t c memo united_states tax_court estate of mildred green deceased thomas r green executor petitioner v commissioner of internal revenue respondent docket no filed date jacqueline a dimmitt jay l levitch and lewis e striebeck jr for petitioner steven w labounty for respondent memorandum findings_of_fact and opinion thornton judge respondent determined a dollar_figure federal estate_tax deficiency with respect to the estate of mildred green the estate the issues for decision are the proper allocation of federal and missouri estate_taxes to the property bequests in the will of mildred green decedent the proper allocation of federal generation-skipping_transfer gst tax to the property bequests in decedent’s will and the fair_market_value of decedent’s shares of stock of royal bancshares inc findings_of_fact the parties stipulated some facts which we incorporate along with the associated exhibits into our findings_of_fact decedent died on date her domicile at death was in st louis missouri when the petition was filed the executor’s legal residence was in st louis missouri decedent’s will on date decedent’s will dated date was admitted to probate section b of article first of decedent’s will which deals with the payment of transfer estate inheritance succession and other death taxes provides b i direct my personal representative to pay out of my estate all transfer estate inheritance succession and other death taxes exclusive of any generation-skipping_transfer_tax payable including interest and penalties thereon if any assessed by the united_states or assessed by any state thereof or by any foreign government against my estate or against any gift bequest or devise or assessed by reason of the inclusion in my estate for tax purposes of any life_insurance_proceeds annuity joint property property held as a tenant by the entirety or any other_property or interest in property other than property of any trust created by me under an instrument which provides otherwise with respect to the property of such trust respondent represents that after our resolution of the above-stated issues the parties will resolve whether the estate is entitled to deductions of dollar_figure for executor’s commissions and dollar_figure for accountant’s fees such taxes shall not be charged against nor deducted from any such gift bequest devise life_insurance_proceeds annuity joint property tenancy_by_the_entirety property or other_property or interest in property upon or by reason of which such taxes are assessed and paid notwithstanding the foregoing i direct my personal representative to pay out of my estate any_tax imposed under chapter of the internal federal revenue code on property transferred in a direct_skip as defined in sec_2612 of the code such tax shall not be deducted from or reduce the gift bequest or devise which constitutes a direct_skip article second of decedent’s will provides for the disposition of all her tangible_personal_property article third gives one-half of the rest residue and remainder of decedent’s property to the lubin-green foundation which is a charity for purposes of sec_2055 article fourth gives the other one-half of the rest residue and remainder of decedent’s property in trust for her grandchildren at death decedent was survived by three grandchildren each of whom was an eligible_beneficiary under article fourth of decedent’s will decedent’s shares of common_stock of royal bancshares inc at death decedent owned big_number of the big_number shares of issued and outstanding common_stock of royal bancshares inc rbi decedent’s shares represented dollar_figure percent of the outstanding shares of rbi hers was the fifth largest holding of unless otherwise indicated all section references are to the internal_revenue_code as amended and all rule references are to the tax_court rules_of_practice and procedure rbi shares by any one shareholder rbi had shareholders at decedent’s death no one person had a controlling_interest in rbi the largest percentage interest in rbi stock held by any one shareholder was dollar_figure percent rbi shares have never been listed on any securities exchange as of date rbi had total assets of dollar_figure from to rbi’s total assets and earning assets interest and dividend-producing assets increased from to shareholder equity in rbi increased and as of date totaled dollar_figure compared to other banking companies in its peer group rbi has an above-average capital structure and smaller loan losses between and rbi declared the following cash dividends per share year cash dividend per share dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure rbi wholly owned a subsidiary royal banks of missouri royal banks a missouri banking corporation on the date of decedent’s death royal banks operated five branches in the st royal bancshares inc rbi is a member of peer group as defined by the federal financial institutions examination counsel along with other commercial banks having total assets of dollar_figure to dollar_figure million and with three or more branch offices in a metropolitan area louis metropolitan area for the 12-month_period date through date royal banks had earnings_of dollar_figure on date royal banks lent dollar_figure million to robert and bonnie havrilla the havrillas jefferson keeler printing co jefferson keeler guaranteed this loan by a deed_of_trust dated date jefferson keeler granted a security_interest in certain real_property that it owned the havrillas’ note was current through a payment made in date however no payment was made on the havrillas’ note for august or date and at decedent’s death the havrillas were in default on their note on date creditors of jefferson keeler filed an involuntary petition in federal district_court seeking relief under chapter of the united_states bankruptcy code royal banks was not a petitioning creditor in this case the district_court granted jefferson keeler’s motion to convert the involuntary bankruptcy case to a voluntary case under chapter the guaranty was unconditional absolute and irrevocable the guaranty did not require royal banks of missouri royal banks as a condition to performance by jefferson keeler printing co jefferson keeler to seek collection from robert and bonnie havrillas the havrillas or to enforce any security interests or liens granted to royal banks by the havrillas as of date the property was appraised at dollar_figure million before the security_interest was granted there were no other security interests or liens with respect to the property of the united_states bankruptcy code on date counsel for royal banks filed a notice of appearance in the voluntary bankruptcy case decedent’s estate_tax_return on date the estate filed a form_706 united_states estate and generation-skipping_transfer_tax return reporting a gross_estate of dollar_figure the estate included decedent’s big_number shares of rbi stock in the gross_estate at an estate_tax_value of dollar_figure or dollar_figure per share the estate claimed a charitable_contribution_deduction of dollar_figure for the bequest to the lubin-green foundation on schedule r generation-skipping_transfer_tax the estate reported the property transferred in trust to decedent’s grandchildren as a direct_skip with an estate_tax_value of dollar_figure in reporting these amounts the estate allocated and charged all estate federal and missouri and gst tax to the portion of the estate that passed in trust to decedent’s grandchildren notice_of_deficiency on date respondent commenced an examination of the estate and gst tax_return by notice_of_deficiency respondent determined a dollar_figure deficiency in the estate and gst tax respondent determined that at the date of decedent’s death the fair_market_value of the big_number shares of rbi stock was dollar_figure rather than dollar_figure as shown on the estate’s tax_return respondent also determined that the allowable charitable_contribution_deduction for the bequest to the lubin-green foundation was dollar_figure rather than dollar_figure as shown on decedent’s estate_tax_return on the basis of a determination that percent of the estate_taxes federal and missouri including interest and penalties and all the gst tax should be allocated against the amount passing to the lubin-green foundation opinion a allocation of federal and missouri estate_taxes apart from gst tax generally the manner in which estate_taxes are apportioned to the assets included in a decedent’s gross_estate is determined under state law 317_us_95 in this case the parties agree that missouri law governs the apportionment of the estate’s taxes missouri has no apportionment statute see estate of boder v albrecht art museum s w 2d mo the apportionment_of_taxes is instead determined according to the decedent’s intent looking first to the decedent’s testamentary instrument id if the decedent’s intent is clear it is to be given effect id pincite if the decedent’s intent is unclear judicial construction of the instrument s is appropriate id if the decedent’s intent cannot be determined the doctrine_of equitable_apportionment applies id st louis union trust co v krueger s w 2d mo hammond v wheeler s w 2d mo carpenter v carpenter s w 2d mo the doctrine_of equitable_apportionment places the burden of the federal estate_tax on the property that generates the tax and exonerates from the burden the property which does not estate of boder v albrecht art museum supra pincite citing jones v jones s w 2d mo in the notice_of_deficiency respondent determined that decedent intended percent of her federal and missouri estate_taxes exclusive of gst tax to be paid out of the charitable_bequest and the other percent to be paid out of the bequest in trust for her grandchildren for the first time on brief respondent has abandoned this position in favor of a new_theory respondent now argues that decedent intended the estate_taxes to be paid entirely out of the charitable_bequest to the lubin-green foundation the estate argues that decedent’s will contains no clear expression of intent regarding the allocation of estate_taxes and therefore the doctrine_of equitable_apportionment requires an allocation of all estate_taxes to the property passing in trust to decedent’s grandchildren decedent’s will states in relevant part