties certain rents and capital_gains however under sec_512 notwithstanding these exclusions items of gross_income less applicable deductions relating to debt-financed_property as defined in sec_514 are included in unrelated_business_taxable_income rationale to qualify for exemption under sec_501 of the code as an organization described in sec_501 of the code a hospital or other health care provider must satisfy the community benefit standard under revrul_69_545 supra to do this the organization must establish the presence of significant factors demonstrating that it promotes the health of a class of persons that is broad enough so that the community as a whole benefits as long as a health care provider can establish the presence of these significant factors it is not required that it establish the presence of all the factors in revrul_69_545 for the organization to satisfy the community benefit standard your primary function is to provide basic medical_care to indigent persons through five medical clinics you operate in various parts of your service area the operation of these clinics enables you to continue to provide healthcare services to the ‘uninsured and to those who would not otherwise have access to healthcare services through a private physician under the plan you will pay for emergency room medical_care provided to medically indigent persons by annually distributing the income earned by the ems fund to certain general acute care hospitals including the hospital located within your service area who request reimbursement for uncompensated care that they provided through their basic or comprehensive emergency medical services room in the prior year once the plan is implemented you expect that approximately percent of your expenditures will continue to be made for the operation of the five medical clinics and approximately percent will be made for distributions under the plan to for-profit hospitals including the hospital in these activities you will continue to benefit the community as a whole in compliance with the community benefit standard in revrul_69_545 in addition you will continue to be engaged primarily in activities which accomplish your charitable purposes and thus will continue to be operated exclusively for charitable purposes under sec_1_501_c_3_-1 of the regulations by engaging under the plan reimbursing the for-profit hospitals including the hospital for expenses they incur in providing emergency services to charitable recipients will not constitute the distribution of net_earnings to these hospitals instead this activity will further your charitable purposes furthermore none of these hospitals including the hospital are insiders as defined in sec_1_501_a_-1 of the regulations therefore under the plan you will not violate the proscription against inurement of net_earnings under sec_1_501_c_3_-1 similarly under the plan your reimbursement of for-profit hospitals including the hospital for expenses they incur in providing emergency services to charitable recipients will confer upon these hospitals benefits which will be both quantitatively and qualitatively incidental for example in you expect that approximately percent of your total expenditures will be made to the hospital and that approximately percent of the medically indigent persons served under the plan will be served by the hospital thus you will not be conferring impermissible private benefits upon these hospitals including the hospital and will continue to serve public rather than private interests within the meaning of sec_1_501_c_3_-1 of the regulations therefore following implementation of the plan you will continue to satisfy the requirements for exemption under sec_501 of the code as an organization described in sec_501 as a result of investing the ems fund you expect to earn dividends interest royalties rents and capital_gains under sec_512 of the code dividends interest royalties and certain rents are excluded from unrelated_business_taxable_income except to the extent that these items of gross_income tess applicable deductions relate to debt-financed_property as defined in sec_514 therefore income earned from investing the ems fund including capital_gains will be excluded from unrelated_business_taxable_income under sec_512 except to the extent that these items of gross_income less applicable deductions relate to debt- financed property ruling sec_1 distributions of income from the ems fund to nonprofit and for-profit hospitals including the hospital for reimbursement of uncompensated care they provided to medically indigent persons residing in the service area pursuant to the plan described above will not adversely affect your status as an organization described in sec_501 of the code pursuant to sec_512 of the code dividends interest royalties rents and capital_gains earned by the ems fund will be excluded from unrelated_business_taxable_income under sec_512 except to the extent provided in section sec_12 these rulings are based on the understanding that there will be no material changes in the facts upon which they are based these rulings do not address the applicability of any section of the code or regulations to the facts submitted other than with respect to the sections described these rulings are directed only to the organization that requested them and may not be used or cited by others as precedent please keep a copy of this letter in your permanent records if you have any questions about this ruling please contact the person whose name and telephone number are shown in the heading of this letter in accordance with the power_of_attorney currently on file with the internal_revenue_service we are sending a copy of this letter to your authorized representative sincerely signed marvin friedlander marvin friedlander manager exempt_organizations technical group