t c memo united_states tax_court estate of paul mitchell deceased patrick t fujieki executor petitioner v commissioner of internal revenue respondent docket no filed date david w k wong b john williams jr miriam louise fisher karen l hirsh and melvin e lefkowitz for petitioner henry e o'neill alan summers and paul g robeck for respondent memorandum findings_of_fact and opinion jacobs judge respondent determined a dollar_figure federal estate_tax deficiency an dollar_figure penalty under sec_6662 and a dollar_figure penalty under sec_6662 after concessions the issues remaining for decision are the moment-of-death value of big_number shares of john paul mitchell systems common_stock and whether petitioner is liable for the sec_6662 penalty all section references are to the internal_revenue_code as amended and in effect at decedent's date of death and all rule references are to the tax_court rules_of_practice and procedure findings_of_fact some of the facts have been stipulated and are found accordingly the stipulations of facts stipulations of settled issues and attached exhibits are incorporated herein by this reference a background paul mitchell mr mitchell or decedent was a resident of hawaii when he died on date patrick t fujieki is the executor of the estate of paul mitchell mr fujieki resided in honolulu hawaii at the time the petition in this case was filed among the assets included in mr mitchell's taxable_estate were big_number shares of john paul mitchell systems common_stock held by the paul mitchell trust the trust a revocable_trust on date petitioner filed a motion to shift the burden of persuasion by order dated date we denied petitioner's motion on brief petitioner again raised this issue we reaffirm our conclusions as stated in our date order but even assuming arguendo we would have granted petitioner's motion our valuation of the stock at issue would not be altered established by mr mitchell it is the value of these shares at the moment of mr mitchell's death that we must determine b paul mitchell paul mitchell was born cyril thomson mitchell in scotland on date his mother was a hairdresser at the age of he enrolled in beauty school and after a 5-year apprenticeship he became a qualified hairdresser thereafter mr mitchell worked in four salons and won several competitive hair contests in england in the early 1960's mr mitchell pursued fashion hair styling working with vidal sassoon and became one of london's best known hair stylists when mr sassoon opened his first u s salon he chose mr mitchell to train the staff while employed with vidal sassoon mr mitchell brought to the united_states the blow dry look in mr mitchell left mr sassoon and became director of bendel's beauty floor at henri bendel's in new york city while he was at bendel's his work was featured on the covers and pages of major fashion magazines he became known as the haircutter's haircutter in mr mitchell and other investors opened crimpers salon a successful high-fashion cutting salon in new york city we believe the moment-of-death valuation is appropriate in this case due to the importance of mr mitchell to and the impact of his death on john paul mitchell systems other crimpers salons subsequently opened in boston chicago dallas and philadelphia in mr mitchell sold his share in crimpers and spent a year away from the hair styling industry in mr mitchell returned to the hair styling industry opening the superhair salon in new york city a high-fashion salon and cutting school several years later he moved to hawaii his reputation as a master stylist continued and he was invited to perform as a guest platform artist at professional beauty shows throughout the united_states while demonstrating his techniques at professional beauty shows mr mitchell developed the sculpted look of hair styling this new look started with an excellent cut a product was introduced by mr mitchell that gave the cut greater versatility permitting the setting of hair without rollers or a curling iron mr mitchell's product called liquid styling tool was a gel- like liquid that set hair in the shape into which it was combed mr mitchell's product line was marketed in orange and white bottles and sold only at the hair shows where mr mitchell demonstrated his hair styling techniques mr mitchell's initial efforts to market his product line proved unsuccessful c the hair care industry the hair care products industry is segmented by distribution channels mass market products are sold directly to consumers through major retail outlets such as supermarkets drugstores and discount stores products sold through this distribution channel are heavily dependent upon extensive and expensive mass-media advertising to generate an awareness of the product and consumer demands over-the-counter products are sold through beauty supply stores which sell products that are not salon-only products and are generally not available in the mass market salon-only or professional-only products such as the paul mitchell line described hereinafter are available to the public only through professional hair salons throughout the 1980's the greatest growth in sales of hair care products was in the salon- only market salon-only products do not require a high level of advertising expenditures but they are heavily dependent upon the recommendation of a brand product or system by the hair stylist to the consumer in the salon because of the hair stylist's ability to influence the consumer companies that sell their products through salons emphasize marketing to hair stylists and salon owners furthermore these companies place importance on educating hair stylists and salon owners about their products in order to ensure correct recommendations to consumers which in turn increase the possibility of repeat sales the professional hair care industry is trendy and fashion oriented and sells the public on changes in looks hair stylists learn the latest trends and fashions through trade magazines such as modern salon salon today american salon and salon news growth in sales for a professional hair care company depends upon maintaining a forward edge in fashion and trends there are three categories of liquid hair products hair care shampoos conditioners and rinses styling products hair sprays fixatives mousses sculpture lotions etc and chemical reactive products hair color perms and bleaches professional-only hair care products are marketed on an implied promise to the hair stylists that such products will not be mass marketed or sold through drugstores supermarkets or discount stores professional hair stylists will not sell or use mass- marketed products in their salons mass marketing a product closes the salon or professional market to that product education is an important aspect of marketing hair care products to hair stylists this education includes hair shows product knowledge classes and styling classes featuring new ways to cut hair and new products to achieve the latest looks during hair shows platform artists demonstrate new styles and techniques for instance redken was a professional hair care company that dominated the salon-only market through the 1970's in the early 1980's mr mitchell began to convince hair stylists that the new trend in styling was the sculpted look redken's sales growth flattened when it did not keep abreast of this trend during the 1960's and 1970's companies such as wella balsam aqua net vidal sassoon and jhirmack broke the implied promise and changed their distribution from salon-only to the mass market the products of each of these companies were closed out of the professional market shortly after being mass marketed using the promoted products hair shows occur at the international national regional and local levels hair care industry market revenues grew to dollar_figure billion in during that year shampoo sales rose by percent conditioner sales rose by percent and styling products sales rose by percent hair sprays and hair styling products were growing at double-digit rates d the creation of john paul mitchell systems john paul jones dejoria grew up in los angeles following his graduation from high school he enlisted in the navy upon his discharge therefrom he had a variety of sales jobs selling products such as encyclopedias photocopiers insurance and magazines in the early 1970's mr dejoria began working in the beauty products industry for redken he held several positions including field sales representative district manager texas and national chain and salon manager while employed at redken mr dejoria gained extensive experience in the sale marketing promotion and distribution of beauty products he possessed exceptional organizational managerial and