that decedent directs her personal representative to pay out of my estate all transfer estate and other death taxes exclusive of any generation-skipping_transfer_tax the will goes on to state that the estate_tax shall not be charged against nor deducted from any such gift bequest devise or other_property or interest in property upon or by reason of which such taxes are assessed and paid in the first instance we might agree that this language represents an attempt on the part of decedent to apportion the estate_taxes arising at her death arguably this language might be read to reflect an intent on the part of decedent that the principles of equitable_apportionment shall not apply nevertheless the language in decedent’s will is not altogether clear as to who ultimately should bear the estate_tax burden respondent argues that the plain unambiguous meaning of the language in decedent’s will is that estate_taxes are to be allocated entirely against the charitable_bequest to the lubin- green foundation if this language has a plain and unambiguous meaning it eludes us as it evidently eluded respondent inasmuch as he previously interpreted the will language to provide for a allocation against the residuary bequests the language in decedent's will does not purport to express who ultimately should bear the estate_tax burden rather it provides that certain transfers or property shall not be charged with the estate_taxes this language does not expressly or implicitly charge the estate_taxes to the property passing to the lubin-green foundation respondent focuses on the language upon or by reason of which such taxes are assessed and paid and contends that this language exonerates from payment of estate_taxes all gifts bequests and devises other than the residuary bequest to the lubin-green foundation reasoning that this is the only gift bequest or devise that does not constitute property upon or by reason of which such taxes are assessed and paid respondent’s construction may be tenable but is by no means compelled when the specific language that respondent relies upon is read in context with other language in decedent’s will including the provisions dealing with the residuary bequest to the lubin-green foundation and the residuary bequest in trust to decedent’s grandchildren for example if as respondent contends the language in question requires the property passing to the lubin-green foundation to bear all the estate_taxes then that is the property upon which all the taxes are ultimately assessed and paid and consequently that property would also be exonerated from the payment of estate_taxes taken to its logical conclusion then this language might be read to exonerate all gifts bequests and devises from being charged with the estate_taxes other than gst tax also in the absence of some clearer expression of decedent’s intent we would be hard pressed to infer an intent on her part to allocate all the estate_taxes against the charitable_bequest see sec_2055 limiting charitable_contribution_deduction to amount of charitable_bequest reduced by amount of taxes payable out of that bequest this is especially true when we consider the equivalency that the will otherwise gives to the charitable_bequest and the bequest in trust to decedent’s grandchildren these bequests are designated in decedent’s will to each constitute one half of the rest residue and remainder of decedent’s property we agree with the estate that decedent’s will lacks a clear expression of intent as to who is ultimately to bear the burden of the estate_taxes the will as a whole is ambiguous on this score although decedent’s will provision is susceptible to a number of plausible ways of apportioning the estate_taxes none of these interpretations provides a sustainable basis for apportioning the estate_taxes between the bequest in trust to decedent’s grandchildren and the charitable_bequest to the lubin- green foundation under these circumstances missouri judicial precedents dictate that we apply the doctrine_of equitable this designation might support respondent’s original interpretation which he has now abandoned that the will requires a allocation of the estate_taxes between the charitable_bequest and the bequest in trust for the grandchildren although this interpretation is plausible it has no express support in the specific provision of decedent’s will dealing with the apportionment_of_taxes also the fact that both of the interpretations that respondent has forwarded as well as other possible interpretations are similarly plausible supports our ultimate conclusion that the will is ambiguous as to the proper apportionment of the estate_taxes apportionment we hold therefore that no portion of the estate_taxes other than gst tax is allocable to the bequest to the lubin-green foundation cf estate of mccutchan v commissioner tcmemo_1979_393 b allocation of gst tax unless otherwise directed pursuant to the governing instrument by specific reference to the gst tax the tax imposed on a generation-skipping_transfer shall be charged to the property constituting such transfer sec_2603 the estate argues that decedent’s gst tax should be allocated to the property that is to pass in trust for the benefit of decedent’s grandchildren because decedent did not direct otherwise in her will respondent argues that all gst tax imposed on the transfer in trust for the benefit of decedent’s grandchildren is to be allocated against the charitable_bequest to the lubin-green foundation decedent specifically provided for the payment of gst tax on property transferred in a direct_skip decedent’s will directs that those taxes shall not be deducted from or reduce the gift bequest or devise which constitutes a ‘direct skip ’ the parties agree that the transfer in trust for decedent’s grandchildren constitutes a direct_skip as defined in sec_2612 it follows from the express language in decedent’s will that the gst tax is not to be deducted from or reduce the transfer in trust for the grandchildren the estate argues that decedent’s will fails to instruct the executor not to charge the gst tax to the trusts for the grandchildren as the estate contends the language of sec_2603 contemplates it must contrary to the estate’s argument sec_2603 does not require any specific language to elect out of the general apportionment scheme of that section except for a specific reference to the gst tax it is sufficient that decedent’s will made manifest her intent to elect out of the general statutory apportionment scheme and made a specific reference to the gst tax cf 104_tc_352 revd and remanded on another ground 124_f3d_699 5th cir the estate contends that the will provision relating to gst tax is unclear and contradictory the estate claims that if the gst tax is paid out of the estate and charged to the charitable_bequest the charitable deduction would go down the estate_taxes would consequently go up and the bequest to the grandchildren would go down by their share of the additional estate_tax which would ‘reduce’ the bequest to the grandchildren in contravention of the express language of the gst tax provision we are unpersuaded by the estate’s argument which seems to us more unclear and contradictory than the will provisions in question the estate’s argument focusing on the supposed collateral estate-tax effects of allocating the gst tax to the charitable_bequest ignores the more direct and proximate effect that would result from allocating the gst tax against the grandchildren’s bequests even if as the estate suggests allocating the gst tax against the noncharitable bequests would lower the estate’s overall estate-tax burden we are unpersuaded that such an allocation would not reduce the amounts ultimately received by the grandchildren since the gst tax would then be borne entirely by their shares in contravention of the will provision that the gst tax not reduce the gift bequest or devise which constitutes a ‘direct skip’ we hold that the gst tax is not chargeable to the transfer in trust for decedent’s grandchildren but rather is to be charged to the charitable_bequest to the lubin-green foundation c valuation of decedent’s big_number shares of rbi stock generally the value of a decedent’s gross_estate is determined by including the value of all property real or personal tangible or intangible wherever situated sec_2031 the value of every item of property includable in a decedent’s gross_estate is its fair_market_value at the time of the decedent’s death or the alternate_valuation_date sec_20_2031-1 estate_tax regs the fair_market_value of property is the price at which the property would change hands between a willing buyer and a willing seller neither being under a compulsion to buy or to sell and both having reasonable knowledge of relevant facts id see 411_us_546 for unlisted stocks the best indicators of fair_market_value are actual arm’s-length sales in the normal course of business within a reasonable_time before or after the date of death 79_tc_938 where actual sale prices are unavailable the stock value is determined by weighing the corporation’s net_worth prospective earning power dividend-paying capacity and other_relevant_factors id sec_20_2031-2 estate_tax regs valuation of stock is a purely factual determination there is no one universally applicable formula 325_f2d_934 8th cir affg tcmemo_1961_347 the parties dispute the fair_market_value of decedent’s big_number shares of rbi stock respondent who determined in the notice_of_deficiency that the fair_market_value of the shares was dollar_figure dollar_figure per share now contends that the fair_market_value was dollar_figure dollar_figure per share the estate which reported on the estate_tax_return that the fair_market_value of the shares was dollar_figure dollar_figure per share now contends that the fair_market_value was dollar_figure dollar_figure per share generally the estate bears the burden_of_proof see rule a effective for court proceedings arising in connection continued each party relies on an expert opinion we evaluate expert opinions in light of all the evidence in the record and may accept or reject expert testimony in whole or in part according to our own judgment 304_us_282 115_tc_376 affd 283_f3d_1258 11th cir we may be selective in our use of