Estate of William A. v. Cecil, Sr., Donor, William A v. Cecil, Jr., Co-Executor

United States Tax Court
T.C. Memo. 2023-24ESTATE OF WILLIAM A.V. CECIL, SR., DONOR, DECEASED,
WILLIAM A.V. CECIL, JR., CO-EXECUTOR,
Petitioner
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent
ESTATE OF MARY R. CECIL, DONOR, DECEASED, WILLIAM A.V.
CECIL, JR., CO-EXECUTOR,
Petitioner
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent
—————
Docket Nos. 14639-14, 14640-14. Filed February 28, 2023.
—————
David D. Aughtry and John W. Hackney, for petitioners.
Joel D. McMahan, Christopher A. Pavilonis, and A. Gary Begun, for
respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
ASHFORD, Judge: William A.V. Cecil, Sr., and Mary Ryan Cecil
(collectively, petitioners; respectively, Mr. Cecil and Mrs. Cecil)
petitioned the Court separately to redetermine respondent’s
determination of a $13,022,552 deficiency in his or her federal gift tax
Served 02/28/23
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[*2] for 2010. 1 On November 18 and 19, 2010 (valuation dates), Mr.
Cecil caused a transfer of his revocable trust’s class B (generally
nonvoting) stock in the Biltmore Company (TBC) to petitioners’ five
grandchildren, and Mrs. Cecil transferred class A (voting) stock in TBC
to petitioners’ two children. Petitioners timely reported to the Internal
Revenue Service (IRS) on Forms 709, United States Gift (and
Generation-Skipping Transfer) Tax Return, that these transfers were
gifts during 2010, and they reported a fair market value for each gift as
of the time of the corresponding transfer.
The deficiencies result from respondent’s determination that
petitioners’ reported fair market values were too low. Petitioners allege
in their Petitions that the values were actually too high and,
accordingly, that they are entitled to refunds. We consolidated the cases
for trial, briefing, and opinion and now decide the fair market value of
the transferred TBC stock (subject stock) on the valuation dates.
FINDINGS OF FACT
The parties have stipulated some facts, and the stipulated facts
are so found. The Stipulation of Facts and the attached Exhibits are
incorporated herein by this reference. Petitioners, now deceased, were
husband and wife during all relevant times, and they resided in North
Carolina when their Petitions were timely filed.
I. Family Background
Petitioners have two adult children, Bill Cecil and Diana Cecil
Pickering (Dini Pickering). Bill Cecil and his wife, Virginia Rott Cecil,
have three children: Ryan Jordan Vanderbilt Cecil, Aubrey Lea Amherst
Cecil, and Willam Robert Vanderbilt Cecil. We refer to these five
individuals collectively as the Cecil family. Dini Pickering and her
husband, George W. Pickering II, have two children: Chase Kennedy
Cecil Pickering and Devon Lee Cecil Pickering. We refer to these four
individuals collectively as the Pickering family.
1Petitioners later died and were substituted for this proceeding by their co-
executor, William A.V. Cecil, Jr. (Bill Cecil). Additionally, some monetary amounts
are rounded to the nearest dollar.
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[*3] II. TBC
A. Background
1. The Biltmore House
Between 1889 and 1895, George W. Vanderbilt built the Biltmore
House in the Blue Ridge Mountains in Asheville, North Carolina. The
Biltmore House is a French Renaissance chateau that consists of over
four acres of floor space and remains the largest privately owned house
in the United States. Mr. Vanderbilt died in 1914, and he left the
Biltmore House and its surrounding acreage to his only child, Cornelia
Cecil née Vanderbilt (Mr. Cecil’s mother).
2. TBC
TBC, a Delaware corporation, was formed on March 30, 1932, by
Cornelia Cecil and others, and during the same year, it became eligible
to conduct business in North Carolina. Also in 1932 the Biltmore House
and its surrounding acreage (Estate) were contributed to TBC. In 1979
Mr. Cecil and his brother, George Cecil, then TBC’s owners, disagreed
on TBC’s future. They ended up breaking up TBC, with George Cecil
surrendering all of his shares in TBC in exchange primarily for TBC’s
dairy operations inclusive of 3,000 acres of the Estate. TBC elected to
be taxed as an S corporation in 1982 and continues to be characterized
as such.
B. Operations and Relevant Financial Information
1. Roles of Dini Pickering and Bill Cecil
Dini Pickering is vice chairman of TBC’s board of directors. She
has worked for TBC for approximately 32 years and has served in that
position over approximately the last 15 of those years.
Bill Cecil is TBC’s (and its related entities’) president and chief
executive officer. He has served in those positions for over 20 years.
2. Business Operations
TBC operates primarily in the travel and tourism/historic
hospitality industry. The heart of its business is offering its guests the
opportunity to go back in time and experience the Gilded Age.
Originally, TBC only offered tours of the Biltmore House and the
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[*4] adjoining gardens, and the tours were considered a roadside
attraction. In 1995 TBC instituted a long-range plan to become a
multiday destination and eventually expanded the Estate to include
hotels, restaurants, retail stores, and various outdoor activities. During
2010 TBC operated at least 17 lines of business and employed 1,304
employees (over 1,800 combined full-time and part-time employees
including associated businesses).
3. Revenue Sources
TBC’s paying visitors may access five main areas of the Estate:
the Estate entrance, including the Gate House Shop, Lodge Gate, Group
Sales Office, and Reservations and Ticket Center; Biltmore House and
Gardens; Antler Hill Village and Winery; Inn on Biltmore Estate; and
Deerpark, including the Deerpark Restaurant, Lioncrest, and carriage
and trail ride barns. TBC generates revenue from five retail outlets;
eight restaurants, one of which is a catering facility; landscaping; tickets
and tours (including segway tours); Land Rover driving experience and
school; river rafting; fly fishing; equestrian training; timber production;
and farming. During 2010 TBC generated most of its revenue from
admissions to its premises and from restaurant and merchandise sales.
With the exception of 2008, a year within the Great Recession of
2007 through 2009 and for which TBC realized a $1,459,000 loss, TBC
has realized a profit every year since 1995. During its fiscal year ended
June 30, 2010, adult visitors paid between $35 and $69 for admission
depending on the time of the year. In 2010 TBC reported that it realized
approximately $70 million in revenue. Of that total revenue, TBC
realized $38,437,950 from admission tickets.
4. Estate’s Ranges
The Estate has a West Range (approximately 3,000 acres of land)
and an East Range. The West Range contains all the forestry and
farming, and it is used for agricultural, forestry, and recreational
activities. Busbee Mountain, one of TBC’s operating and income-
generating assets, is on the West Range. Busbee Mountain is the main
source of water for the Estate, and it generates annually 28 million
gallons of water and $110,000 in water savings. TBC also conducts
timber operations and leases cell phone towers on Busbee Mountain.
In 1993 TBC sold the West Range to Bill Cecil and Dini Pickering
for $6 million and as part of that sale leased back the West Range. This
transaction was meant to ensure that the West Range remained in
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[*5] petitioners’ extended family forever. TBC received a 30-year
installment note as payment for the sale. On the valuation dates,
$2,700,000 of that note’s principal remained unpaid.
TBC owns the East Range. The East Range includes places for
equestrian, hiking, biking, farming, and timber activities. Also on the
East Range are the Biltmore House, formal gardens, Antler Hill Village,
a vineyard, the Inn on Biltmore Estate, Deerpark, retail shops,
restaurants, and a ticket center. TBC uses all of the East Range to
generate earnings.
5. 2010 Assets and Liabilities
TBC’s reported assets and liabilities were $53,580,000 and
$33,349,000, respectively, on November 30, 2010. Included in its assets
were agricultural land in North Carolina and a multimillion dollar
portfolio of fine art, antiques, and other collectibles. Its artwork
included the following valuable paintings: (1) the Portrait of Frederick
Law Olmsted by John Singer Sargent; (2) the Waltz by Anders Zorn;
(3) Mrs. George W. Vanderbilt by Giovanni Boldini; (4) Rosita by Ignacio
Zuloaga y Zabaleta, and (5) Angelique and Roger on the Hippogriff by
Antoine-Louis Barye.