marketing skills messrs mitchell and dejoria first met in the early 1970's they eventually developed a close friendship in they joined forces to market mr mitchell's hair care products particularly the sculpting lotion through professional-only hair salons mr dejoria believed he could successfully market the line initially messrs mitchell and dejoria were unable to find anyone willing to provide financial assistance thus they pooled their resources of dollar_figure to purchase an answering machine bottles and caps and hire an artist to design a logo for their labels mr dejoria persuaded a cosmetics laboratory to manufacture the first batch of products on credit instead of the orange and white bottles mr mitchell had previously used these products were packaged in white bottles with paul mitchell's name displayed in black lettering down the side at all relevant times paul mitchell products were sold to the public only through professional hair salons structure and ownership on date messrs mitchell and dejoria formed paul mitchell systems inc on date the corporation changed its name to john paul mitchell systems jpms messrs mitchell and dejoria granted jpms all proprietary and distribution rights to the hair and skin products that mr mitchell developed or had developed under his direction including the products' trademark service_mark or other intellectual_property rights jpms' articles of incorporation authorized the issuance of big_number shares of common_stock between date and date the date of mr mitchell's death jpms had big_number shares issued and outstanding article vii of jpms' bylaws provided that any transfer of jpms stock was subject_to a right_of_first_refusal exercisable first by the corporation then by each nontransferring shareholder initially mr dejoria owned big_number shares of jpms common_stock and paul mitchell associates ltd pma owned big_number shares mr mitchell owned all of pma on date pma assigned its jpms shares to mr mitchell on date mr mitchell assigned his jpms shares to the trust on date mr mitchell acting as trustee of the trust assigned shares of jpms common_stock to jeanne braa his long-time stage partner in hair shows and shares of jpms common_stock to angus mitchell his son mr dejoria and jpms executed written waivers of the right_of_first_refusal with respect to all of these transfers as of date the common_stock of jpms was owned as follows number of shares percent mr dejoria the trust ms braa angus mitchell dollar_figure dollar_figure dollar_figure dollar_figure total big_number dollar_figure big_number big_number jpms' bylaws provided for a board_of directors the board consisting of four directors however from until date mr mitchell mr dejoria and peter langenberg were the only board members on date mr langenberg resigned and ms braa was elected to replace him from until date mr mitchell served as president of jpms mr dejoria served as chairman of the board chief_executive_officer chief financial officer and secretary as of date the stock in jpms had not been registered under any securities law moreover neither mr dejoria nor mr mitchell had ever contemplated such a registration or a public offering of jpms' common_stock products jpms debuted its products at the west coast beauty supply spring style show in with mr mitchell demonstrating the product line jpms sold the entire first batch of its products at the show generating revenue of approximately dollar_figure that same year jpms began selling paul mitchell products through distributors at the time the product line consisted of shampoo one shampoo two the conditioner and hair sculpting lotion the new hair sculpting lotion and sculpted look were well received in the market messrs mitchell and dejoria began promoting jpms products as a system of products to be used in conjunction with each other to achieve the look at the time of mr mitchell's death jpms sold the following products which were formulated by independent chemists shampoo products shampoo one shampoo two awapuhi shampoo tea tree special shampoo hair conditioning products the conditioner super-charged conditioner hair repair treatment hair setting and styling products hair sculpting lotion the spray fast drying sculpting spray freeze and shine super spray super clean gel sculpting foam super clean spray permanent wave products the solution special perm neutralizer awapuhi conditioning box perm marketing and distribution jpms' marketing effort primarily targeted and the distribution network was primarily oriented toward hair stylists and salon owners who sold hair care products to their customers rather than direct marketing to the consumers themselves mr mitchell's popularity and reputation with hair stylists were used to introduce jpms' products and the hair shows were used to increase the visibility of jpms and its products jpms' marketing strategy included the use of distributors to promote its products as of date jpms had distributors in the united_states and distributors in other countries nearly all of the distributors had an exclusive geographic territory the distribution network was generally composed of friends of messrs mitchell and dejoria who believed that mr mitchell's reputation as an avant-garde hair stylist and mr dejoria's business background would sell the jpms products as of date jpms had no written agreements with its u s distributors mr dejoria's organizational and marketing skills combined with mr mitchell's artistic creativity and expertise allowed jpms to create a successful and effective product line the jpms products were marketed only to salons and emphasized education as a selling technique e mr mitchell's role in jpms in mr mitchell promised hair stylists that his products marketed through jpms then paul mitchell systems inc would be sold only through professional salons mr mitchell's promise carried credibility due to his stature in the professional beauty industry the promise to remain professional-only was important to the successful marketing of the paul mitchell products mr mitchell was the heart of jpms' connection to hair stylists who were the foundation for jpms' marketing strategy of promoting and selling products that mr mitchell developed mr mitchell was jpms' creative trendsetter and his hair sculpting technique revolutionized hair styling in order to further promote its products jpms developed the associates program to train hair stylists in the paul mitchell system this program became an integral part of jpms' marketing effort jpms associates underwent special training in both hair styling and jpms products once trained the associates went to salons to teach the proper techniques to promote the products by date jpms had associates the associates were paid_by the distributors and they were involved with jpms because they sought professional advancement and financial rewards the associates program played a large part in jpms' success mr mitchell was a popular draw at industry hair shows performing on a regular basis from until date during the show season mr mitchell along with his stage partner jeanne braa would travel to as many as four cities a week for approximately months at a time this included shows for each distributor as well as demonstrations through in-salon classes mr mitchell traveled with distributors' salesmen who assisted in the introduction and sale of jpms products mr mitchell was the focal point of jpms' advertising campaign in jpms came up with the creative concept campaign putting mr mitchell literally behind the product using photographs of him taken by irving penn a noted fashion photographer this campaign which ran through was bifurcated into a consumer version for vogue mademoiselle and glamour magazines with the caption can you say 'paul mitchell does my hair ' as well as a trade version for modern salon and american salon magazines with the caption paul mitchell works for me a similar advertising campaign also featured mr mitchell f mr mitchell's illness and death mr mitchell's health had been good until approximately date when he returned from a series of hair shows in japan and began to experience loss of appetite weight loss and the onset of jaundice on date he was admitted to cedars sinai hospital in los angeles and was diagnosed as having pancreatic cancer four days later his pancreas spleen gall bladder and a portion of his stomach were surgically removed he remained in the hospital until date undergoing additional surgeries and medical procedures including radiation therapy upon release he returned to his home in hawaii where he had full-time private duty nursing throughout this period mr mitchell continued his roles as the jpms creative force company spokesman and executive