any part of an expert’s opinion 110_tc_530 the estate’s expert the estate’s expert gary l schroeder is accredited by the american society of appraisers as a senior appraiser in the valuation of businesses and intangible assets he has been actively engaged in the appraisal and consulting profession since mr schroeder determined that as of date the fair_market_value of percent of the shares of rbi stock on a controlling-interest basis was dollar_figure he determined a dollar_figure aggregate value for rbi stock after allowing a continued with examinations commencing after date if certain requirements are met under sec_7491 the burden_of_proof shall be on the commissioner as to any factual issue relevant to ascertaining the tax_liability of the taxpayer see internal_revenue_service restructuring and reform act of publaw_105_206 sec c 112_stat_727 the examination in the instant case commenced after date nevertheless neither party addresses whether the requirements of sec_7491 have been met and in any event we do not decide any factual issue on the basis of which party bears the burden_of_proof percent minority interest discount and a 40-percent lack of marketability discount respondent’s expert respondent’s expert william c herber is an associate member candidate of the american society of appraisers and a member of the institute of business appraisers inc mr herber prepares valuations and market analyses of real_estate business enterprises and intangible_property rights he has worked in the valuation field since approximately mr herber determined that as of date the fair_market_value of percent of the shares of rbi stock before consideration of any discounts was dollar_figure mr herber determined an dollar_figure dollar_figure per share value for decedent’s shares of rbi stock in determining this value mr herber allowed a 15-percent minority interest discount and a 25-percent discount for lack of marketability the experts agree to a considerable extent on the valuation of rbi stock indeed the aggregate values the experts determined are relatively close the greatest difference in the experts’ respective positions relates to the lack of marketability discount d pre-discount aggregate value of rbi stock income approach both experts used an income approach to value rbi stock and arrived at nearly identical values mr schroeder determined a value of dollar_figure and mr herber determined a value of dollar_figure respondent’s brief states the experts offered by the parties are in agreement as to the value of the royal bancshares derived from the discounted net_income method considering this concession and out of fairness to the estate we accept mr herber’s dollar_figure estimate of the value of rbi stock under the income approach market approaches a guideline analysis using a market approach both experts used a guideline analysis of publicly held banks and a transaction analysis of acquisitions of privately held banks using the guideline analysis the experts arrived at similar values for rbi stock mr schroeder determined a value of dollar_figure and mr herber determined a value of dollar_figure million respondent’s brief states the experts offered by the parties are in agreement on the value of royal bancshares suggested by publicly-traded guideline banks considering this concession and out of fairness to the estate we accept mr herber’s dollar_figure million estimate of the value of rbi stock using the guideline analysis b transaction analysis under the transaction analysis both experts identified a number of transactions involving the acquisition of privately held banks which the experts determined were similar to rbi’s banking company i the estate’s expert mr schroeder obtained information relating to five banks located in either illinois or missouri that were acquired within the 9-month period before date mr schroeder determined a range of multiples from the price-to-earnings price-to-equity and price-to-assets ratios of the acquired banks because royal banks appeared to be located in a more urban_area than the acquired banks and because of the potential of a significant pending loan impairment on a loan granted to jefferson printing mr schroeder selected multiples between the median and the low end of the range derived from the acquired banks mr schroeder determined a controlling_interest value of dollar_figure for rbi stock using the transaction analysis ii respondent’s expert mr herber obtained information concerning private banks that were similar to rbi focusing on privately held commercial banks whose sales were announced and completed between date and date and that had assets between dollar_figure and dollar_figure million he selected nine acquired banks that he determined to be comparable to rbi he determined average and median price- to-earnings price-to-equity and price-to-assets ratios of the acquired banks he compared these ratios to rbi’s ratios and selected appropriate multiples for rbi stock mr herber determined a value of dollar_figure for rbi stock using the transaction analysis in reaching his conclusions mr herber unlike mr schroeder did not consider the effects of any potential loan impairment iii effect of potential loan impairment in their disagreement over the experts’ transaction analyses the parties focus on whether the multiples that the experts selected should reflect the impairment risk of the loan to the havrillas and the pending bankruptcy of jefferson keeler although mr schroeder considered the potential of a loan impairment in his report it is unclear whether or to what extent it depressed his appraisal accordingly we are unpersuaded that mr herber’s failure to consider the potential loan impairment materially undermines his valuation recommendations the difference in the values that the estate’s expert gary l schroeder and respondent’s expert william c herber determined is not solely attributable to differing treatments of the potential loan impairment the experts also relied upon different guideline transactions which resulted in the use of different price earnings price equity and price assets ratios respondent however raises no issues as to the remaining aspects of mr schroeder’s transaction analysis including his selection of guideline transactions similarly the estate does not appear to dispute the remaining aspects of mr herber’s transaction analysis furthermore the record reflects that mr schroeder’s knowledge and understanding of the circumstances of the loan impairment were in key respects faulty iv conclusion on the basis of all the evidence and using our best judgment we find that the transaction analysis indicates a value of dollar_figure correlation of values we have found that the following values were indicated under the income and market approaches that the parties’ experts used approach analysis value derived income approach dollar_figure market approach guideline analysis big_number transaction analysis big_number like the experts in their respective reports we find that each of these derived values is entitled to equal weight accordingly we hold that the aggregate value of rbi stock is appropriately estimated at dollar_figure before taking into account any discounts e discounts the parties and their experts agree that minority interest and lack of marketability discounts are appropriate in valuing decedent’s stock interest in rbi they disagree about the amounts of those discounts minority interest discount mr schroeder determined a minority interest discount of percent mr herber determined a minority interest discount of percent both experts determined the minority interest discount by calculating the inverse of what they considered to be the appropriate control premium for rbi mr herber also considered other factors in determining his recommended minority interest discount a the estate’s expert mr schroeder recommended a minority interest discount of percent on the basis of information contained in mergerstat review regarding offers to acquire a majority interest or total ownership of public companies from this information with little explanation he calculated a control premium of percent and an implied minority interest discount of percent as a basis for this conclusion mr schroeder states simply that for royal banks of missouri we have selected a control premium of as being reasonable considering its size financial performance and geographic location b respondent’s expert mr herber relied on a study of minority interest discounts by christopher mercer in quantifying marketability discounts the mercer study indicated a median and average minority interest discount of percent mr herber conducted his own study of control premiums in transactions involving banking companies he concluded that these transactions indicated median and average minority interest discounts ranging from to percent which was equivalent to the mercer study results mr herber then considered certain additional factors which led him to reduce the minority interest discount to percent first mr herber claims that decedent’ sec_5 09-percent stock interest in rbi is a substantially larger interest than typical minority interests in publicly traded shares in banks and this would result in a minority interest discount which would tend to be somewhat lower than the indicated range of to percent for banking interests mr herber offers no independent evidence or empirical data to verify these conclusions and we are unpersuaded that he appropriately relied on this factor in his discount analysis second alluding to the lack of concentration of ownership in rbi stock mr herber claims that because decedent held a relatively large minority interest dollar_figure percent and because no single individual controlled the company with an interest greater than percent the divided interest of the larger shareholders would tend to keep the applicable minority interest discount also at the lower range of the market studies for minority interest discount we are not convinced that decedent’s interest in rbi stock represents a relatively large minority interest or that the holder of that size interest faces less of a challenge in controlling the company mr herber’s suggestion appears purely speculative in any event mr herber determined that this