TBC has 46 trademarks and a trade name registered with the
U.S. Patent and Trademark Office.
III. Ownership and Related Agreements
A. 1989 Ownership and 1989 Shareholders’ Agreement
Mrs. Cecil, Bill Cecil, and Dini Pickering were three of TBC’s
shareholders on December 26, 1989, each owning 1 share of its then
class B common stock. On that day, they entered into a Shareholders’
Agreement. As of that time, TBC had three classes of stock.
B. 1997 Amendment to Certificate of Incorporation
On August 8, 1997, TBC’s Certificate of Incorporation was
amended to reclassify TBC’s three existing classes of stock into two
classes of common stock inclusive of seven issued shares of class A
common stock and 9,993 issued shares of class B common stock. These
two classes of stock differ only in their voting rights. The amendment
states as to their voting rights:
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[*6] Class A Common: Each holder of class A Common Stock
shall be entitled to one vote for each share of such stock
standing in his name on the books of the Corporation. Said
voting rights shall be with respect to all matters that may
be subject to a vote of stockholders under the Bylaws of the
Corporation, under the General Corporation Law of the
State of Delaware, or otherwise.
Class B Nonvoting Common: The holders of class B
Nonvoting Common Stock of the Corporation shall not be
entitled to vote on any matter except as to matters in
respect of which they shall be indefeasibly vested by
statute with such right.
C. Voting Trust Agreement
On June 30, 1999, TBC, petitioners, Bill Cecil, and Dini
Pickering, as the corporation and its shareholders, respectively, and
Henry P. Hoffstot, Jr., as an “independent trustee,” entered into a Voting
Trust Agreement (1999 Voting Trust Agreement). The 1999 Voting
Trust Agreement was meant:
to secure continuity and stability in the Company’s policies
and management and to coordinate the Company’s policies
and management with other Biltmore Estate Business
Entities, the stock of which is owned by some or all of the
Shareholders, and in order to provide that the four
Shareholders who sign this Agreement and the lineal
descendants of these four Shareholders, will control for the
maximum time legally permissible all the development,
use and management of the Company as well as policy and
management decisions pertaining to other Biltmore Estate
Business Entities, these Shareholders have determined to
place all their shares of voting stock in the Company with
the Trustees and their successors in Trust as hereafter
provided.
In accordance with the 1999 Voting Trust Agreement, each
signatory shareholder deposited his or her stock in a trust and acted as
trustee. The only persons eligible to later become a trustee were lineal
descendants of Bill Cecil and Dini Pickering. While petitioners are
trustees, all decisions had to be made by a majority of the trustees. If
petitioners were not trustees, decisions would be made by a majority of
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[*7] each side of the two families (the Cecils and the Pickerings) with
each family having a 50% voting strength. The trust had a ten-year
term.
Any decision to sell any land, structure, assets or stock of TBC or
any present or future Estate business entity required the vote of two-
thirds of the Cecil family trustees and two-thirds of the Pickering family
trustees. The trustees set TBC’s policies and general operating
procedures relating to the operation of TBC and the Estate. The
Trustees elected the board of directors and confirmed the appointment
of senior officers.
IV. Family Business Preservation Program
A. Background
In or around 2000 or 2001 Dini Pickering met Craig Aronoff, a
consultant with the Family Business Consulting Group. Mr. Aronoff
encouraged Dini Pickering to hold family meetings and to create a
structure for her family that would allow them to operate TBC more
efficiently. Dini Pickering began exploring family business planning.
She read books on the subject as well as material from the Family
Business Consulting Group.
Dini Pickering later started the Family Business Preservation
Program for TBC in 2003. As a part of the program, petitioners, the
Cecil family, and the Pickering family would hold two meetings
annually. During these meetings they would work on policies and
educational programs for the benefit of their families, which were
intended to help them become more effective owners of TBC.
The children of Bill Cecil and Dini Pickering attended these
meetings. Those children were 8 to 15 years old as of the first meeting.
In the early years Dini Pickering strived innovatively to keep the
children focused in the meetings and participating in the business
discussions. As the children grew older, they attended educational
seminars that focused on topics such as financial literacy or family-
based money management. These meetings and seminars were
intended to prepare the next generation to take over TBC’s
management.
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[*8] B. Policies
Petitioners, the Cecil family, and the Pickering family adopted
the following three policies as a result of these meetings. The first
policy, the premarital policy, requires that each family member enter
into a prenuptial agreement before marriage. The prenuptial
agreement must ensure that all separate property remain separate
during the marriage and not be subject to a division in the event of a
divorce. This policy is intended to ensure that all TBC stock remain in
the Cecil and the Pickering families. The second policy, the family
employment policy, requires that any Cecil or Pickering family member
seeking employment in TBC must have a four-year college degree and
at least one year of outside employment. The third policy, a family code
of conduct, requires that members of the Cecil and the Pickering families
treat others with respect, act ethically, obey the law, respect
confidentiality, avoid conflicts of interest, protect family business
property, represent the best interests of the family and family business,
and practice open, honest, and effective communication. The three
oldest of the five children of the Cecil and the Pickering families have
adhered to these policies. None of these three children has any desire
to ever sell the TBC shares he or she would later receive (see further
discussion infra p. 28), or to vote to liquidate TBC’s assets.
V. 2009 Shareholders’ Agreement
On December 16, 2009, the shareholders that owned all issued
and outstanding shares of TBC stock entered into the 2009
Shareholders’ Agreement. The 2009 Shareholders’ Agreement states:
[T]he Parties agree that the success of the Corporation
requires the active interest, support, and the personal
attention of the Shareholders and for that reason it is not
advisable to permit the stock of the Corporation to go upon
the open market for sale except as otherwise permitted
under the terms of this Agreement.
TBC and its shareholders confirmed the purpose of the 2009
Shareholders’ Agreement as providing (i) the continued ownership and
control of all issued and outstanding TBC shares; (ii) the harmonious
and future conduct of the business; and (iii) a stock transfer mechanism
to operate when a shareholder dies, becomes incapacitated, or otherwise
needs to sell company stock.
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[*9] Under the terms of the 2009 Shareholders’ Agreement, a
shareholder may transfer, with or without consideration, his or her
shares to any other shareholder who is a party to the agreement or to
any of the shareholder’s lineal descendants. As to a proposed transfer
to a nonfamily member, the transferor must first notify the other
shareholders and TBC of the proposed transfer and receive a notice of
consent from each shareholder. If a shareholder receives an offer from
a nonfamily member to buy shares from the shareholder, the
shareholder must notify the other shareholders and TBC within ten
days at which point the other shareholders may purchase all but not less
than all of the shares at the lesser of the purchase price or the price set
forth by a valuation method contained in the 2009 Shareholders’
Agreement. As a condition of a transfer to any person who is not bound
by the 2009 Shareholders’ Agreement, the transferee must agree to be
bound by the terms of that agreement.
VI. Gift Transfers
A. 2010
Immediately before November 18, 2010, TBC’s outstanding stock
was owned as follows:
Owner Number of Shares Percentage 2
Class A Common Stock
Mr. Cecil, Trustee under the William 3 42.86%
A.V. Cecil Revocable Trust
Agreement dated August 13, 1999
Mrs. Cecil 1 14.29%
Bill Cecil 1 14.29%
Dini Pickering 1 14.29%
Bill Cecil and Dini Pickering, as 1 14.29%
tenants in common
Total Shares 7
Class B Common Stock
Mr. Cecil, Trustee under the William 9,337 93.37%
A.V. Cecil Revocable Trust
Agreement dated August 13, 1999
Bill Cecil 328 3.28%
Dini Pickering 328 3.28%
Total Shares 9,993
2These percentages are the percentages which the parties stipulated.