following his hospitalization mr mitchell was required to take insulin to control diabetes in october and date he consulted with and received treatment from doctors in hawaii los angeles and new york although he continued experiencing bouts of nausea his medical_condition improved and he gained weight mr mitchell began receiving acupuncture treatments keeping his medication intake at a minimum although follow-up tests revealed no evidence of metastasis a date blood test raised a possibility of a recurrence of cancer but was inconclusive mr mitchell's medical_condition prevented him from working or performing at hair shows until approximately date when he performed at a hair styling show in new york city and participated in the jpms distributors meeting in vail colorado during this time he also continued his role in product development meeting with an independent chemist regarding his ideas for future products in date tests revealed a recurrence of cancer physicians in hawaii encouraged mr mitchell to begin chemotherapy but he refused mr dejoria avoided disclosing the severity of mr mitchell's illness to quell any fears about the uncertainty of jpms' future without mr mitchell upon mr dejoria's instruction mr mitchell's illness was portrayed as bacterial food poisoning rumors circulated that mr mitchell was suffering from aids or cancer to a degree the advertising campaign which was shot in november or date still focused on mr mitchell however mr dejoria and jpms began shifting emphasis away from mr mitchell as an individual and towards the products themselves in fact one campaign attempted to focus on mr dejoria featuring him and his daughter in an advertising campaign for baby don't cry shampoo after performing at the west coast beauty show in san francisco in date mr mitchell returned to honolulu where he visited physicians later that month he traveled to mexico to begin receiving laetrile treatments he remained in mexico until his return to cedars sinai hospital where he died on date at the age of the cause of death was listed as liver failure due to liver and pancreatic cancer as of the time of his death the public at large was generally unaware of who paul mitchell was or that he had died following mr mitchell's death the hair care industry widely perceived that jpms had lost its creative and artistic leader rumors about jpms becoming a mass marketer resurfaced and there was uncertainty whether jpms would become just another company distributors both exclusively jpms and multiline feared that the loss of paul mitchell's creative force would at least slow product sales however they did not consider dropping the jpms product line primarily because of its profitability g jpms' operations and management as of date jpms had some employees approximately of whom worked in a big_number square-foot warehouse space with an additional big_number square feet of office space in santa clarita california owned by mr dejoria and the trust as tenants in common and leased by jpms as of date the warehouse space was not in compliance with the local fire code and had no environmental controls for drainage of waste or runoff water in the event of fire or disposal of poor-quality product some materials used to make hair care products are categorized as hazardous waste jpms had no useful inventory controls by date the warehouse was in disarray and there was a several-months' supply of products stacked up in jpms' parking lot in fact jpms tracked its sales by manually recording them on a blackboard none of the jpms staff knew how to use computers as of date jpms' products were formulated by independent chemists and manufactured at independent laboratories jpms did not have the formulas for many of its products relying on unrelated contract manufacturers to supply the products prior to mr mitchell's death jpms generally had no confidentiality agreements with the contract manufacturers covering the proprietary nature of the formulas prior to mr mitchell's death jpms was managed as a partnership wherein each partner had a unique role mr mitchell's strength was his artistry creativity and relationship with hair stylists and jpms relied on his foresight and artistry to develop products mr dejoria's strength was in sales distribution and promotion mr dejoria ran the daily operations at jpms making all management decisions and having all managers reporting directly to him because jpms had no middle management mr mitchell however was the senior partner having the last word on all from date through date star laboratories of california star an independent contract manufacturer produced most of jpms' products in date jpms' relationship with star ended and jpms' manufacturing was switched to sun laboratories sun jpms' relationship with sun was terminated in date thereafter jpms' manufacturer became bocchi laboratories a corporation in which mr dejoria was a 50-percent owner policy matters following mr mitchell's death mr dejoria became critical to jpms' future h jpms' position in the industry jpms was known for its styling products over the years jpms developed into a major force in the hair care industry with brand recognition by the consuming public a sophisticated distribution network and hundreds of hair stylists trained in the use of the company's products from through date jpms' share of the salon-only market in comparison with those of its chief competitors improved every year in date jpms was among the top five companies in the salon-only market the success of the salon-only product companies attracted the attention of the large well-capitalized mass-market companies which competed in the premium-price market with products that attempted to capture the salon-only aura but were in reality mass marketed i compensation from jpms' inception until paul mitchell's death neither mr mitchell nor mr dejoria had any formal contract with jpms regarding compensation instead they set sales and profitability goals for jpms at the beginning of each fiscal_year thereafter in september or october of each year they divided equally the company's available income for fiscal years ended date through messrs mitchell and dejoria each received the following payments from jpms for year ended salary management fees total --- --- 1dollar_figure --- --- big_number --- --- big_number dollar_figure dollar_figure big_number big_number big_number big_number payments to messrs mitchell and dejoria for this year were not broken down into salary or management fees jpms characterized these payments as compensation_for services rendered between date and date jpms paid mr mitchell dollar_figure which jpms characterized as compensation_for services rendered for fiscal_year messrs mitchell and dejoria agreed that each of them would receive a dollar_figure million annual salary and a dollar_figure million management fee the jpms board approved these compensation amounts on date from the inception of jpms until the moment of mr mitchell's death the only dividend declared by jpms was for its fiscal_year ended date the dividend was originally set at dollar_figure million but was subsequently raised to dollar_figure million during the latter part of mr mitchell's illness messrs dejoria and mitchell discussed mr dejoria's future compensation mr dejoria promised mr mitchell that in the event of mr mitchell's death he would reduce his management fee from dollar_figure million to dollar_figure million for jpms' fiscal_year ending date mr dejoria's dollar_figure million salary for that year was to remain intact j discussions and agreement with gillette in the gillette co gillette was interested in entering the salon-only or professional-only products segment of the hair care market jpms was one of the primary candidates that gillette considered purchasing in the fall of gillette and messrs dejoria and mitchell discussed a potential joint_venture between gillette and jpms to distribute a gillette permanent wave product through the jpms distribution system gillette also sought an option to purchase jpms but messrs dejoria and mitchell would agree only to grant gillette a right_of_first_refusal accordingly on date aapri cosmetics inc a wholly owned subsidiary of gillette and jpms entered a joint_venture which began on date and was to last for an initial 2-year period the joint_venture agreement provided gillette with a right_of_first_refusal to purchase jpms at a formula price of times jpms' prior months' operating income after deducting the maximum federal and state corporate income taxes assumed to be percent of income and excluding from jpms' operating income officers' salaries and car expenses until date the price payable pursuant to the right_of_first_refusal