factor indicates a discount at the lower end of the indicated range not a discount below that range mr herber also notes that the banking industry is highly regulated and banking companies are transparent ie shareholders have access to a great deal of information regarding banking companies’ performance he claims that these factors support a lower minority interest discount mr herber however determined the indicated range of to percent from his own study of transactions involving banking companies because the indicated range presumably takes into account issues relating to the regulation of banking companies we are unpersuaded that these factors support a discount for decedent’s shares lower than the indicated range mr herber also claims that rbi is well capitalized has high returns on equity and assets maintains a very high rating in comparison to other banking companies and has offered a favorable dividend over the past years he claims that these factors reduce risk and enhance the attractiveness of a minority position in rbi relative to other banking companies and support a lower discount than the indicated range of to percent mr herber does not attempt to quantify the effect of these additional factors and he provides no independent evidence or verification regarding the comparison of rbi and other banking companies mr herber has not persuaded us that these factors support a lower minority interest discount c our analysis we are unsatisfied that either expert has adequately supported his recommended minority interest discount the estate does not argue for a minority interest discount greater than percent mr herber who started with a minority interest discount range of to percent before making various adjustments that we do not find well supported has not persuaded us that the minority interest discount should be less than percent accordingly we hold that a 17-percent minority interest discount is appropriate in valuing decedent’s shares of rbi stock lack of marketability discount mr schroeder determined a lack of marketability discount of percent and mr herber determined a lack of marketability discount of percent both experts used information from restricted_stock studiesdollar_figure mr schroeder also used information from initial_public_offering ipo studiesdollar_figure a the estate’s expert in determining an appropriate lack of marketability discount mr schroeder relied on restricted_stock studies that indicated discounts ranging from to percent and an overall average discount of percent he also relied on ipo studies that indicated an average lack of marketability discount ranging from to percent and an overall average discount of percent after considering certain factors influencing the marketability of rbi shares mr schroeder concluded that the factors supporting a higher discount would slightly outweigh the factors supporting a lower discount and he selected a discount of percent mr schroeder considered the potential impairment of the loan to the havrillas and the pending bankruptcy of restricted_stock studies compare private-market prices of unregistered restricted shares in public companies with the public-market prices of unrestricted but otherwise identical shares in the same corporations see 120_tc_358 historically restricted shares generally could not be resold in the public market for years see c f_r sec d in the required holding_period was shortened to year see fed reg date initial_public_offering ipo studies compare the private-market price of shares sold before a company goes public with the public-market price obtained in the ipo of the shares or shortly thereafter see mccord v commissioner supra pincite jefferson keeler as factors indicating a higher discount for the reasons discussed above including mr schroeder’s demonstrated incomplete knowledge of the potential loan impairment and the pending bankruptcy we find mr schroeder’s reliance on these factors unpersuasivedollar_figure mr schroeder also considered seven prior transactions involving shares of rbi stock as supporting a higher lack of marketability discount six of those transactions however occurred between and 1994--more than years before decedent’s death the remaining transaction occurred in date mr schroeder provided no specifics about the prior transactions and we have no basis for concluding they were at arm’s length see revrul_59_60 sec_4 g 1959_1_cb_237 furthermore mr schroeder does not indicate whether or to what extent the information from the prior transactions affected his overall conclusion of an appropriate lack of marketability discount instead he states equivocally that the existence of prior transactions is usually a factor that would decrease the lack of marketability discount however the prior transactions have been at prices which are moreover mr schroeder has failed to adequately explain why he considered this factor both in reaching an aggregate value for rbi stock and in calculating a lack of marketability discount we are unpersuaded that mr schroeder’s double counting of this factor would not lead to understating the value of decedent’s shares significantly below our appraisal value which is a factor that would increase the lack of marketability discount in sum we believe that mr schroeder’s consideration of the potential loan impairment the pending bankruptcy and the prior transactions cause his recommended lack of marketability discount to be overstated the remaining factors that he identified in his report support a lower lack of marketability discount b respondent’s expert in determining an appropriate lack of marketability discount mr herber relied on restricted_stock studies indicating median discounts ranging from to percent with median results from most of the studies trending in a narrow range from to percent mr herber placed considerable reliance on a management planning inc study which indicates that a discount ranged overall from to with a central tendency of overall mr herber suggested that rbi’s relatively smaller gross_income and earnings supported a greater discount but that the overriding relative stability of the companies earnings would contribute to a lower applicable lack of marketability discount he also indicated that the companies in the studies tended not to pay dividends thus in mr herber’s view the fact that rbi paid dividends would support a lower discount mr herber concluded that these factors together suggested a lower discount than the overall average found for all observations in the management planning study mr herber also considered certain factors identified in mandelbaum v commissioner tcmemo_1995_255 affd 91_f3d_124 3d cir for determining whether an appropriate discount for lack of marketability should be higher than the same as or lower than the indicated range of discountsdollar_figure in considering these factors mr herber observed that a lack of marketability discount applicable to decedent’s stock interest would have a strong central tendency relative to the overall studies taking into account rbi’s stability of earnings and its lower overall company risk as a bank however he recommended a 25-percent discount for lack of marketability which he characterizes as being at the slightly lower end of the indicated range of median discounts the factors identified in mandelbaum v commissioner tcmemo_1995_255 affd 91_f3d_124 3d cir include the value of the subject corporation’s privately traded securities vis-a-vis its publicly_traded_securities the corporation’s financial statements the corporation’s dividend-paying capacity its history of paying dividends and the amount of its prior dividends the nature of the corporation its history its position in the industry and its economic outlook the corporation’s management the degree of control transferred with the block of stock to be valued any restriction on the transferability of the corporation’s stock the length of time an investor must hold the subject stock to realize a sufficient profit the corporation’s redemption policy and the cost of effecting a public offering of the stock to be valued eg legal accounting and underwriting fees we are unpersuaded by mr herber’s conclusions in the first instance his recommended 25-percent marketability discount is very nearly at the rock bottom rather than at the slightly lower end of the to 45-percent range he says is indicated by the restricted_stock studies he analyzed furthermore we question his 24-percent lower range limitdollar_figure he himself states that most of the restricted_stock studies showed median marketability discounts in a range from to percent in his analysis of the management planning inc study mr herber compared rbi with the grouping of companies with gross incomes of dollar_figure to dollar_figure million the transactions involving those mr herber cites only two studies that he says indicate median discounts of percent or lower one of those studies is the securities and exchange commn institutional investor study sec study see securities and exchange commn institutional investor study report h_r doc vol 92d cong 1st sess on cross-examination however mr herber was unable to respond satisfactorily to the estate’s contention that the sec study describes various categories of sales transactions and that the category for nonreporting over-the-counter companies which are most comparable to smaller businesses like rbi shows a median_price discount of percent mr herber also relied on the hall polacek study which in his opinion indicated a mean discount of percent see hall polacek strategies for obtaining the largest valuation discounts estate_planning jan date the hall polacek study also indicates however that lack of marketability discounts appear to increase as the capitalization of the corporation decreases below dollar_figure million -40 compared to corporations with capitalizations in excess of dollar_figure million - id pincite because rbi’s capitalization was below dollar_figure million the hall polacek study would appear to indicate a higher discount to percent than the mean discount of percent upon which mr herber relied companies had an overall average lack of marketability discount of percent mr schroeder points out however that this particular group contained only two transactions involving