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[*10] B. Gifts
On November 18, 2010, Mrs. Cecil transferred, by gift and in
undivided equal shares, her interest in one share of TBC class A common
stock to Bill Cecil and Dini Pickering. Two new stock certificates were
created for Bill Cecil and Dini Pickering, each certificate stating that
“[t]he sale, transfer, assignment or pledge of this stock certificate is
restricted pursuant to the terms of a Shareholder Agreement dated the
16 day of December 2009.”
On November 19, 2010, Mr. Cecil, in his capacity as trustee of the
William A.V. Cecil Revocable Trust, transferred 9,337 shares of TBC
class B common stock to himself. On the same day, he transferred by
gift his interest in those shares to petitioners’ five grandchildren, in
separate trusts, as follows:
Donee Class B Common Stock
Shares Percentage 3
William A.V. Cecil Irrevocable Qualified 1,556.16 and 2/3 15.57%
Subchapter S Trust for Ryan Cecil
William A.V. Cecil Irrevocable Qualified 1,556.16 and 2/3 15.57%
Subchapter S Trust for Aubrey Cecil
William A.V. Cecil Irrevocable Qualified 1,556.16 and 2/3 15.57%
Subchapter S Trust for Robert Cecil
William A.V. Cecil Irrevocable Qualified 2,334.25 23.36%
Subchapter S Trust for Chase Pickering
William A.V. Cecil Irrevocable Qualified 2,334.25 23.36%
Subchapter S Trust for Devon Pickering
Total Shares 9,337
Each stock certificate stated that “[t]he sale, transfer, assignment
or pledge of this stock certificate is restricted pursuant to the terms of a
Shareholder Agreement dated the 19th day of November 2010.” This
Shareholder Agreement added the trusts for the grandchildren as
signatories.
Each gift of the class A and B common stock imposed upon the
shareholder the obligation to pay tax on his or her distributive share of
TBC’s income, with no guaranty of sufficient dividend distributions to
pay that tax.
3These percentages are the percentages which the parties stipulated.
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[*11] VII. Voting Rights and Stock Transfer Restrictions
TBC’s Articles of Incorporation, TBC’s Amended and Restated
By-Laws as of August 21, 2009 (By-Laws), and the 2009 Shareholders’
Agreement set out rights and powers with respect to the TBC stock as
of the valuation dates.
The By-Laws regulate how shareholders, board members, and
executives control TBC. Each class A common stock shareholder
receives one vote per share, with decisions made by the majority of the
votes cast. A quorum generally requires the presence of two-thirds of
all outstanding class A common stock to be present in person or by proxy.
TBC’s board of directors (Board) manages its business and affairs.
Class A common stock shareholders elect directors by a majority vote.
The presence in person of a majority of the Board constitutes a quorum
to transact business. The Board generally acts by a majority vote of the
directors. The Board elects officers by majority vote. By majority vote,
the Board decides when and whether to make the accounts, books,
minutes, and other records of TBC available to stockholders. The Board
declares dividends by majority vote.
VIII. Notices of Deficiency
Each petitioner timely filed Form 709 for 2010. On the Forms
709, petitioners properly elected to treat the transfers of their stock as
split gifts under section 2513. 4 Each form included as an attachment an
appraisal of the gifts by Dixon Hughes based on a weighted average of
the subject shares (using an asset approach and an income approach).
Petitioners commissioned the Dixon Hughes appraisal for purposes of
reporting their gift tax liabilities on their Forms 709. Petitioners
reported a value of $3,308 per share for class A common stock and $2,236
per share for class B common stock. Each petitioner reported total
taxable gifts of $10,438,766.
Petitioners’ Forms 709 were selected for audit, and respondent
ultimately issued petitioners separate notices of deficiency on March 24,
2014. The notices of deficiency disregarded the existence of TBC and
attributed no weight to its going-concern value. The numerical
4Unless otherwise indicated, all statutory references are to the Internal
Revenue Code, Title 26 U.S.C., in effect at all relevant times, all regulation references
are to the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all relevant
times, and all Rule references are to the Tax Court Rules of Practice and Procedure.
12
[*12] adjustments in the notices of deficiency reflect the enterprise
value of TBC based solely on an asset liquidation assumption.
OPINION
I. Burden of Proof
Except as otherwise provided by statute or determined by the
Court, the Commissioner’s determinations are presumed correct, and
taxpayers bear the burden of proving that the determinations are
erroneous. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).
The burden of proof (or a portion thereof) may sometimes shift to the
Commissioner. See, e.g., § 7491(a) (providing that the burden of proof in
a gift tax setting such as here may shift to the Commissioner as to
discrete factual issues if certain conditions are met); Helvering v. Taylor,
293 U.S. 507, 515 (1935) (holding that the burden of going forward with
evidence to establish the amount of a deficiency may shift to the
Commissioner where determination is arbitrary and excessive). The
record at hand allows us to decide these cases on the basis of a
preponderance of the evidence, without regard to which party bears the
burden of proof. We therefore proceed to do so and need not and do not
decide which party actually bears the burden of proof. Cf. Blodgett v.
Commissioner, 394 F.3d 1030, 1039 (8th Cir. 2005), aff’g T.C. Memo.
2003-212; Polack v. Commissioner, 366 F.3d 608 (8th Cir. 2004), aff’g
T.C. Memo. 2002-145; Knudsen v. Commissioner, 131 T.C. 185, 189
(2008), supplementing T.C. Memo. 2007-340; Deskins v. Commissioner,
87 T.C. 305, 322 n.17 (1986).
II. Gift Valuation
A. In General
A tax is imposed on the transfer of property by gift during a
calendar year. § 2501. The value of a gift made in property is “the value
thereof at the date of the gift.” § 2512(a). That value is “the price at
which such property would change hands between a willing buyer and a
willing seller, neither being under any compulsion to buy or to sell, and
both having reasonable knowledge of relevant facts.” Treas. Reg.
§ 25.2512-1; see also Rev. Rul. 59-60, 1959-1. C.B. 237. The willing buyer
and the willing seller are hypothetical persons rather than specific
individuals or entities, and the characteristics of these hypothetical
persons are not necessarily the same as the personal characteristics of
the actual seller or a particular buyer. Estate of Newhouse v.
Commissioner, 94 T.C. 193, 218 (1990). The valuation of stock is
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[*13] ultimately a question of fact in which the trier of fact must weigh
all relevant evidence and draw appropriate inferences. CSX Transp.,
Inc. v. Ga. State Bd. of Equalization, 552 U.S. 9, 18 (2007); Hamm v.
Commissioner, 325 F.2d 934, 938 (8th Cir. 1963), aff’g T.C. Memo. 1961-
347; Bank One Corp. v. Commissioner, 120 T.C. 174, 306 (2003), aff’d in
part, vacated in part on other grounds, and remanded in part sub nom.
JPMorgan Chase & Co. v. Commissioner, 458 F.3d 564 (7th Cir. 2006).
B. Valuation Approaches
1. Overview
Generally, three approaches are used to determine the fair
market value of property: (1) the market approach, (2) the income
approach, and (3) the asset-based approach. The question of which of
these approaches to apply in a given case is a question of law. Bank One
Corp., 120 T.C. at 306–07.
2. Market Approach
The market approach compares the subject property with similar
property sold in an arm’s-length transaction in the same timeframe. Id.
at 307. This approach values the subject property by taking into account
the sale price of the comparable property and the differences between
the comparable property and the subject property. Id. This approach
measures value properly only when the comparable property has
qualities substantially similar to those of the subject property. Id.
3. Income Approach
The income approach capitalizes income and discounts cashflow.
Id. This approach values property by computing the present value of
the estimated future cashflow as to that property. Id. The estimated
cashflow is ascertained by taking the sum of the present value of the
available cashflow and the present value of the residual value. Id.