was capped at dollar_figure million gillette's ultimate goal in entering into the joint_venture was to acquire jpms gillette had no interest in a minority shareholder position gillette neither exercised nor waived its right to exercise its right_of_first_refusal contained in the joint_venture agreement during the pendency of the joint_venture gillette received no notification concerning any offers by third parties to purchase the stock or assets of jpms only gillette's board_of directors could approve an acquisition the size of jpms no formal proposal was ever made to gillette's board_of directors to approve the acquisition of jpms the permanent wave product marketed through the joint_venture agreement was not well received in the salon market the joint_venture lost dollar_figure million in the first years and was unsuccessful accordingly the joint_venture agreement was terminated in date according to mr dejoria a gillette representative orally proposed the acquisition of jpms for dollar_figure million and a percent royalty payment to each of messrs mitchell and dejoria mr dejoria responded that he thought jpms was worth more however roland l loper gillette's vice president and controller of the personal care division from through and vice president for finance and strategic planning of the personal care group in insisted that no such offer was made k sale discussions with minnetonka another suitor of jpms was minnetonka corp minnetonka a publicly traded company robert taylor was minnetonka's president and chief_executive_officer mr taylor co-founded minnetonka in and took the company public in minnetonka was involved in consumer product brands primarily those that were sold through the department store gift or beauty trade minnetonka was the licensee for calvin klein and created obsession and eternity women's fragrances in addition minnetonka created foltene a treatment used in the beauty salon business for fine and thinning hair a product line for home fragrance and a gift soap product line for department stores in mr taylor started a salon-only hair products company graham webb international which grew to dollar_figure million in sales in years from or to approximately mr taylor was on the board_of directors of banker's trust venture capital fund in new york bankers trust which specializes in providing funds for small businesses or recapitalization funds bankers trust had dollar_figure million to invest in recapitalizations or buyouts that it used primarily for companies in the dollar_figure million to dollar_figure million range during his tenure with bankers trust mr taylor reviewed approximately proposals for_the_use_of this money as chairman mr taylor was responsible for minnetonka's strategic acquisitions in when jpms' sales approximated dollar_figure million a financial adviser to jpms solicited mr taylor's interest in acquiring jpms however minnetonka determined that jpms was too small and that the paul mitchell brand name was not strong enough to stand on its own accordingly mr taylor declined to enter discussions at that time two years later minnetonka targeted the salon industry for acquisition candidates and mr taylor contacted redken sebastian and jpms during this time the annual sales of these companies were approximately dollar_figure million dollar_figure million and dollar_figure million respectively although minnetonka agreed to acquire sebastian for dollar_figure million in late the sale was not consummated mr taylor initiated discussions with mr dejoria in the fall of jpms' fiscal_year when jpms' sales were approximately dollar_figure million mr taylor informed mr dejoria that mr taylor was involved in the date sale of minnetonka's liquid soap business to colgate-palmolive co for dollar_figure million the date acquisition of the vitabath business from quintessence for dollar_figure million and the date sale of minnetonka to unilever for dollar_figure million at approximately two times sales when the unilever acquisition was announced the price of minnetonka stock was at dollar_figure per share and the transaction was consummated at dollar_figure a share a 60-percent premium over the freely traded value mr taylor used two rules of thumb with regard to the valuation of a company under consideration for acquisition two times sales and or five times operating income mr taylor measured these rules against other standards such as potential for future growth quality of management capital requirements and strength of brand name minnetonka was willing to pay dollar_figure million to acquire all of the jpms stock assuming officers' salaries were revised mr dejoria insisted on a dollar_figure million acquisition price mr taylor refused to raise minnetonka's bid and the negotiations were terminated in the fall of mr taylor again approached messrs dejoria and mitchell at the time jpms' sales were in the dollar_figure million range mr taylor offered dollar_figure million10 to acquire all of the jpms stock at this time mr taylor was unaware that mr mitchell was seriously ill the proposed acquisition price assumed that mr dejoria would continue managing jpms mr mitchell would continue promoting the products for at least months to years as a transition_period and both messrs mitchell and dejoria would be compensated in salary and stock at a level paid to officers of other minnetonka subsidiaries such as calvin klein mr dejoria did not accept minnetonka's dollar_figure million offer he believed that minnetonka was just a little short every time mr dejoria represented to mr taylor that he had received from minnetonka would not have been interested in purchasing a 49-percent interest in jpms mr taylor regarded the level of compensation_for messrs mitchell and dejoria as too high he considered a more appropriate level of compensation to be in the dollar_figure to dollar_figure million range including performance bonuses in determining the value of jpms mr taylor considered the company's growth potential in the fall of he thought that jpms could perhaps double or triple in size within years gillette a dollar_figure million offer plus a royalty of percent of sales for lifetime mr taylor informed mr dejoria that he could not match gillette's offer sales discussions with minnetonka thus ended l financial information available at date of death jpms adopted a fiscal_year ending july beginning with the fiscal_year ended date the shareholders elected subchapter_s status for federal_income_tax purposes jpms remained a subchapter_c_corporation for state of california income_tax purposes until the fiscal_year when the shareholders elected subchapter_s status for california kpmg peat marwick kpmg or one of its predecessors certified jpms' audited financial statements jpms' net sales and net_income after taxes for fiscal years ended date through inclusive were as follows fiscal_year ended net sales net_income after taxes dollar_figure dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number and state this amount as dollar_figure the audited financial statements for the years ended july at mr mitchell's death the most recent available certified financial statements were for jpms' fiscal_year ended date the most recent interim financial statements available were for the months ended date in addition to the annual audited financial statements kpmg also prepared unaudited financial statements on a quarterly basis except for motivational sales goals announced at semiannual distributors meetings as of date jpms did not project future revenues expenses costs of maintaining the paul mitchell brand name or income between date and date kpmg prepared projections of jpms' revenues and expenses for fiscal years m post-death event sec_1 mr fujieki's request for jpms documents on date patrick fujieki trustee of the trust and michaeline re11 were elected to the jpms board the board was thus comprised of mr dejoria ms braa mr fujieki and ms re at this time the trust was the shareholder of record of dollar_figure percent of the outstanding common shares of jpms of which percent was to be transferred to mr dejoria in accordance with the terms of mr mitchell's will and trust mr fujieki in his capacities as director of jpms trustee for the trust and executor of paul mitchell's estate asked to ms re an attorney joined jpms on date as vice president and general counsel to oversee the correction of certain operational problems on date she became jpms' chief operating officer inspect the jpms corporate records and financial information at the date jpms board meeting and in later correspondence with ms re mr dejoria and other jpms employees through date mr fujieki was not provided with financial statements for the jpms