companies with revenues comparable to rbi’s relatively small revenues dollar_figure for the months preceding decedent’s death dollar_figure according to mr schroeder those two transactions had an overall average lack of marketability discount of percent the management planning inc study indicates a clear correlation between the size of a company’s gross_income and the size of the lack of marketability discount see pratt et al valuing a business the analysis and appraisal of closely held companie sec_401 4th ed there was clear size effect in the management planning study with smaller companies tending to have larger discounts mr herber admits as much on page of his report in other words restricted shares of companies with higher gross_income tended to sell for lower discounts than the restricted shares of companies with lower gross_income because rbi had gross_income at the lower end of the range indicated in the management planning study we might expect the appropriate discount for rbi to be higher than the overall average lack of marketability discount of percent indicated for the relevant grouping of companies mr herber was unfamiliar with the two transactions that mr schroeder identified he could only testify that i can look that up i would like to see that in sum we are unpersuaded that mr herber has adequately supported his recommended 25-percent discount for lack of marketability c conclusion on the basis of all the evidence and using our best judgment we hold that a lack of marketability discount of percent is appropriate for decedent’s shares of rbi stock this discount is at the higher end of the narrow range that mr herber identified in his report and is consistent with the average discount that mr schroeder derived from the restricted_stock studiesdollar_figure conclusion we conclude that for date the fair_market_value of decedent’s shares of rbi stock is dollar_figure dollar_figure per share computed as follows total aggregate value of rbi stock dollar_figure percent of value of stock less 17-percent minority interest discount big_number dollar_figure dollar_figure less 35-percent discount for lack of marketability fmv of decedent’s shares fmv per share big_number shares dollar_figure big_number dollar_figure dollar_figure although we believe that the ipo studies mr schroeder used are entitled to some consideration we do not find that those studies justify a discount greater than percent we have considered all contentions the parties have raised to the extent not addressed herein those contentions are without merit or unnecessary to reach to reflect the foregoing decision will be entered under rule


t c memo united_states tax_court lloyd anthony rajcoomar petitioner v commissioner of internal revenue respondent docket no filed date lloyd anthony rajcoomar pro_se christopher d davis and gerald mackey for respondent memorandum findings_of_fact and opinion lauber judge the internal_revenue_service irs or respondent deter- mined a deficiency of dollar_figure with respect to petitioner’s federal_income_tax for petitioner has conceded all of the adjustments set forth in the notice of 1all statutory references are to the internal_revenue_code in effect for the continued deficiency the sole issue remaining for decision which petitioner raises by way of offset is whether he may exclude from gross_income under sec_104 as damages received on account of personal physical injuries or phy- sical sickness proceeds that he received under a settlement agreement with his former employer concluding as we do that the answer to this question is no we will sustain the deficiency findings_of_fact the parties filed a stipulation of facts with attached exhibits that is incor- porated by this reference petitioner resided in new york when he filed his peti- tion before petitioner was employed by mount saint mary college col- lege as a campus safety officer in date he was seriously injured in a car accident unrelated to his employment the trucking company whose vehicle rear- ended his car eventually paid him a dollar_figure million damage award which he re- ceived in that recovery is not at issue here petitioner had several surgeries because of the injuries he suffered in the car crash these injuries caused him to go on short-term disability leave from the continued tax_year in issue and all rule references are to the tax_court rules_of_practice and procedure we round all monetary amounts to the nearest dollar college in date in date he had ankle surgery also connected with the injuries he suffered in the car crash and he remained on short- term disability leave on date the college informed him that he was near the end of his maximum disability leave period and that if he did not return to work by april his employment would be terminated petitioner replied that if he returned to work he would be unable to per- form his usual patrol duties because he needed to use crutches or wear a protective boot he asked to be shifted to a more sedentary position the college declined to permit such a change insisting that he return to work without restrictions he did not return to work by the deadline and he was fired in response to his firing petitioner filed a complaint in date with the new york state division of human rights division and a similar complaint with the equal opportunity employment commission eeoc in the division complaint which he captioned description of discrimination he alleged that the college discriminated against me on the basis of my disability and that it had failed to offer him a reasonable accommodation in support of this claim he cited the college’s april letter which stated you will be expected to return to work without restrictions or face termination of employment petitioner alleged that caucasian employees had been allowed the type of reasonable accommodation that the college refused to make for him he did not allege that he had suffered any physical injury for which the college was respon- sible and he did not seek compensation_for any physical injury rather he urged the division to investigate and defend me against the discrimination that i faced based on my disabilities while under the college’s employ in date petitioner and the college settled this dispute by exe- cuting a conciliation agreement and general release this document recited that petitioner had filed complaints with the division and the eeoc alleging that the college had committed unlawful discriminatory practices relating to his em- ployment because of disability while the division had made no findings regard- ing these allegations the parties desire d to resolve all pending litigation by executing the settlement in exchange for a monetary payment petitioner agreed to withdraw with prejudice the complaints he had filed with the division and the eeoc he agreed to release any claim he might have had against the college for compensation in any form arising from the term and conditions of his employment or the termination of his employment he specifically released any claims arising under any federal or state law prohibiting employment discrimination based upon age race color sex religion handicap or disability the agreement does not recite any allegation of physical injury and petitioner did not release the college from any claim of physical injury the parties agreed that a form_w-2 will be issued for the settlement payment less legal withholdings the college issued petitioner a form_w-2 wage and tax statement report- ing the settlement amount as wages for he timely filed form_1040 u s individual_income_tax_return for reporting the proceeds as wages on line on date the irs sent him a timely notice_of_deficiency that ad- justed his social_security income reduced a claimed casualty_loss deduction and disallowed a claimed deduction for gambling_losses petitioner timely petitioned this court before trial he conceded all of the adjustments in the notice_of_deficiency by way of offset he contended that he had erred in treating the settlement payment as taxable_income and that it was exclud- able from gross_income in its entirety under sec_104 opinion the irs’ determinations in a notice_of_deficiency are generally presumed correct though the taxpayer can rebut this presumption rule a 290_us_111 in certain circumstances the burden_of_proof on factual issues may shift to respondent see sec_7491 rule a peti- tioner does not contend and the record does not demonstrate that this provision applies here sec_61 defines gross_income as all income from whatever source derived this definition has broad scope and exclusions from gross_income must be narrowly construed 515_us_323 348_us_426 309_us_331 proceeds from litigation settlements consti- tute gross_income unless the taxpayer proves that the proceeds fall within a specif- ic statutory exclusion schleier u s pincite save v commissioner tcmemo_2009_209 98_tcm_218 the exclusion_from_gross_income upon which petitioner relies appears in sec_104 it provides that gross_income does not include the amount of any damages other than punitive_damages received whether by suit or agree- ment on account of personal physical injuries or physical sickness con- gress intended this exclusion to cover all nonpunitive damages that flow from a physical injury or physical sickness see h_r conf rept no pincite 1996_3_cb_741 for this purpose emotional distress shall not be treated as a physical injury or physical sickness sec_104 penultimate sen- tence when damages are received under a settlement agreement the nature of the claim that was the actual basis for the settlement determines whether the damages are excludable under sec_104 504_us_229 the nature of the claim is typically determined by reference to the terms of the agreement see 349_f2d_610 10th cir aff’g tcmemo_1964_33 23_tcm_182 if the settlement agree- ment does not explicitly state which claims the payment was made to settle the intent of the payor is critical longoria v commissioner tcmemo_2009_162 98_tcm_11 see devine v commissioner tcmemo_2017_111 at george v commissioner tcmemo_2016_156 at the intent of the payor may be determined by taking into consideration all of the facts and circumstances including the amount_paid the circumstances lead- ing to the settlement and the allegations in