4. Asset-Based Approach
The asset-based approach generally values property by
determining the cost to reproduce it. Id. One example of an asset-based
approach in the setting of a nonpublicly traded corporation is to value
the corporation on the basis of the fair market value of its net assets
(i.e., the fair market value of its assets less its liabilities). See, e.g.,
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[*14] Estate of Jones v. Commissioner, T.C. Memo. 2019-101, at *29;
Estate of Noble v. Commissioner, T.C. Memo. 2005-2, slip op. at 17.
C. Split Gifts
Section 2513(a) provides: “A gift made by one spouse to any
person other than his spouse shall, for the purposes of this chapter, be
considered as made one-half by him and one-half by his spouse,” as long
as both spouses have properly signified their consents to that treatment.
Section 2512, which governs the valuation of gifts, is found in chapter
12 of subtitle B of the Internal Revenue Code, which is the chapter
containing section 2513. Consistent with petitioners’ proper election to
treat each gift here as a split gift under section 2513, we consider those
gifts as made one half by Mr. Cecil and one half by Mrs. Cecil.
III. Experts
A. General
The parties dispute the value of the subject stock, and each party
has retained and at trial called experts to testify in support of their or
his proffered value of the stock. In deciding valuation cases, courts often
hear the views of expert witnesses. See generally Rule 143(g) (providing
that an expert’s direct testimony in a proceeding in this Court is
generally “heard” by way of his or her expert report). We are not bound
by the opinion of an expert witness, and we may accept or reject expert
testimony in the exercise of our sound judgment. Helvering v. Nat’l
Grocery Co., 304 U.S. 282, 295 (1938); Bank One Corp., 120 T.C. at 332;
Estate of Newhouse, 94 T.C. at 217. We may accept the opinion of one
expert over that of another, see Buffalo Tool & Die Mfg. Co. v.
Commissioner, 74 T.C. 441, 452 (1980), and we may select what portions
of each expert’s opinion, if any, to accept, Parker v. Commissioner, 86
T.C. 547, 562 (1986). Because valuation involves an approximation, the
figure at which we arrive need not be directly traceable to specific
testimony if it is within the range of values that may be properly derived
from consideration of all the evidence. Estate of True v. Commissioner,
T.C. Memo. 2001-167, slip op. at 171 (citing Silverman v. Commissioner,
538 F.2d 927, 933 (2d Cir. 1976), aff’g T.C. Memo. 1974-285), aff’d, 390
F.3d 1210 (10th Cir. 2004).
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[*15] B. Petitioners’ Experts
Petitioners’ experts are David Adams and George Hawkins.
1. Mr. Adams
a. Overview
Mr. Adams works for Adams Capital, Inc., as a business valuation
appraiser. He founded Adams Capital, Inc., and beforehand was
engaged in business valuation services with Coopers & Lybrand, LLP,
and KPMG Peat Marwick, LLP. He has a master’s in business
administration from Georgia State University and is a member of the
American Society of Appraisers. He appraised the subject stock relying
exclusively on TBC’s representations and financial documentation.
Mr. Adams appraised the stock using the income approach and
the market approach. As to the former, he applied the discounted
cashflow (DCF) method. As to the latter, he applied the guideline public
company (GPC) method and the similar transactions method. He
rejected the asset-based approach of valuing TBC’s assets directly
because the number of shares was too small to force a liquidation and
he had heard from TBC’s owners and management that TBC would not
be liquidated in the foreseeable future. He concluded that TBC is
unlikely to be sold within the next 30 years.
b. DCF
Mr. Adams concluded for purposes of his DCF analysis that a
discount rate of 15% was appropriate based on TBC’s weighted average
cost of capital. He predicted that TBC would grow by 1% in 2010, 5% in
2011, 5% in 2012, 5% in 2013, 4% in 2014, and 3% in 2015. He totaled
his forecasted cashflows, subtracted interest-bearing debt, added back
the value of any nonoperating asset, and applied a 30% discount for a
lack of marketability to arrive at $9,030,059.
c. GPC
The GPC is used to calculate the fair market value of a business
on the basis of comparison to publicly traded companies in similar lines
of business. The conditions and prospects of companies in similar lines
of business depend on common factors such as overall demand for their
products and services. Comparable company values are measured on
the basis of stock prices. The comparable company value is divided by
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[*16] an earnings parameter (e.g., sales, net income, earnings before
interest and taxes (EBIT)) or balance sheet parameter (e.g., total
shareholder’s equity, assets) to arrive at a valuation multiple. The
resulting multiple is applied to the subject company to arrive at its fair
market value.
Mr. Adams identified five companies as comparable companies.
One company, Peak Resorts, Inc., operates 13 ski resorts in the Midwest
and Northeast United States. It offers activities, services, and
amenities, such as skiing, snowboarding, dining, lodging, equipment
rental and sales, and ski and snowboard instruction. It manages hotels
in New Hampshire and Vermont and a restaurant in Pennsylvania. The
second company, Pairi Daiza SA, operates a park in Belgium that houses
approximately 4,000 animals. It also participates in approximately 30
scientific programs for the conservation of endangered species. The
third company, Premier Exhibitions, Inc., presents museum quality
touring exhibitions to the public worldwide. It also develops, deploys,
operates, and presents exhibition products in exhibition centers,
museums, and nontraditional venues; sells merchandise through the
internet; publishes exhibition catalogs; and provides ancillary services
such as audio tours. The fourth company, Vail Resorts, Inc., operates
mountain resorts and urban ski areas in the United States. Its resorts
offer various winter and summer recreational activities (such as skiing,
snowboarding, sightseeing, and guided hiking), and offer skiing and
snowboarding lessons, equipment rentals, retail merchandise services,
dining services, and private club services. Vail Resorts, Inc., also owns
and leases commercial real estate and provides real estate brokerage
services, and owns and/or manages various luxury resorts and
condominiums. The fifth company, Whistler Blackcomb Holdings, Inc.,
operates a four season mountain resort in Canada and offers a variety
of summer and winter activities such as mountain biking, hiking,
fishing, golfing, kayaking, tennis, snowmobiling, cross-country skiing,
and horseback riding. It also operates 18 bars and restaurants, 19 retail
shops, and 22 rental shops.
Mr. Adams’s GPC analysis looked at the size, growth, and
liquidity of TBC and his comparable companies. It used the last 12
months’ (LTM) earnings before income tax, depreciation, and
amortization (EBITDA) and LTM EBIT multiples because, he
rationalized, TBC is less profitable than the comparable companies
because of their larger scale. He applied a 15% discount to the multiples
because of TBC’s lack of diversification and resistance to technological
development. He added cash and subtracted debt from the enterprise
17
[*17] value to arrive at a 100% equity value on a noncontrolling,
marketable basis and then applied a 30% discount for a lack of
marketability to arrive at $10,540,694 on a noncontrolling,
nonmarketable basis.
d. Similar Transactions
Under the similar transactions method, a value estimate for the
subject company is developed by using information obtained from
various databases on actual sales of closely held and public businesses.
The goal is to define the market for companies operating in the same
industry as a subject company by considering the data as a statistical
ensemble of value multiples that are representative of the entire
market. These valuation multiples are ratios that compare the
numerator or the price paid for a controlling interest in a closely held
corporation with various measures of operating results in the financial
position in the denominator.