fiscal_year ended date on date representatives of mr fujieki were permitted to review jpms' financial records but were not allowed to make copies before permitting mr fujieki's representatives to review its financial records jpms required mr fujieki and his representatives to execute confidentiality agreements mr fujieki continually questioned the actions of the jpms board at its meetings and the accuracy of the corporate minutes beginning date through at least date james ukropina esq outside legal counsel for jpms attended the jpms board meetings purchase offer from mr dejoria on date jpms faced losing its subchapter_s status when the trust ceased to qualify as a subchapter_s shareholder maintaining jpms' subchapter_s status would have been beneficial to its shareholders because no corporate-level tax would be imposed on jpms' income one option would have been for mr dejoria to purchase the trust's shares of jpms however mr dejoria refused to consider this option because it would have gone against mr mitchell's wishes of providing for his son angus for which reason the trust had been created gregg ritchie an accountant with kpmg who oversaw the preparation of jpms' annual audited financial statements began to explore various scenarios for maintaining jpms' subchapter_s status on date mr dejoria offered through mr ritchie to purchase the trust's share of jpms common_stock for dollar_figure million mr dejoria's offer included dollar_figure million in cash on date with the balance in annual installments of dollar_figure million commencing date the unpaid principal balance would bear interest pincite percent per year payable quarterly on date mr fujieki rejected the offer mr fujieki invited mr dejoria to make a higher bid mr dejoria refused indicating that his next offer would be dollar_figure million dollar_figure million less than his date offer compensation dispute mr dejoria assumed many of mr mitchell's corporate responsibilities following mr mitchell's death between april and date jpms paid mr dejoria dollar_figure as compensation_for services rendered to jpms for jpms' fiscal_year ended date mr dejoria agreed to reduce his management fee from dollar_figure million to dollar_figure million as promised to mr mitchell mr dejoria also received dollar_figure million in salary for that year in summary jpms paid mr dejoria the following amounts for fiscal years ended date through for year ended amount dollar_figure big_number big_number big_number big_number jpms characterized these payments as compensation_for services rendered from date through mr fujieki repeatedly requested in letters and at board meetings that the board retain an independent compensation consultant to consider the reasonableness of mr dejoria's compensation the board rejected mr fujieki's requests at this time tension began to mount among members of the board in late mr fujieki retained coopers lybrand to determine a reasonable level of compensation_for mr dejoria on date coopers lybrand preliminarily determined that a reasonable level of compensation was within the range of dollar_figure to dollar_figure million with a possible dollar_figure million ceiling at the date board meeting the board approved mr dejoria's compensation pincite percent of jpms' gross_sales not to exceed dollar_figure million per year for jpms' fiscal years ended date through mr fujieki objected to this approval by the board mr fujieki proposed to have the compensation dispute resolved by arbitration but mr dejoria refused accordingly in date mr fujieki brought suit against mr dejoria ms re and jpms on the trust's behalf alleging that mr dejoria's compensation was excessive the suit was filed in both the superior court for the state of california and the u s district_court for the central district of california in response to mr fujieki's allegations of shareholder derivative claims jpms formed a special litigation committee slc comprising jpms' outside directors kenin spivak paul rupert and david tisdale among other things the slc was to evaluate mr fujieki's allegations to decide whether to pursue the derivative claims on jpms' behalf the slc hired towers perrin as executive compensation consultants to assist the slc in date the litigation between the trust and jpms was settled the slc determined that the settlement agreement was in jpms' best interests the jpms board and shareholders as well as the court approved the settlement agreement neither the slc the jpms board nor the court determined that mr dejoria's compensation was unreasonable n the estate_tax_return notice_of_deficiency and petition on its estate_tax_return petitioner valued the trust's interest in the big_number shares of jpms common_stock at the moment of decedent's death at dollar_figure million this figure was based upon a kpmg valuation analysis prepared at mr fujieki's request kpmg utilized both the comparable companies and discounted cash-flow analyses in the notice_of_deficiency respondent determined in pertinent part that petitioner had undervalued the jpms common_stock respondent determined that the fair_market_value of the trust's interest in the big_number shares of jpms common_stock at the moment of death was dollar_figure million accordingly respondent determined that the value of the gross_estate should be increased by dollar_figure million the notice also determined sec_6662 and h penalties petitioner filed a petition in this court challenging respondent's moment-of-death valuation for the trust's big_number shares of jpms common_stock essentially restating the position taken on the estate_tax_return in the original answer to petitioner's petition respondent restated the position taken in the notice_of_deficiency following the trial in this case petitioner filed an amended petition alleging that the value of the big_number shares of jpms common_stock as of date was dollar_figure rather than the dollar_figure million reflected on both the estate_tax_return and the original petition in the answer to the amended petition respondent denied the allegations contained in petitioner's amended petition ultimate finding of fact the moment-of-death value of the big_number shares of jpms common_stock held by the trust and includable in decedent's gross_estate was dollar_figure opinion issue moment-of-death value of jpms stock the primary issue for decision is the moment-of-death value of big_number shares of jpms common_stock held by the trust petitioner now contends that the stock was worth between dollar_figure and dollar_figure million respondent now asserts the value to be dollar_figure million or dollar_figure million less than that determined in the notice_of_deficiency sec_2031 requires a decedent's gross_estate to be determined for federal estate_tax purposes by including the value at the time of his death of all property real or personal tangible or intangible wherever situated value is determined at the moment of deathdollar_figure ahmanson found v united_states f 2d the following statements made by the court_of_appeals for the fifth circuit in 303_f2d_170 5th cir are in our opinion pertinent to our determination that the valuation of the big_number shares of jpms common_stock held by the trust must be pinpointed to the moment of mr mitchell's death brief as is the instant of death the court must pinpoint its valuation at this instant--the moment of truth when the ownership of the decedent ends and the ownership of the successors begins it is a fallacy therefore to argue value before-- or--after death on the notion that valuation must be determined by the value either of the interest that ceases or of the interest that begins instead the valuation is determined by the interest that passes and the value of the interest before or after death is pertinent only as it serves to indicate the value at death in the usual case death brings no change in the value of property continued 9th cir 106_tc_206 the standard for valuation is fair_market_value defined as 'the price at which the 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 ' 411_us_546 quoting section b estate_tax regs 3_f3d_625 2d cir affg tcmemo_1992_478 this objective test requires property to be valued from the viewpoint of a hypothetical buyer and seller each of whom would seek to maximize his or her profit from any transaction involving the property see 823_f2d_483 11th cir affg tcmemo_1985_595 658_f2d_999 5th cir the value of property is a question of fact and we consider all relevant facts and circumstances e g ahmanson found v united_states supra pincite 325_f2d_934 8th cir affg tcmemo_1961_347 101_tc_412 continued it is only in the few cases where death alters value as well as ownership that it is necessary