the injured party’s complaint 507_f3d_857 5th cir aff’g tcmemo_2005_250 90_tcm_436 87_tc_236 aff’d 835_f2d_67 3d cir t he nature of underlying claims cannot be determined from a general release of claims that is broad and inclusive ahmed v com- missioner tcmemo_2011_295 102_tcm_607 citing connolly v commissioner tcmemo_2007_98 t c m cch aff’d 498_fedappx_919 11th cir petitioner’s cause of action was based exclusively on the new york human rights law and comparable provisions of federal_law that prohibit discrimination on the basis of disability nowhere in his complaint or in his 12-page rebuttal to the college’s response to that complaint did he allege any physical injury or phys- ical sickness for which the college should be liable the settlement agreement does not mention any physical injury or physical sickness that he suffered while on the job much less allocate any portion of the settlement to claims therefor by executing the settlement petitioner released the college from any claims arising under any federal or state law prohibiting employment discrimination based upon age race color sex religion handicap or disability as well as from any claim for compensation arising from the term and conditions of his employment or the termination of his employment there is no suggestion in this provision that petitioner had made or was releasing the defendants from any claims for damages on account of physical injury or physical sickness see molina v commissioner tcmemo_2013_226 106_tcm_371 the parties explicitly recited their agreement that a form_w-2 will be issued reflect- ing their understanding that the settlement proceeds replaced lost wages at trial petitioner acknowledged that he had to demonstrate some physical injuries apart from those suffered in the car crash in order to render the set- tlement payment damages received on account of personal physical injuries or physical sickness see sec_104 he testified vaguely that the college’s alleged discrimination had exacerbated his earlier injuries eg by causing him headaches but he pointed to no medical evidence to support this the only medi- cal bills in the record relate to his date ankle surgery and a followup visit six months after his employment was terminated by the college in sum there is no credible_evidence that petitioner suffered any on-the-job physical injury for which the college might be thought to have compensated him his complaint and the agreement that settled his complaint uniformly refer to claims of disability-based discrimination in alleged violation of federal and state civil rights laws we accordingly conclude that petitioner has not borne his bur- den of proving that any portion of the settlement proceeds was excludable from gross_income under sec_104 to reflect the foregoing decision will be entered for respondent


of f i c e of c h i ef c ou n sel department of the treasury i n t e r n al r e v e n u e s e r v i c e w ashington d c date cc ita b01 number info release date genin-119917-09 ---------------------- --------------------------------------- ------------------------------ uil dear ------------------- this letter responds to your inquiry dated date relating to capital_loss carryovers we are pleased to provide the following general information an individual taxpayer can claim capital losses only to the extent of capital_gains plus if losses exceed gains the lower_of dollar_figure dollar_figure for married individuals filing separate returns or the excess of losses over gains sec_1211 of the code individual taxpayers can carry capital losses that exceed the limitation forward to future tax years sec_1212 of the code the excess of net_short-term_capital_loss over net_long-term_capital_gain for the year is carried over as a short- term capital_loss in succeeding years sec_1212 of the code the excess of net_long-term_capital_loss over net_short-term_capital_gain for the year is carried over as net_long-term_capital_loss in succeeding years sec_1212 of the code the number of years that the excess losses can be carried forward is not specifically limited however the amount that can be carried forward is limited in determining the amount that can be carried forward to the next taxable_year the lesser_of the dollar_figure loss allowed under sec_1211 of the code or the adjusted_taxable_income is treated as a gain which will reduce the carryover sec_1212 of the code the loss allowed under sec_1211 is considered whether or not it is taken in the taxable_year rev_rul c b the phrase adjusted_taxable_income means the taxpayer’s taxable_income which may be expressed as a negative_amount if deductions exceed income increased by the dollar_figure loss allowed by sec_1211 and the deduction for personal exemptions sec_1212 of the code in a year that the taxpayer’s deductions exceed income by an amount greater than the sum of dollar_figure and the amount allowable as a deduction for personal exemptions the capital_loss_carryover will not be reduced genin-119917-09 i hope this information is helpful please call -------------------- at --------------------- if you have any questions sincerely john p moriarty chief branch income_tax accounting


internal_revenue_service number release date cc dom fs it a uilc date internal_revenue_service national_office field_service_advice memorandum for from deborah a butler assistant chief_counsel cc dom fs subject proper royalty expense accrual this field_service_advice responds to your memorandum dated date field_service_advice is not binding on examination or appeals and is not a final case determination this document is not to be cited as precedent legend a issue whether a’s royalty expense deduction for royalties paid to authors under book contracts should be computed on the basis of sales less actual returns and a reasonable reserve for returns conclusion pursuant to the all_events_test of sec_461 a’s royalty expense deduction for royalties paid to authors under book contracts must be computed on the basis of sales less actual returns and a reasonable reserve for returns facts a is an accrual basis taxpayer and its subsidiaries entered into royalty contracts with various authors each contract contains the following language regarding the amount of royalty payable to the respective author the publisher shall pay to the author a royalty on the retail price of every copy sold by the publisher less actual returns and a reasonable reserve for returns typically authors are paid semi-annually and subsequent adjustments are made to the extent the estimated reserve for returns differs from actual experience for financial_accounting purposes a’s accounting conforms to the terms of each contract regarding royalties that is a expenses royalties on the basis of sales less actual returns and a reasonable reserve for returns for tax purposes a accrues royalty expenses on the basis of books sold less actual returns which of course results in a higher expense figure than the method used for financial reporting using a’s schedule m-1 all royalties expensed on sales of books expected to be returned pursuant to reasonable reserves have been disallowed in the statutory notice law under sec_461 deductions are to be taken for the taxable_year which is the proper taxable_year under the method_of_accounting used in computing taxable_income sec_461 also requires that a taxpayer’s method_of_accounting clearly reflect income sec_1_461-1 provides that under an accrual_method of accounting a liability is taken into account in the taxable_year in which all the events have occurred that establish the fact of the liability the amount of the liability can be determined with reasonable accuracy and economic_performance has occurred with respect to the liability sec_1_461-1 provides that if a liability if properly taken into account in an amount based on a computation made with reasonable accuracy and the exact amount of the liability is subsequently determined in a later taxable_year the difference if any between such amounts shall be taken into account for the later taxable_year analysis the contract defines the royalty expense liability the contract at issue provides that a must pay a royalty on the retail price less actual returns and a reasonable reserve for returns a argues that the return of sold books is a condition_subsequent which should have no effect on the computation of a royalty deduction we disagree with a’s argument but more importantly the argument is irrelevant the reserve for estimated returns is not a condition_subsequent but rather is an aspect of the fact of liability of the all_events_test that is the reserve according to the contract is part of the equation defining the liability sales minus returns and estimated returns the fundamental question involving the fact of liability is always whether all operative facts have occurred that establish the liability such facts are those that make it clear that a taxpayer has incurred an obligation to take some action and the action though not yet taken is nonetheless fixed if the existence of the liability is subject_to a condition_precedent the obligation is not fixed until the condition has occurred or is satisfied a classic example may be found in 481_us_239 in that case the issue was whether an accrual basis taxpayer providing medical benefits to its employees may deduct at the close of the taxable_year an estimate of its obligation to pay for medical_care obtained by employees or their qualified dependents during the final quarter of the year claims for which have not been reported to the employer taxpayer’s position was that the liability for medical_benefit payments accrued at the time the medical services were received whether or not a claim for reimbursement had been filed or approved thus taxpayer sought to deduct a reserve for estimates of liabilities which had been incurred but not reported the supreme court stated that the case involved a mere estimate of liability based on events that had not occurred before the close of the taxable_year and the all_events_test was not met the missing event in order to fix the liability condition_precedent was the filing of properly documented claims forms u s pincite to receive reimbursement for covered medical services employees had to submit claim forms to