Mr. Adams selected six acquisitions as similar transactions. The
first acquisition was that of USJ Co., Ltd., which operated a theme park
in Japan. Its amenities included restaurants, riding and show
attractions, hotels, and shopping and entertainment facilities. The
second acquisition was that of Paramount Canada’s Wonderland Park,
which owns and operates an amusement park. It offers thrill rides,
family rides, shopping, splash works, live entertainment, and dining
activities. The third acquisition was that of Festival Fun Parks, LLC,
which owns and operates family entertainment centers and water parks
in the United States. The fourth acquisition was that of American Golf
Corp., which owns 22 fee simple and 6 leasehold golf clubs. The fifth
acquisition was that of Northern Racing, PLC, which acquires, manages,
and develops horseracing courses in the United Kingdom. The
company’s nine horseracing courses stage various events ranging from
large-scale conferences and banquets to business meetings and music
events. The sixth acquisition was that of Sydney Attractions Group, Pty
Ltd., which offers management and operation of the Sydney Aquarium
in Australia. It also operates Manly Oceanworld, an aquarium;
Skywalk, an outdoor viewing adventure; Wildlife World, a zoo; and
Koala Gallery, a small wildlife park; and it offers Shark Dive Xtreme, a
product for scuba divers to swim with sharks, and OzTrek, a virtual
reality ride through Australia’s cultural history and geography.
Mr. Adams analyzed and computed purchase price multiples from
the revenue, EBITDA, and EBIT of these six companies. After applying
18
[*18] the multiples, he added cash and subtracted debt from the
indicated enterprise value to arrive at the indicated equity value of 100%
on a controlling, marketable basis. He applied a 20% discount for a lack
of control and a 30% discount for a lack of marketability to arrive at a
100% equity noncontrolling, nonmarketable basis of $12,161,048.
e. Final Values
Mr. Adams chose a combination of the income and market
approaches to ascertain the fair market value of the subject stock
because, he concluded, a buyer of a restricted minority interest would
assume continuation of TBC based on existing dividend trends, rather
than assume any liquidation in the face of the opposition to liquidation.
He gave each of his methods a weighted average. He gave the DCF
method a weighted average of 50% because it was based on TBC’s
financial projections, expectations, and risk factors. He gave each of the
GPC and the similar transactions methods an equal weighted average
of 25%. His analysis also included looking at various methods to apply
“tax affecting” (discussed infra pp. 25–27), and he arrived at one value
for each class of stock if he took tax affecting and the 2009 Shareholders’
Agreement into account and another value if he did not. His final values
included a 30% discount for a lack of marketability and a 20% discount
for a lack of control. He concluded that the class A common stock and
the class B common stock had a fair market value of $1,019 per share
on November 18, 2010, with tax affecting and the shareholder
agreement in effect, and that the class B shares of TBC were worth
$1,614.71 per share without tax affecting and the shareholder
agreement in effect.
2. Mr. Hawkins
a. Background
Mr. Hawkins of Bannister Financial in Charlotte, North Carolina,
specializes in business valuation of closely held companies and the type
of stock interest at issue. He holds a bachelor’s in economics from the
University of North Carolina at Chapel Hill and a master’s in business
administration from Wake Forest University. He is an accredited senior
appraiser in business valuation and a chartered financial analyst.
b. Capitalization of Net Cashflow
Mr. Hawkins valued the subject stock using the income
approach’s capitalization of net cashflow method. This method
19
[*19] measures the dividend or distribution paying capacity of the
company being valued by applying an appropriate capitalization rate
that incorporates the investor’s required rates of return for risk and a
factor for future growth in earnings (or net cashflow). He ascertained
that TBC has a net cashflow of $1,162.60 and a capitalization rate of
0.107. Dividing the net cashflow by the capitalization rate rendered a
preliminary value of equity of $10,865.40 as if TBC was a C corporation.
Mr. Hawkins then tax affected the preliminary value using the
S Corporation Economic Adjustment Model (SEAM). The SEAM values
the S corporation’s shares as if the S corporation paid the same level of
taxes as a C corporation. He used TBC’s dividend/distribution payout
ratio, the taxes that would be paid on its income, dividends, and any
capital gains on shares to calculate the difference in the net tax benefit
realized by the company as a C corporation and as an S corporation. He
ascertained that there would be a 24.6% greater after tax benefit of an
S corporation in these cases. He tax affected what he had ascertained
was the preliminary value of equity by a rate of 24.6% to arrive at an
adjusted S corporation value of common equity of $13,638.30. After
dividing the adjusted S corporation value of common equity by the
number of outstanding shares, he arrived at a preliminary fair market
value per share of $1,353.83.
c. GPC
Mr. Hawkins also used the market approach’s GPC method to
value the subject shares. He used Cedar Fair, L.P. (Cedar Fair), as a
comparable company because theme parks are a competitor of TBC and
it is similarly aligned with the services offered. Cedar Fair operates in
the United States 11 amusement parks, 6 water parks, and 5 hotels. Of
Cedar Fair’s total 2009 revenues, 58.2% came from admissions, 34.5%
from food, drink, and games, and the remaining 7.3% from
accommodation and other. He viewed these percentages as similar to
TBC’s 2009 revenues from admissions, restaurants and merchandise,
and from all other sources, respectively.
After comparing the size, profitability, return on equity, growth
trends, business opportunities, diversification, financial strength, and
distributions of Cedar Fair and TBC, Mr. Hawkins selected the Market
Value of Invested Company to Earnings Before Income Taxes,
Depreciation, and Amortization (MVIC/EBITDA) value multiple. He
applied the MVIC/EBITDA value multiple to two time frames: (1) the
EBITDA of the trailing 12 months (TTM) of the valuation date and
20
[*20] (2) the median of 2006 to TTM. He applied the multiples to TBC’s
adjusted EBITDA to arrive at the preliminary values of $1,508.10 and
$1,661.53.
He applied a 25% discount for a lack of marketability and a 2%
discount for a lack of voting rights to the GPC method. He concluded
that the applicable fair market value of the class A common stock was
$1,131 per share and that the applicable fair market value of the class B
common stock was $1,108 per share.
d. Asset-Based Valuation
Mr. Hawkins chose not to value the subject stock on the basis of
TBC’s assets because he was valuing a minority issue with no power to
force a liquidation. He rationalized that TBC’s shareholders would not
liquidate given that TBC had survived through four generations of the
family of Cornelia Cecil and was the subject of the 2009 Shareholders’
Agreement. He concluded that a willing buyer with knowledge of these
facts would assume that it was too speculative to believe that he or she
would realize anything significant from the underlying assets.
C. Respondent’s Experts
Respondent’s experts are Gretchen Wolf and Robert Morrison.
1. Ms. Wolf
Ms. Wolf appraises art for the IRS Office of Art Appraiser
Services. She has a certification in appraisal studies for fine and
decorative arts from George Washington University and attended
programs at the University of Virginia’s Rare Book School and
Georgetown University for continuing coursework in rare books and fine
arts. She has completed valuation training with the American Society
of Appraisers.
Ms. Wolf valued the five aforementioned works of art owned by
TBC using the market comparison approach. She looked at comparable
sales that had taken place in high-end auction houses and the retail
market where private sales take place. She did not value the artwork
using the income approach because the artwork has little income-
21
[*21] producing value to TBC. She appraised the artwork at a total of
$13,250,000 as of November 19, 2010. 5
2. Mr. Morrison
a. Background
Mr. Morrison works for Morrison Valuation and Forensic Services
as a forensic accountant and business appraiser. He has a bachelor’s of
science in finance from Miami University (Ohio) and a master’s in
business administration from the University of Central Florida. He has
an accredited senior appraisers certification and an intangible asset
certification.
b. NAVM
Mr. Morrison appraised the subject stock using the asset-based
approach’s net asset value method (NAVM). The general premise of the
NAVM is that value equals the sum of the market values of all assets,
including those assets which may not be recorded on the company’s
balance sheet, less the share of the market values of liabilities. He
applied the NAVM in two steps. First, he identified all assets and
liabilities of TBC regardless of whether they were recorded on the
balance sheet and ascertained the fair market value of the assets and
liabilities identified. Second, he ascertained an appropriate adjustment
to reflect the noncontrolling nature of the subject stock.