to determine whether the value at the time of death reflects the change caused by death for example loss of services of a valuable partner to a small_business 48_tc_502 sec_20_2031-1 estate_tax regs fair_market_value may be affected by future events that were reasonably foreseeable at the valuation_date 88_tc_38 gray v commissioner 2_bta_672 estate of livermore v commissioner tcmemo_1988_503 determining the fair_market_value of a closely held corporation's capital stock is difficult because it involves property that has no public market the best_method for valuing closely held stock is by reference to an actual arm's-length sale of the stock in the normal course of business within a reasonable_time before or after the valuation_date see 79_tc_938 estate of campbell v commissioner tcmemo_1991_615 sec_20_2031-2 estate_tax regs in the absence of an arm's-length sale the fair_market_value of closely held stock must be determined indirectly by considering inter alia the nature of the business and the history of the a enterprise from its inception the economic outlook in general and the condition and b outlook of the specific industry in particular the book_value of the stock and the financial c condition of the business d the earning capacity of the company e the dividend paying capacity of the company whether or not the enterprise has goodwill or other f intangible value g the size of the block of stock to be valued h the market price of stocks of corporations engaged in the same line or similar line_of_business having their stocks actively_traded in a free and open market either on an exchange or over-the-counter revrul_59_60 sec_4 1959_1_cb_237 see also sec_20_2031-2 estate_tax regs these factors cannot be applied with mathematical precision see revrul_59_60 supra c b pincite rather the weight accorded each factor must be tailored to account for the particular facts under consideration see messing v commissioner supra both parties relied upon expert valuations at times expert testimony aids the court in determining valuation in other instances it does not see 92_tc_101 we are not bound by an expert's formulae and opinions especially when they run contrary to our judgment 84_tc_722 instead we may reach a decision as to the value of the property based on our own analysis of all the evidence in the record hamm v commissioner supra pincite using all of one party's expert opinion 74_tc_441 or selectively using any portion of such an opinion see 86_tc_547 in sum we will consider expert opinion testimony to the extent it assists our fair_market_value determination valuation is an approximation and the figure we reach need not be one as to which there is specific testimony our role is to approximate fair_market_value as closely as possible within the range of figures that may properly be deduced from the evidence 538_f2d_927 2d cir affg tcmemo_1974_285 a valuations of petitioner's expert sec_1 the weiksner report petitioner's first expert george b weiksner is a managing director and senior adviser of cs first boston an investment banking firm mr weiksner ha sec_25 years of investment banking experience mr weiksner's report valued the trust's dollar_figure percent interest in jpms common_stock big_number shares at dollar_figure to dollar_figure with a midpoint value of dollar_figure mr weiksner's report began with a comparable companies analysis13 that comparable companies analysis is a public market valuation tool that values a company by reference to publicly traded companies with similar operating and financial characteristics the first step involves identifying appropriate comparable companies and measuring their enterprise and equity values as multiples of financial benchmarks mr weiksner considered seven comparable companies the second step in the comparable companies analysis involves applying the derived multiples to the corresponding actual and projected financial benchmarks of the company subject continued selected five standard multiples net sales operating cash-flow-- ebitda operating income--ebit net_income and cash_flow determined the ranges of applicable multiples from the comparable companies data and applied the multiple ranges to jpms' normalized financial data making adjustments to the financial data generated in the earnings model dollar_figure from the value ranges thus derived mr weiksner determined a comparable companies value range for jpms of dollar_figure million to dollar_figure million he then determined jpms' public value15 of dollar_figure million to dollar_figure million by subtracting from jpms' comparable companies value a 10-percent extraordinary risk discount this discount accounted for the approximate cost of replacing mr mitchell's services that was estimated in the projections of jpms' operating_expenses operational continued to valuation in order to create that set of financial benchmarks mr weiksner developed an earnings model for jpms which forecast the company's results for a 5-year period and normalized the actual and projected financial results to reflect jpms' profile going forward mr weiksner used the earnings model to portray how a hypothetical buyer or seller of the jpms stock would perceive jpms as of the moment of decedent's death given the information available at that date among other things mr weiksner's adjustments to jpms' historical financial data included the removal of mr mitchell's compensation as an expense adding an amount equal to percent of net sales as additional sales general and administrative expenses in lieu of mr mitchell's compensation and the adjustment of mr dejoria's compensation to dollar_figure million to reflect his average anticipated compensation public value refers to the estimated value of liquid freely trading shares of jpms as if it had been a public company difficulties dependence on mr dejoria and difficulty in maintaining future growth mr weiksner believed that these risks were unique to jpms at the valuation_date and warranted the discount of the stock mr weiksner subsequently calculated the proportionate public value of the shares and adjusted that value by a 45-percent discount to reflect minority interest and lack of marketability to arrive at a dollar_figure to dollar_figure private value17 for the big_number jpms shares at trial mr weiksner suggested a to percent range for these discounts in addition to the comparable companies analysis mr weiksner utilized the comparable acquisitions and discounted cash-flow analyses as confirming methodologies mr weiksner valued jpms through the comparable acquisitions analysis by reference to private market sales of similar businesses thereby generating control valuesdollar_figure mr weiksner identified appropriate comparable transactions and measured the enterprise and equity values of a minority shareholder discount reflects the decreased value of shares that do not convey control of a closely_held_corporation a lack of marketability discount reflects the fact that there is no ready market for shares in a closely_held_corporation private value refers to the value of a minority interest in stock for which no liquid public trading market exists control value is the value of a company in a transaction in which the acquirer acquires the controlling stock target companies as multiples of financial benchmarks then he applied those multiples to the corresponding actual and projected financial benchmarks of jpms accordingly mr weiksner applied his comparable acquisitions multiples to the normalized data for jpms that he created from his earnings model to determine a range of control values for jpms the dollar_figure million to dollar_figure million control value that he determined exceeded jpms' comparable companies value by approximately percent and exceeded jpms' public value by approximately percent within his expectations of an appropriate control premium in his discounted cash-flow analysis mr weiksner valued jpms as the sum of its projected cash-flows before financing costs over several years plus an estimated value of the company at the end of the forecast period all discounted to present_value he determined a range of terminal values through his comparable companies analysis and a range of appropriate discount rates through an adjusted weighted average cost of capital analysis the dollar_figure million to dollar_figure million control value that mr weiksner determined for jpms through this analysis exceeded jpms' comparable companies value by approximately percent and jpms' public value by approximately percent within his expectation of an appropriate premium we note that at trial mr weiksner suggested a dollar_figure million to dollar_figure million range of control values