employee_benefits personnel similarly in this case it is unequivocal that the royalty expense owed is less a reasonable reserve for returns the specific contract provision defines the royalty owed as the book price less actual returns and a reasonable reserve for returns the reserve is a fundamental part of the liability on the other hand a condition_subsequent is a condition which may later arise and eliminate a previously fixed liability and such a possibility does not preclude accrual and deduction of the total liability for example in 476_us_593 taxpayer sought to deduct at the end of each fiscal_year an accrued liability for progressive jackpot amounts shown on the payoff indicators of the jackpot machines although pursuant to state law and regulation registered jackpot amounts were recorded daily and could not be turned back to a lesser amount unless paid to a winning player or unless the change in reading was necessitated by a machine malfunction the commissioner’s position was that the obligation to pay a jackpot was contingent until a winning handle pull by a patron absent a winning handle pull there was no one who could make a claim for payment and thus no accrued deductible expense existed the court held that the effect of the nevada regulation was to fix taxpayer’s liability the event creating liability was the last play of each progressive slot machine before the end of the fiscal_year since that play fixed the jackpot amount irrevocably the court pointed out that the identity of the eventual winner was irrelevant to the existence of the basic liability furthermore that an extremely remote and speculative possibility existed that the jackpot might never be won did not change the fact that as a matter of state law taxpayer had a fixed liability there is always a possibility of course that a casino may go out of business or surrender or lose its license or go into backruptcy with the result that the amounts shown on the jackpot indicators would never be won by playing patrons but this potential nonpayment of an incurred liability exists for every business that uses an accrual_method and it does not prevent accrual see eg 528_f2d_735 9th cir u s pincite the various possibilities which would result in nonpayment of the liability were conditions subsequent which did not defeat accrual of the jackpot liability this issue does not involve a condition_subsequent rather the event that a refers to as a condition_subsequent is part of the definition of the liability we concur with your analysis that the explicit contract language precludes accruing royalties on books reasonably expected to be returned we do wish to point out though that the contract clause at issue provides a method for a to more accurately estimate its royalty liabilities and to avoid requiring authors to refund in a subsequent period a portion of royalties previously received for books which end up being returned this method of calculating royalty expenses does not violate the economic_performance rules of sec_461 that is economic_performance for a royalty liability of publishers to authors is based on the service of providing books and their sale the sale of books creates the liability for royalties and in this contract the parties agreed that the royalty would be reduced by estimated returns of books purchased in the current period in contrast if the contract calculated royalties based on an estimate of future sales of books that would constitute advance_royalties and would violate economic_performance resulting in a premature deduction in general it is not necessary for a taxpayer’s related items of income and expense to be precisely matched matching is a desired goal of financial_accounting rather than an overriding rule_of tax_accounting see hughes properties supra u s pincite for example in koebig koebig v commissioner 23_tcm_170 taxpayer accrued income only those amounts which were billed during the year but it deducted expenses actually incurred even when the expenses were incurred after the last billing date the tax_court determined that income was clearly reflected and it rejected any requirement of precise matching similarly in fidelity assocs inc v commissioner tcmemo_1992_142 the tax_court allowed the deduction of selling commissions in the year in which the all_events_test was satisfied notwithstanding the commissioner’s assertion that the allowance of such deductions created a mismatch between related items of income and expense and thus caused the taxpayer’s method_of_accounting to fail to clearly reflect income in summary matching is a dominant principle of financial_accounting and although the matching principle may sometimes be used as a sword by the commissioner related items of income and expense need not be recorded in the same taxable_year in order for income to be clearly reflected the matching principle is sometimes relevant in testing whether a particular method_of_accounting clearly reflects income for tax purposes but matching alone neither condones nor prevents finding a fixed liability or permitting a deduction in this case the contract defines the royalty expense deduction the alleged mismatch is required by tax law income may not be reduced by estimated returns because the returns are not deductible pursuant to sec_461 and the royalty expense by contract must be reduced by estimated returns case development hazards and other considerations deborah a butler by


internal_revenue_service index number number release date cc dom p si 6-plr-119225-98 date legend taxpayer location district date company location state a b c d e f g h i k dear plr-119225-98 this letter responds to a request for a private_letter_ruling filed on behalf of taxpayer dated date and subsequent submissions you requested a ruling that a certain neighborhood electric vehicle nev acquired by taxpayer constitutes a qualified_electric_vehicle for purposes of sec_30 of the internal_revenue_code taxpayer is an individual residing in location taxpayer utilizes the cash_method_of_accounting and reports income on the basis of a calendar_year accounting_period district_director has audit jurisdiction over the return filed by taxpayer in date taxpayer acquired a nev from a retail dealer taxpayer’s nev is manufactured by company which is headquartered in location company’s advertising literature which was submitted to us for consideration as part of taxpayer’s submissions portrays the purpose of the nev as a low speed zero-emission alternative to the traditional gasoline-powered passenger_automobile for meeting community driving needs for short distance road trips and describes the nev as designed to be used in residential areas with low-density traffic and low speed zones taxpayer’s nev is used for most of taxpayer’s trips in location taxpayer utilizes the vehicle for a variety of personal uses including dining shopping and attending local events in location the nev is driven on public roads ie city state and federal roads the nev is registered in state and has a state license plate taxpayer has insurance on it as required by state law in response to a question of whether taxpayer is aware of any operating restriction on what taxpayer can do with its nev taxpayer represented that in the location area where taxpayer operates the for purposes of this ruling we generically refer to taxpayer’s vehicle as a neighborhood electric vehicle nev the term nev is applied to certain vehicles recognized by the department of transportation national highway traffic safety administration nhtsa as being included in a vehicle group called low-speed vehicle lsv nhtsa defines the term lsv to mean any 4-wheeled motor_vehicle whose top speed is greater than miles per hour mph but not greater than mph the term nev is defined by nhtsa to mean any 4-wheeled electric vehicle whose top speed is not greater than mph nhtsa’s definition describes some nevs as looking more like a passenger car than a typical golf cart see the discussion accompanying federal motor_vehicle safety standards final rule fed reg date at big_number the final rule establishes federal motor_vehicle safety standard fmvss no for lsvs the new fmvss requires lsvs to be equipped with headlamps stop lamps turn signal lamps tail lamps reflex reflectors parking brakes windshields rearview mirrors seat belts and vehicle identification numbers vins plr-119225-98 nev that the maximum speed limit i sec_35 mph taxpayer’s nev is a 4-wheeled electric vehicle which has been designed to attain the maximum speed of mph taxpayer’s nev has an acceleration capability of to mph in six seconds for quick acceleration on a roadway and a range of about miles taxpayer’s nev is powered by a c-volt d kilowatt direct current dc motor drawing electrical current from e 12-volt lead acid batteries taxpayer’s nev has one auxiliary battery for electrical accessories the nev’s approximate dimensions are f feet g inches in length d feet h inches in width g feet i inches in height and k pounds in weight the body configuration of taxpayer’s nev is that of a rust-free composite unibody construction including side portions and a roof portion with front and rear steel subframe the nev also possesses four-wheel independent suspension and rack and pinion steering based on taxpayer’s representations and submissions the following is a description of certain standard features available for company’s nev models that are found in taxpayer’s nev 17-digit society of automotive engineers sae nhtsa- approved vehicle identification_number vin two adjustable bucket seats each with a three point retractable harness seat belt laminated auto safety-glass windshield that is sealed into the vehicle for safety rollover protection from nev’s roof which will support weight of nev for safety laminated fiberglass impact- absorbing bumpers for vehicle protection a dual speed controller and selector switch which allows the operator the option to select mph or mph as the maximum speed for the vehicle with mph setting for operation on a golf course and since taxpayer made the representation relating to any operating restriction on taxpayer’s nev state has recently enacted legislation that amends sections of and adds sections to the state vehicle code relating to low-speed vehicles taxpayer’s nev meets