TBC’s reported assets were $53,580,000 and its liabilities were
$33,349,000 on November 30, 2010. The difference of $20,231,000 is the
net asset value (NAV) before adjustments. Mr. Morrison made two types
of adjustments: reclassification adjustments (which do not affect the
NAV) and valuation adjustments. He made the following valuation
adjustments.
Real Estate. Mr. Morrison relied on a real estate appraisal report
prepared by Ducksworth, Jacobs, Naeger, Swicegood & Thrash, LLC
(Duckworth Appraisal). The effective date of the Duckworth Appraisal
is December 31, 2009, almost 11 months before the valuation date.
During those 11 months, the value of agricultural land in North
Carolina declined approximately 2%. Mr. Morrison adjusted the
Duckworth Appraisal downward by 2% which resulted in a real estate
5As indicated infra p. 22, Mr. Morrison, in taking into account TBC’s collectible
portfolio, relied on Ms. Wolf’s appraisal.
22
[*22] value of $95,922,000. This resulted in an increase of $71,652,000
to his NAV.
Collectible Portfolio. Mr. Morrison took into account TBC’s
portfolio of fine art, antiques, and other collectibles. He relied on an
appraisal report from Christie’s Appraisal, Inc., which estimated that
those items had a total fair market value of $37,947,000 on
December 31, 2009 (Christie’s Appraisal). The appraisal was later
supplemented to include additional collectibles valued at $3,474,000
(Christie’s Supplement). He also relied on Ms. Wolf’s appraisal. His
combining the Christie’s Appraisal value (unadjusted for Ms. Wolf’s
appraisal value) with the Christie’s Supplement value resulted in a total
value of $41,421,000 for TBC’s collection. This resulted in an increase
of $41,421,000 to his NAV.
Installment Note Receivable. TBC reported on its balance sheet
that the installment note that it received in the West Range
sale/leaseback transaction had a value of $554,000, the amount deferred
on the gain. Mr. Morrison adjusted the value of the note to $2,700,000,
the amount of the remaining payments. This resulted in an increase of
$2,146,000 to his NAV.
Trademarks and Trade Name. Mr. Morrison employed the Relief
from Royalty Method (RFRM) to value TBC’s trademarks and trade
name. The premise of the RFRM is that the value of the asset is equal
to the present value of future royalties to license and use the asset as if
it did not own the asset (hence, relief from royalty). Using the RFRM,
he estimated the value of TBC’s trademarks and trade name was
$9,514,000. This resulted in an increase of $9,514,000 to his NAV.
Workforce-in-Place. Mr. Morrison estimated that TBC had 1,700
workers in place and rationalized that, while many of these workers
were unskilled, hourly employees, the assemblage of this workforce-in-
place had value. He ascertained the value using the replacement cost
method (RCM). The premise of the RCM is that the value today equals
the cost to reproduce/replicate the asset. He ascertained that the value
of the workforce-in-place was $1,624,000. This resulted in an increase
of $1,624,000 to his NAV.
After he made the valuation adjustments, the NAV was
$146,587,000. The NAVM assumes a marketable, liquid, and
controlling interest whereas the subject stock is nonmarketable, illiquid,
and noncontrolling. To adjust for this, Mr. Morrison looked in markets
23
[*23] for noncontrolling interests and chose real estate limited
partnerships (RELP) and closed-end funds (CEF). He rationalized that
his observed prices to NAV (P/NAV) of RELPs and CEFs that held assets
similar to TBC’s provided some guidance as to a proper adjustment. For
purposes of this analysis, he considered all of the operating assets
(excluding real estate) as a portfolio of assets, then considered each asset
individually. After he estimated the P/NAV of RELPs and CEFs, the
value indicated by the NAVM is $92 million on a noncontrolling but
marketable and liquid basis.
c. DFBM
Mr. Morrison also valued the subject stock using the income
approach’s discounted future benefits method (DFBM). The DFBM
values a company at the present value of expected future periodic
income benefit stream during a discrete time plus residual value at the
end of the period and discounts for the relative risk of expected future
returns. He employed the following seven steps to ascertain value under
the DFBM: (1) selected the benefit stream to be used; (2) projected the
future annual benefit streams until the company reaches stabilization;
(3) estimated the residual or terminal value of the company at the end
of the discrete projection period; (4) estimated an appropriate discount
rate for the company that compensates both the equity holders and the
debt holders of the company and a stabilized long-term rate of growth;
(5) discounted all future benefit streams, including the residual value,
to present value; (6) adjusted, as appropriate, for nonoperating assets
and/or liabilities; and (7) applied any necessary valuation adjustment.
Mr. Morrison chose an after-tax net cashflow to equity (NCF)
benefit stream because the data used to develop capitalization rates and
discount rates are based on after-tax cashflows. After projecting the
future annual benefit streams, he used the single-period capitalization
model (SPCM) to estimate the residual or terminal value. He opined
that the premise of the SPCM is that the stabilized NCF at the end of
the discrete projection period will grow into perpetuity at some
stabilized level of annual growth. He ascertained that the terminal
value as of the end of the discrete period is determined by capitalizing
that stabilized NCF; and by using a growth rate of 3%, he ascertained
that the stabilized benefit stream of the last year of the discrete
projection period was $1,773,000. He used a 16% cost of equity as his
discount rate. After discounting the future benefits streams, the sum of
all present values of all cashflows is $12,931,000. Because TBC is an S
corporation, Mr. Morrison used the SEAM method to tax affect at a
24
[*24] premium of 17.6%. He next added the values for various
nonoperating assets. Using the DFBM, he reached a value of $36
million.
d. Reconciliation of Two Approaches
In reconciling his two approaches, Mr. Morrison concluded that
the P/NAVs may not actually reflect TBC’s circumstances because TBC,
contrary to RELPs and CEFs, does not seek to maximize its assets. He
also recognized that the DFBM is superior but chose to incorporate the
NAVM into his final evaluation. Ultimately, he assigned a 90% weight
to the DFBM and assigned a 10% weight to the NAVM. He also
ascertained and took into account discounts for a lack of marketability
of 19% for the class A common stock, 22% for the smaller block of class
B common stock, and 27% for the larger block of class B common stock.
His resulting values were $4,000 per share for the class A common stock,
$3,066 per share for the 2,334.25 larger block of class B common stock,
and $3,276 per share for the 1,556.16 2/3 smaller block of class B
common stock.
D. Summary
Below is a summary of the fair market values ascertained by each
expert less Ms. Wolf (three relevant experts):
Class of Stock Adams Hawkins Morrison
Class A Common $1,019.00 $1,131 $4,000
(with tax (with tax (with tax
affecting) affecting) affecting)
Class B Common 1,019.00 1,108 3,276
(Smaller Block) (with tax (with tax (with tax
affecting) affecting) affecting)
1,614.71
(without tax
affecting)
Class B Common 1,019.00 1,108 3,066
(Larger Block) (with tax (with tax (with tax
affecting) affecting) affecting)
1,614.71
(without tax
affecting)
25
[*25] IV. Tax Affecting
With the exception of Ms. Wolf, whose appraisal was limited to
the five pieces of artwork, all experts agree that “tax affecting” must be
considered to ascertain the fair market value of the subject stock
because an S corporation such as TBC, unlike a C corporation, generally
does not pay income tax. Where, as here, the data used to value an
S corporation are largely based on the data from C corporations,
proponents of tax affecting believe that the mismatch from pretax
cashflows and after-tax discount rates must be adjusted through tax
affecting to ascertain the fair market value of the S corporation. See
Dallas v. Commissioner, T.C. Memo. 2006-212, slip op. at 7 n.3 (stating
that “in the context of valuation of stock of an S corporation, ‘tax
affecting’ is the discounting of estimated future corporate earnings on
the basis of assumed future tax burdens imposed on those earnings, such
as from the loss of S corporation status and imposition of corporate-level
tax”).