for jpms on date the mcgraw report petitioner's second expert kenneth w mcgraw is managing director of patricof co capital corp an investment banking firm he has approximately years of experience in finance markets and investment banking utilizing a comparative companies analysis mr mcgraw valued the big_number shares of jpms common_stock at approximately dollar_figure million in this analysis he used virtually the same group of comparable public companies as mr weiksner mr mcgraw adjusted jpms' financial data in deriving an earnings model to which he applied his comparable companies analysis to represent the amount jpms would have to spend to replace the benefits of mr mitchell's services mr mcgraw estimated that additional expenditures_for advertising and administrative expenses would increase jpms' advertising and promotional expenses to percent of total revenues he also removed mr mitchell's compensation expense from the financial datadollar_figure mr mcgraw reduced his approximate dollar_figure million theoretical publicly traded value for jpms by an extraordinary risk discount through a 15-percent reduction to his average ebit and average ebitda mr mcgraw then applied a 45-percent marketability mr mcgraw did not believe that a reduction in mr dejoria's compensation was a circumstance upon which a prospective purchaser of the shares could reasonably depend thus he did not adjust mr dejoria's historical compensation_for purposes of this analysis discount20 to the value he determined through the comparative companies analysis resulting in a dollar_figure million value for the big_number shares of jpms common_stock in addition to his comparative companies analysis mr mcgraw utilized a discounted cash-flow analysis determining a pro_rata equity value of dollar_figure million in this analysis he also applied a 45-percent discount for lack of marketability yielding a dollar_figure million value for the big_number shares of jpms common_stock mr mcgraw weighed his comparative companies analysis more heavily than his discounted cash-flow analysis in his opinion the comparative companies analysis was the more reliable indicator of value accordingly relying on this analysis mr mcgraw concluded that the fair_market_value of the big_number shares of jpms common_stock was approximately dollar_figure million b valuations of respondent's expert sec_1 the hanan report respondent offered martin d hanan president of business valuation services inc bvs as an expert witness he has worked as an appraiser for many years mr hanan valued the big_number shares of jpms common_stock at dollar_figure million relying on both the comparable companie sec_21 and discounted cash-flow analyses on the basis of mr mcgraw's methodology no discount for minority interest was taken mr hanan refers to this approach as the guideline company approach in his comparable companies analysis mr hanan utilized practically the same group of comparable public companies used by mr weiksner mr hanan began with normalizing jpms' financial results for instance mr hanan concluded that the combined compensation paid to messrs mitchell and dejoria would not have exceeded dollar_figure million if they were paid under arm's-length conditions mr hanan thus adjusted the historical financial performance to reflect arm's-length rates he believed that a shareholder of the 49-percent block would likely reach an accommodation with mr dejoria regarding his compensation before agreeing to a price for those shares for purposes of this analysis mr hanan accordingly assumed mr dejoria's compensation would be set at dollar_figure million per year after the valuation_date mr hanan's comparable companies analysis indicated a dollar_figure million value for jpms on a publicly traded minority interest basis he subsequently applied a 30-percent discount for lack of marketability concluding that jpms' size profitability shareholder rights dividend paying capacity and policy as well as transfer restrictions all favored a below-average marketability discount while mr dejoria's anticipated intention to continue drawing excessive_compensation favored an above-average marketability discount by applying the 30-percent discount to his dollar_figure million value for jpms mr hanan determined an dollar_figure million fair_market_value for the big_number shares of jpms common_stock as of date in his discounted cash-flow analysis mr hanan projected jpms' anticipated cash-flows for years after and discounted the cash-flows to a present_value at the valuation_date for purposes of this analysis mr hanan again assumed executive compensation would be set at dollar_figure million accordingly mr hanan determined that as of date the discounted cash-flow control value of jpms was dollar_figure million while the discounted cash- flow value of jpms' equity was dollar_figure million on a publicly traded minority-interest basis finally although mr hanan proposed an dollar_figure million fair_market_value for the big_number shares of jpms common_stock he concedes that because of a likely disagreement between the buyer seller and mr dejoria over mr dejoria's compensation and the possibility of litigation the value of the subject stock could be as high as dollar_figure million and as low as dollar_figure million the brennan report respondent also offered the expert report of e james brennan iii president of brennan thomsen associates inc mr brennan regularly testifies as an expert witness regarding personnel management and pay practices particularly in the area of executive compensation mr hanan reached the dollar_figure million figure by assuming that mr dejoria's compensation would be set at dollar_figure million for fiscal_year and dollar_figure million per year thereafter stand respondent chose not to put e james brennan iii on the mr brennan's report evaluated the reasonable level of compensation_for services provided by messrs mitchell and dejoria prior to mr mitchell's death and made an estimate of the reasonable level of compensation_for mr dejoria for the fiscal years following mr mitchell's death mr brennan opined that the amounts messrs mitchell and dejoria paid themselves for the fiscal years were far in excess of the maximum amounts paid to comparable top executives at equivalent enterprises for employee services mr brennan concluded that the maximum level of reasonable_compensation for mr dejoria for would range between dollar_figure and dollar_figure based on projections of an increase in sales revenue for those years c critique of experts not unexpectedly each party criticized the opposing experts' analyses the following points highlight these disparate perspectives respondent's arguments respondent criticizes messrs weiksner's and mcgraw's valuations as based on the mistaken assumption that jpms was a fragile disorganized mismanaged problem-ridden company on the verge of collapse as of date moreover respondent criticizes three aspects of petitioner's comparable companies analyses the kinds of multiples selected the time periods to which the multiples relate and their weighting the adjustments made to jpms' financial data and the adjustments for risk and illiquidity respondent argues that petitioner's experts' analyses were essentially based upon subjective judgment in fact respondent believes that petitioners' experts failed to offer a credible basis for their extraordinary risk or illiquidity discounts respondent further argues that mr weiksner's normalized earnings model which he applies over a 3-year period is inaccurate and misleading because of the years ended after the valuation_date thus the figures for those years are essentially a projection rather than an analysis of actual results with regard to messrs weiksner's and mcgraw's discounted cash-flow analyses respondent first argues that these analyses fail to confirm the comparative companies method values these experts determined respondent posits that mr weiksner's discounted cash-flow analysis assumes that mr dejoria's future compensation will conform to mr dejoria's expectation of dollar_figure million in fiscal_year and dollar_figure million per year thereafter however according to respondent mr weiksner's discounted cash- flow analysis actually presumes no control_over mr dejoria's compensation or any other element of jpms' cash-flows thus respondent argues that mr weiksner's result is a minority interest value rather than a control value petitioner's arguments petitioner counters that mr hanan's valuation has four erroneous bases nonexistent projections of mr dejoria an unreasonable assumption that mr dejoria would unilaterally reduce his compensation to dollar_figure million as of the valuation_date a nonexistent