the state statutory definition of a low-speed vehicle see state vehicle code section a the new law specifically governs the operation of low-speed vehicles with some exceptions the law prohibits the operator of a low-speed vehicle from operating the vehicle on any roadway with a speed limit in excess of mph see state vehicle code section b in addition local authorities by ordinance or resolution may restrict or prohibit the use of low-speed vehicles taxpayer represents that state requires the 17-digit vin for entry into the department of motor_vehicle computers for registration of motor vehicles and that no other vehicle other than motor vehicles are allowed to use approved 17-digit vin plr-119225-98 mph setting for road travel a speed control sensor for preventing the nev from exceeding the selected maximum speed while going down hills street tires inside rearview mirror day-night adjustable side and rear red reflectors three separate braking systems consisting of a front wheel hydraulic drum brakes b hand cable-activated parking brakes and c rear wheel regeneration brakes headlamps and tail lamps stop lamps high mounted center stop lamp parking lamps self-correcting turn signals horn driver-side outside rearview mirror and back-up lamps taxpayer’s representations describe the standard features of a typical golf cart a typical golf cart has a maximum speed of mph taxpayer represents that a typical golf cart is designed and manufactured for golf use only but is sometimes used on streets and that the typical golf cart has no rollover protection or seat belts for the riders according to taxpayer’s representations a typical golf cart has only turf tires which are not department of transportation approved a serial number assigned by its manufacturer as opposed to the vin which is assigned to taxpayer’s nev a one brake system with lock on pedal and a single bench not adjustable for riders taxpayer represents that a typical golf cart does not generally have headlamps and tail lamps stop lights and self-correcting turn signals unless installed by a dealer further taxpayer represents that a typical golf cart may also have a nylon screen or plastic covering as opposed to the windshield that taxpayer’s nev has a sun screen canopy-type roof held up by lightweight supports and partial rigid bumpers for vehicle protection even though taxpayer’s nev with its dual speed controller and selector switch has the capability to be used for playing golf taxpayer represented that taxpayer’s nev has not been modified so that it may be used for playing golf such a modification would include the use of turf tires that would enable the nev to be operated on a golf course law and analysi sec_4 according to taxpayer’s representations all of company’s nev models are manufactured for street use turf tires in lieu of street tires can be found on some of company’s nev models so as to enable those vehicles to also operate on a golf course both types of tires are approved by the department of transportation for road use for operator safety thus those turf tires which are mounted on company’s nev models have the dual use capability of both on and off road use taxpayer also represented that one manufacturer’s golf cart model will reach a maximum speed of mph but that in accordance with industry guidelines golf carts are strictly prohibited from traveling faster than mph on a golf course plr-119225-98 sec_30 and sec_179a of the code which were added to the internal_revenue_code by section of the energy policy act of apply to property placed_in_service after date sec_30 provides a credit for qualified electric vehicles and sec_179a includes a deduction for qualified_clean-fuel_vehicle_property sec_179a provides that the term qualified_clean-fuel_vehicle_property under sec_179a does not include any qualified electrical vehicle as defined in sec_30 the legislative_history underlying sec_30 and sec_179a provides that the goal of these provisions is the reduction of atmospheric pollution caused by gasoline-powered motor vehicles and the reduction of the dependence of the united_states on imported petroleum and imported petroleum products see h_r rep no 102d cong 2d sess pt pincite and s prt no 102d cong 2d sess pincite sec_30 of the code allows a credit against tax of an amount equal to of the cost of any qualified_electric_vehicle placed_in_service by a taxpayer during the taxable_year sec_30 of the code limits the amount of credit allowed under sec_30 to dollar_figure and establishes certain other limitations on the availability of the credit which are not applicable to this case sec_30 of the code defines the term qualified_electric_vehicle as meaning any motor_vehicle a which is powered primarily by an electric motor drawing current from rechargeable batteries fuel cells or other portable sources of electrical current b the original_use of which commences with the taxpayer and c which is acquired for use by the taxpayer and not for resale sec_30 of the code provides that for purposes of sec_30 the term motor_vehicle means any vehicle which is manufactured primarily for use on public streets roads and highways not including a vehicle operated exclusively on a rail or rails and which has at least wheels sec_1_30-1 of the income_tax the conference agreement followed the house bill with some modifications eg the inclusion of an income_tax_credit equal to percent of the cost of a qualified_electric_vehicle note that the senate amendment unlike the house bill included a provision for an income_tax_credit for a qualified_electric_vehicle identical language appears in sec_179a of the code in defining the term motor_vehicle for purposes of sec_179a the department of transportation plr-119225-98 regulations defines a qualified_electric_vehicle as a motor_vehicle that meets the requirements of sec_30 based on taxpayer’s representations notwithstanding the presence of the issue of whether taxpayer’s nev meets the definition of the term motor_vehicle taxpayer’s nev meets the requirements of sec_30 a - c of the code thus the question to be addressed in this ruling in determining whether taxpayer’s nev is a qualified_electric_vehicle for purposes of sec_30 is whether the nev is a motor_vehicle for purposes of sec_30 as noted in sec_30 of the code the term motor_vehicle means any vehicle which is manufactured primarily for use on public streets roads and highways and which has at least wheels clearly off-road vehicles that is any vehicles that are manufactured primarily for off-road use would not meet the definition of motor_vehicle because they are not manufactured primarily for use on public streets roads and highways the capability of incidental off-road use by a vehicle is not a basis for excluding a vehicle from the category of motor_vehicle for purposes of sec_30 further the capability of incidental road use by a vehicle would not preclude such a vehicle from the category of off-road vehicles off-road vehicles would include such vehicles as golf carts manufactured primarily for use on the golf course which would be capable of incidental road use for traveling to and from a golf course race cars that due to their construction are dedicated for use on racetracks and are never driven on any public roads ride-on lawn mowers and farm tractors taxpayer’s nev is a four-wheeled vehicle taxpayer’s nev has a body configuration more akin to that of a traditional passenger_automobile than to the body configuration of a typical golf cart taxpayer’s nev’s features include four-wheel has extensive regulatory authority over motor vehicles its statutory definition of motor_vehicle is similar in language to the definition of motor_vehicle found in sec_30 see u s c a the phrase which is manufactured primarily for use on public streets roads and highways appears throughout the code for example in the following current income_tax and excise_tax provisions enacted prior to sec_30 and sec_179a sec_280f which relates to the limitation on depreciation for luxury automobiles sec_4001 which relates to the excise_tax on luxury automobiles and sec_4064 which relates to the gas guzzler excise_tax for purposes of the substantiation requirement as it pertains for example to listed_property under sec_280f and sec_1 280-6t b of the income_tax regulations sec_1_274-5t notes that the terms automobile and vehicle by cross-reference incorporate the phrase which is manufactured primarily for use on public streets roads and highways into their definition plr-119225-98 independent suspension rack and pinion steering a windshield and two adjustable bucket seats with three point harness seat belts these features along with other previously discussed features found in taxpayer’s nev are automotive-type design and safety features found in a traditional passenger_automobile as previously noted company’s literature portrays the nev as an alternative to the traditional gasoline- powered automobile for short distance road trips and describes the nev as being designed to be used in residential areas with low-density traffic and low speed zones thus the similarities between taxpayer’s nev’s body configuration and a traditional passenger_automobile body the presence of automotive-type design and safety features throughout taxpayer’s nev and company’s advertising literature which describes the nev’s purpose and use for which it was designed when considered together lead us to conclude that taxpayer’s nev cannot be characterized as a typical golf cart and that taxpayer’s nev was manufactured primarily for use on roadways notwithstanding its capability of incidental_use on a golf course based solely on taxpayer’s representations and submissions and the relevant law and regulations set forth above we conclude that the neighborhood electric vehicle purchased by taxpayer does constitute a qualified_electric_vehicle for purposes of sec_30 of the code no opinion is expressed or implied as to the federal tax consequences of this transaction under any provision not specifically addressed herein this ruling is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this ruling is being sent to your authorized representative sincerely yours charles b ramsey chief branch office of assistant chief_counsel passthroughs and special industries enclosure copy