In Gross v. Commissioner, T.C. Memo. 1999-254, aff’d, 272 F.3d
333 (6th Cir. 2001), we held that tax affecting was improper in valuing
an S corporation. There, the taxpayer sought tax affecting and the
Commissioner argued against it. We held that “[a]s a theoretical matter,
we do not believe that ‘tax-affecting’ an S corporation’s projected
earnings is an appropriate measure to offset that potential burden
associated with S corporations.” Id. slip op. at 24. We concluded that
the principal benefit that shareholders expect from an
S corporation election is a reduction in the total tax burden
imposed on the enterprise. The owners expect to save
money, and we see no reason why that savings ought to be
ignored as a matter of course in valuing the S corporation.
Id. slip op. at 27.
We continued to reject applying tax affecting to determine an
S corporation’s fair market value. See Estate of Gallagher v.
Commissioner, T.C. Memo. 2011-148, slip op. at 32, supplemented by
T.C. Memo. 2011-244 (finding tax affecting not appropriate where
appraiser failed to explain his reasoning for tax affecting); Dallas, T.C.
Memo. 2006-212 (finding tax affecting not appropriate when the
taxpayer presumed that an S corporation would lose its S corporation
status after a sale); Wall v. Commissioner, T.C. Memo. 2001-75, slip op.
at 27 n.19 (“[T]ax-effecting an S corporation’s income, and then
26
[*26] determining the value of that income by reference to the rates of
return on taxable investments, means that an appraisal will give no
value to S corporation status.”); see also Estate of Giustina v.
Commissioner, 586 F. App’x 417 (9th Cir. 2014), rev’g and remanding
T.C. Memo. 2011-141.
In Estate of Jones, T.C. Memo. 2019-101, however, we concluded
that tax affecting was appropriate in that setting. There, the parties
agreed that a hypothetical buyer and seller would take into account the
entity’s business form when determining the value of a limited partner
interest; they simply disagreed on how to account for it. The
Commissioner argued that a zero percent tax rate should apply. The
Commissioner disagreed with his experts, who were largely silent except
to point out that the taxpayer’s tax affecting was improper, not because
the business paid entity level tax, but because the nature of the business
meant that its rates of return were closer to the property rates of tax.
Thus, we did “not have a fight between valuation experts but a fight
between lawyers.” Id. at *39.
Most recently, in Estate of Jackson v. Commissioner, T.C. Memo.
2021-48, we did not find tax affecting appropriate. There, all of the
estate’s experts agreed that the buyer would be a C corporation and that
the value should be tax affected to account for the tax liability of the
C corporation. Each expert, however, used a different tax rate. The
Commissioner’s experts strongly disagreed that tax affecting was
appropriate. We distinguished Estate of Jones by noting that Estate of
Jones was a situation where the experts agreed to take into account the
form of the business entity and agreed on the entity type. We held that
tax affecting would not be appropriate because the estate’s experts had
not persuaded us that the buyers would be C corporations. Id. at *82.
We also stated, though, that
[w]e do not hold that tax affecting is never called for. But
our cases show how difficult a factual issue it is to
demonstrate even a reasonable approximation of what that
effect would be. In Estate of Jones, there was expert
evidence on only one side of the question, and that made a
difference.
Id. at *82–83.
Here, experts on both sides agree that tax affecting is necessary
to value the subject stock. Messrs. Morrison and Hawkins also agree
27
[*27] that the SEAM method is the appropriate method to employ in the
setting at hand to account for tax affecting and that a factor of at least
17.6% applies here for that purpose. As we observed in Estate of
Jackson, there is not a total bar against the use of tax affecting when
the circumstances call for it. Now given that each side’s experts (with
the exception of Ms. Wolf who did not opine on this point) totally agree
that tax affecting should be taken into account to value the subject stock,
and experts on both sides agree on the specific method that we should
employ to take that principle into account, we conclude that the
circumstances of these cases require our application of tax affecting.
While Messrs. Morrison and Hawkins do not agree on the specific rate
that applies here to implement tax affecting (Mr. Hawkins determined
the rate to be 24.6% while Mr. Morrison determined the rate to be
17.6%), we consider it appropriate on the basis of the record (and relying
on Mr. Morrison’s opinion in this regard) to set that rate at 17.6%. We
emphasize, however, that while we are applying tax affecting here, given
the unique setting at hand, we are not necessarily holding that tax
affecting is always, or even more often than not, a proper consideration
for valuing an S corporation.
V. Our Impression of the Experts
A. Mr. Morrison
We are unpersuaded by Mr. Morrison’s opinion on the fair market
value of the subject stock. In that TBC is an operating company whose
existence does not appear to be in jeopardy, and not a holding company,
we believe that TBC’s earnings rather than its assets are the best
measure of the subject stock’s fair market value. See Estate of Ford v.
Commissioner, T.C. Memo. 1993-580, 1993 Tax Ct. Memo LEXIS 595,
at *14 (1993) (“[P]rimary consideration is generally given to earnings in
valuing the stock of an operating company, while asset values are
generally accorded the greatest weight in valuing the stock of a holding
company.”), aff’d, 53 F.3d 924 (8th Cir. 1995).
Mr. Morrison’s reliance on the asset-based approach also appears
to be inconsistent with the Uniform Standards of Professional Appraisal
Practice (USPAP). USPAP Standards Rule 9-3 states:
In developing an appraisal of an equity interest in a
business enterprise with the ability to cause liquidation, an
appraiser must investigate the possibility that the
business enterprise may have a higher value by liquidation
28
[*28] of all or a part of the enterprise . . . . However, this typically
applies only when the business equity being appraised is in
a position to cause liquidation.
That is not the setting here. The liquidation of TBC is most
unlikely (if likely at all) in that a hypothetical buyer and seller would
need to (1) acquire additional shares in order to cause TBC’s liquidation;
(2) convince other shareholders to vote for a liquidation; or (3) wait until
the shareholders or their heirs decide to liquidate TBC, and we consider
each of these three events unlikely to occur. Bill Cecil, Dini Pickering,
Chase Pickering, Aubrey Cecil, and Ryan Cecil all credibly testified that
they had no intention of selling their TBC stock or liquidating TBC, and
we find that testimony as a fact. In so doing, we decline respondent’s
request to disregard that testimony as self-serving. The mere fact that
a witness’s testimony may serve his or her interests does not necessarily
mean that we will disregard that testimony as untrustworthy. See, e.g.,
Diaz v. Commissioner, 58 T.C. 560, 564 (1972). Our acceptance of their
credible “self-serving” testimony is even more appropriate here, where
documentary and other evidence supports that testimony. The 2009
Shareholders’ Agreement and the 1999 Voting Trust sufficiently
established that petitioners, their children, and their grandchildren
aspired to keep TBC in their family by restricting the transfer of stock
outside of the family. We also understand the family’s holding of the
annual meetings to serve strategically to minimize and control business
disputes that could occur within the family, to obviate any TBC
shareholder’s rogue attempt to sell his or her TBC shares to an outsider,
and to make most unlikely any breakup of TBC similar to the breakup
effected by Mr. Cecil and his brother in 1979. These meetings also serve
to groom TBC’s shareholders to manage TBC as a family asset. The fact
that TBC has been in the family since its incorporation in 1932 also
speaks loudly to the fact that the Cecil and the Pickering families are
committed to maintaining TBC as a family business.
We assign zero weight to Mr. Morrison’s valuation opinion.
B. Mr. Hawkins
We also have concerns with the thrust of Mr. Hawkins’s valuation
opinion. In using the GPC method to value the subject stock, he relied
on a single company, Cedar Fair. We have previously held that it is
inconceivable that a hypothetical buyer would consider only a single
alternative comparable. See Estate of Hall v. Commissioner, 92 T.C. 312,
339–40 (1989). Although Cedar Fair does operate competitors of TBC,
29
[*29] the lack of multiple comparable companies renders his GPC
appraisal suspect. Furthermore, TBC lacks the traditional features of
its competitors such as diversification. Cedar Fair is larger, more
diversified, and more profitable than TBC.