transition plan and financial information not available as of mr mitchell's date of death in fact petitioner asserts that both mr hanan's discounted cash-flow and comparable companies analyses improperly rely on kpmg's projections of jpms' operating results following mr mitchell's death more specifically petitioner first argues that the dejoria projections referred to by respondent are the projections developed by kpmg with the benefit of months of hindsight and yearend audited financial data not available on date petitioner contends that the projections did not exist at the valuation_date and would not have been knowable to a hypothetical buyer or seller second petitioner contends that it would be unreasonable and unrealistic to assume as mr hanan did that mr dejoria's compensation could be reduced by any means short of litigation petitioner contends that most buyers are litigation averse therefore petitioner posits the only reasonable assumption is that mr dejoria would receive compensation in the amounts of dollar_figure million for jpms' fiscal_year and dollar_figure million per year thereafter third according to petitioner respondent refers to a transition plan mr dejoria developed when he learned of mr mitchell's illness petitioner suggests that no concrete plan ever existed fourth petitioner argues that mr hanan relied on post-date information in developing his discounted cash-flow model he used data from fiscal_year ended date taken from jpms' annual certified financial statements in deriving his date base_year however this information was not available until the late fall of thus petitioner argues mr hanan premised his base_year data on jpms' actual financial results that by definition could not have been available at the valuation_date furthermore petitioner contends that mr hanan mechanically used the kpmg projections which he referred to as the dejoria projections to compute his discounted cash-flow in short petitioner contends that while mr hanan's discounted cash-flow purports to be a minority interest discounted cash-flow in reality it is a control discounted cash-flow according to petitioner mr hanan improperly changed the capital structure of jpms adding long-term debt on the assumption that a minority shareholder could influence capital structure finally petitioner opines that mr hanan's exorbitant control value is irreconcilable with minnetonka's dollar_figure million offer for all of the jpms stock petitioner urges the court to dismiss mr hanan's conclusions as unrealistic d court's analysis and conclusion we have considered all of the testimony before us as well as the expert witness reports and have weighed all other_relevant_factors as articulated by the parties each expert witness report is susceptible to criticism we are unable to accept the moment- of-death valuations given to the big_number shares of jpms common_stock by any of the expert witnesses instead we rely on our own analysis based on all the evidence in the record we begin our analysis by placing a dollar_figure million value on jpms at the moment immediately prior to mr mitchell's death in determining this value we considered all the evidence but gave the greatest consideration to minnetonka's real world dollar_figure million offer in the fall of which mr dejoria found a little short and mr dejoria's representation to mr taylor that he had received from gillette a dollar_figure million offer plus a royalty of percent of sales for a lifetime which mr taylor found to be an offer he could not match we next consider the impact of mr mitchell's death on jpms mr mitchell embodied jpms to distributors hair stylists and salon owners he was vitally important to its product development marketing and training moreover he possessed a unique vision that enabled him to foresee fashion trends in the hair styling industry it is clear that the loss of mr mitchell along with the structural inadequacies of jpms created uncertainties as to the future of jpms at the moment of death in particular a hypothetical buyer or seller would have to consider the following factors in valuing the big_number shares of jpms common_stock at the moment of mr mitchell's death whether it would be necessary to increase jpms' advertising and marketing expenses whether litigation concerning mr dejoria's compensation would ensue whether the lack of a ready or available market for the stock would affect its fair_market_value whether and how jpms would continue its history of successful product development and styling leadership whether rumors concerning jpms going retail would adversely affect its relationships with salons whether jpms' history of unreliable suppliers would continue whether jpms would solve its inventory control and financial information reporting problems and whether jpms' thin management and total reliance on mr dejoria would hinder its performance nonetheless mr dejoria stepped in to single-handedly run jpms upon mr mitchell's death mr dejoria had always overseen jpms' marketing indeed despite his reputation for creativity mr mitchell had not succeeded in marketing his product line in the late 1970's although there is no doubt that mr mitchell's fame was an important component in launching jpms in the early 1980's william e peplow vice president of salon relations for redken wrote a report and testified on petitioner's behalf he foresaw that jpms would have to increase its advertising budget to sustain sales after mr mitchell's death mr dejoria's salesmanship marketing savvy and construction of the distribution network were also vitally important in addition mr taylor whom we found extremely credible testified that mr mitchell was not as essential to minnetonka's interest in jpms as mr dejoria mr taylor also observed that the deaths of fashion designers perry ellis and anne klein did not affect their ongoing businesses to any significant degree because the consumer somehow is so far removed from the actual involvement of that designer they're still buying the product in our opinion the dollar_figure million value for jpms at the moment immediately prior to mr mitchell's death should be discounted by percent to reflect the loss of mr mitchell to jpms thus we believe that at the moment of mr mitchell's death jpms had a value of dollar_figure million we further believe a total 35-percent discount is appropriate reflecting combined discounts for lack of marketability and minority interest and a dollar_figure million discount reflecting the possibility of a lawsuit over mr dejoria's compensation should be applied taking these factors into consideration we find and thus hold that the value of decedent's interest was dollar_figure as of the moment of his death issue sec_6662 penalty the final issue is whether petitioner is liable for the sec_6662 penalty a substantial estate_tax_valuation understatement occurs if the value of property claimed on a return i sec_50 percent or less of the amount determined to be its correct value and the portion of the underpayment attributable to the understatement exceeds dollar_figure sec_6662 the penalty equals percent of the portion of the underpayment attributable to the understatement sec_6662 the penalty does not apply to any this amount is calculated as follows value of jpms at the moment immediately prior to mr mitchell's death dollar_figure less discount to reflect the loss of mr mitchell to jpms big_number value of jpms at the moment of mr mitchell's death big_number percent of trust's interest in jpms x dollar_figure value of trust's interest in jpms prior to discounts big_number discount for lack of marketability and minority interest big_number big_number discount for possibility of lawsuit big_number value of trust's interest in jpms after discounts big_number portion of the underpayment for which the taxpayer shows that he or she had reasonable_cause and acted in good_faith with respect thereto sec_6664 see also 469_us_241 whether a taxpayer had reasonable_cause and acted with good_faith is a factual determination sec_1 b income_tax regs the parties agree that the sec_6662 penalty is inapplicable unless the court decides that the moment-of-death value of the big_number shares of jpms common_stock was dollar_figure million or moredollar_figure on the basis of our determination that the fair_market_value of the big_number shares of jpms stock as of date was dollar_figure the sec_6662 penalty does not apply in light of the foregoing and to reflect concessions and settled issues decision will be entered under rule the federal estate_tax_return valued the stock at dollar_figure million for sec_6662 to apply the value reported on the return must not be more than percent of the correct value