Nor did we view Mr. Hawkins during his trial testimony to
express much confidence in his GPC analysis. He acknowledged that
Cedar Fair operates at a national level while TBC operates at a regional
level. He acknowledged that Cedar Fair’s 2009 admissions revenue is
significantly greater than TBC’s 2009 admissions revenue. He
acknowledged that Cedar Fair’s 2009 pretax profit was significantly
greater than TBC’s 2009 pretax profit. While multiples could be found
that would have made Cedar Fair more comparable, the fact that Cedar
Fair is the only comparable company Mr. Hawkins used and that it is so
different renders questionable his decision to give the GPC method a
50% weight.
We also find fault with Mr. Hawkins’s application of the
capitalization of net cashflow method. In his calculations, he used TBC’s
median 2006 to TTM 2010 EBT. Between 2007 and 2009, the United
States and much of the world experienced the Great Recession, the worst
economic downturn since the Great Depression. Given the timing of the
Great Recession and TBC’s loss for 2008, the only year since 1995 that
TBC had realized a loss, we consider the 2008 loss to be an aberration
in TBC’s financial operations and do not think it was appropriate for Mr.
Hawkins to have included TBC’s 2008 financial information in his
analysis. While we recognize that his use of the median rather than the
average helps mitigate the distortion caused by the Great Recession, the
distortion is large enough that it renders his analysis on this point
unpersuasive.
C. Mr. Adams
Mr. Adams’s application of the GPC and similar transactions
methods also has flaws. In his GPC valuation, he found five comparable
companies. Two of those companies are not comparable at all. TBC is
in the business of historic hospitality. Its guests enjoy retail shopping,
restaurants, and various outdoor activities in an environment
reminiscent of the Gilded Age. While Peak Resorts, Inc., Vail Resorts,
Inc., and Whistler Blackcomb Holdings, Inc., operate resorts that
similarly offer various outdoor activities in the hospitality business, the
same is not true as to Pairi Daiza SA and Premier Exhibitions, Inc. The
former operates a park which houses thousands of animals, and it does
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[*30] so at a location (in Belgium) that is vastly different from western
North Carolina. The latter presents museum exhibitions outside of the
hospitality industry and does that worldwide while TBC’s operation is
limited to a single city, Asheville, and the surrounding area.
With regard to Mr. Adams’s similar transactions valuation, two
of the six transactions occurred during the Great Recession. American
Golf Corp. was acquired on October 29, 2008, and Sydney Attractions
Group, Pty Ltd., was acquired on February 29, 2008, and we find it most
likely that the Great Recession affected the purchase prices in those two
transactions. We also add that American Golf Corp. and Sydney
Attractions Group, Pty Ltd., are not in the same hospitality industry as
TBC. The former owns and operates golf courses. The latter primarily
operates the Sydney Aquarium. We fault Mr. Adams for including those
two transaction in his analysis.
Notwithstanding the flaws in Mr. Adams’s applications of the
GPC and similar transactions methods, however, we do not find those
flaws to be fatal to his overall opinion. It is abundantly clear that TBC
is a unique company and finding an exact match would be near to
impossible. We consider it noteworthy that Mr. Adams assigned only a
25% weight to each method, which as we see it, adds a degree of
reliability to his application of the GPC and similar transactions
method.
Most importantly, the thrust of his overall opinion is his
application of the DCF method, an application with which we find no
fault. Indeed, on brief, respondent urges us to adopt Mr. Adams’s
valuation based on his DCF analysis with one correction. After
determining the MVIC, Mr. Adams added back the value of TBC’s
nonoperating asset, which was TBC’s excess debt-free working capital.
Respondent contends that the installment note from the West Range
transaction, accounts receivable from the shareholders, and Busbee
Mountain were nonoperating assets whose value should also be added
back. We disagree. Mr. Adams included the excess debt-free working
capital because it added value to the TBC stock in that TBC funds would
be available for distribution to the shareholders at the end of the year.
TBC’s underlying assets did not add any value to the TBC stock.
D. Conclusion
We find flaws with Mr. Hawkins’s and Mr. Morrison’s analyses
that lead us to disregard the thrust of their opinions on the fair market
31
[*31] value of the subject stock. While there are issues with Mr.
Adams’s application of the GPC and similar transactions methods, we
find that his valuation (exclusive of the discounts discussed below), with
one adjustment, is the truest value of the subject stock’s prediscount fair
market value. The single adjustment, as discussed above, is that tax
affecting should be reflected at a rate of 17.6%.
VI. Applicable Discounts
A. Discount for a Lack of Control
Mr. Adams applied a discount for a lack of control to the similar
transactions method because, he surmised, a prudent investor would not
pay full value for a noncontrolling interest. TBC’s owners also made no
effort to sell TBC in the marketplace and had previously rejected
overtures to sell TBC. Mr. Adams reviewed publicly announced
transactions of noncontrolling interests and arrived at a 20% discount
for a lack of control.
Mr. Morrison looked at various RELPs and CEFs, which often
trade at discounts for a lack of control, and arrived at a 38% discount.
We disagree with Mr. Morrison’s discount because his analysis focused
on businesses holding investments rather than on operating companies
like TBC. We accept Mr. Adams’s discount rate of 20% for a lack of
control.
B. Discount for a Lack of Voting Rights
Mr. Hawkins applied a 2% discount in valuing the class B
common stock because, he concluded, that stock lacked voting rights.
That conclusion is not totally accurate in that class B shareholders can
vote in limited circumstances. Mr. Hawkins also misrelied on two
studies which analyzed data from 1994 and 1999. Those data are too
old. Furthermore, in arriving at their values, each of the three relevant
experts already accounted for the fact that he was valuing a nonvoting
minority interest. We decline to apply a discount for a lack of voting
rights.
C. Discount for a Lack of Marketability
Each of the three relevant experts applied a discount for a lack of
marketability because the shares are not registered for public sale or
sold on public markets. Mr. Adams applied a discount rate of 30% to
each method he used. Mr. Hawkins applied a 25% discount rate. Mr.
32
[*32] Morrison applied a discount rate of 19% to the class A common
stock, of 22% for the smaller block of class B common stock, and of 27%
for the larger block of class B common stock.
In arriving at his discount rate, Mr. Adams looked at studies of
the sales of temporarily restricted shares of otherwise publicly traded
companies (letter stock) and sales of closely held companies before
subsequent initial public offerings (IPO). He also conducted a put option
analysis. We are not sold on that process. The studies that Mr. Adams
relies on analyze data that are too old, e.g., the latest study looks at data
from 1969 to 1992, and most of the studies look at data from the 1970s
and 1980s. He also admits that the pre-IPO studies are unreliable and
may overestimate or underestimate actual marketability discounts.
And as for his put option analysis, which produced a range of discount
rates from 11.6% to 22.6%, we cannot fathom how that analysis supports
his final discount rate of 30%.
We turn to the discount rates ascertained by Mr. Hawkins and
Mr. Morrison. We conclude that the appropriate discount rates are the
three rates that Mr. Morrison ascertained. It is logical for us to conclude
that the smaller blocks of class B common stock would be more easily
marketed than the larger blocks of the class B common stock. We also
agree with Mr. Morrison that different discount rates should apply to
the two classes of stock because the voting rights that attach to the class
A stock should make that class of stock more marketable than the class
B common stock.
VII. Conclusion
We accept the valuation reached by Mr. Adams before he took into
account any tax affecting and before he applied any discounts. We
accept Mr. Adams’s 20% discount for a lack of control and Mr. Morrison’s
discount rates of 19%, 22%, and 27% for a lack of marketability.
We have considered all of the arguments made by the parties and,
to the extent they are not addressed herein, we find them to be moot,
irrelevant, or without merit.
To reflect the foregoing,
Decisions will be entered under Rule 155.