DocketNumber: No. 24883-92
Citation Numbers: 81 T.C.M. 1126, 2001 Tax Ct. Memo LEXIS 41, 2001 T.C. Memo. 31
Filed Date: 2/12/2001
Status: Non-Precedential
Modified Date: 4/17/2021
2001 Tax Ct. Memo LEXIS 41">*41 Decision will be entered under Rule 155.
SUPPLEMENTAL MEMORANDUM FINDINGS OF FACT AND OPINION
RUWE, JUDGE: This case is before the Court on remand from the Court of Appeals for the Ninth Circuit for further consideration consistent with its opinion in
We stated the detailed and intricate facts of this case in our original opinion. See
1951 AGREEMENT BETWEEN JOSEPH AND CYRIL
On October 31, 1951, decedent, Cyril Magnin (Cyril), entered into an agreement (the 1951 Agreement or the Agreement) with his father, Joseph Magnin (Joseph), relating to shares of stock in two companies, "Joseph Magnin Co., Inc." (JM) and "Specialty Shops, Inc." (Specialty).
The preamble to the Agreement set forth the following premises:
WHEREAS the parties hereto are the owners of the majority
of the issued and outstanding stock of JOSEPH MAGNIN COMPANY,
INC., a California Corporation, and SPECIALTY SHOPS, INC., a
Nevada Corporation, hereinafter called "said corporations"; and
WHEREAS the parties hereto have over many years last past
mutually controlled the operation and management of said
corporations in the best interests of said corporations and the
2001 Tax Ct. Memo LEXIS 41">*43 stockholders thereof; and
WHEREAS Cyril Magnin desires that upon the death of Joseph
Magnin, the control of said corporations shall be vested in
Cyril Magnin for the term of his life; and
WHEREAS Joseph Magnin is willing under and subject to the
terms and conditions hereinafter set forth, to provide in his
Last Will and Testament that all of his stock, both common and
preferred, of said corporations shall be bequeathed to Cyril
Magnin, as trustee for the benefit of Cyril Magnin, Ellen Magnin
Newman, Donald Magnin and Jerry Magnin, and that Cyril Magnin,
as said trustee, shall have the sole right to vote said stock
for the term of his life as provided in said Last Will and
Testament[.]
Consistent with these premises, the terms of the Agreement provided that Joseph agreed to bequeath his JM and Specialty stock to Cyril as sole trustee for Cyril's life as already provided in his will, which provision he agreed not to revoke. Cyril agreed to will in trust all his JM and Specialty stock "now owned or hereafter acquired" to a bank trustee for the benefit of his three2001 Tax Ct. Memo LEXIS 41">*44 children. The Agreement further provided that in the event of the sale of all or any part of the stock of the corporations, or in the event of a dissolution of either corporation, Cyril would create a trust of the proceeds he received, under the terms of which the income of said trust would belong to Cyril for his life, and the principal would be distributed upon his death to his three children.
Prior to the 1951 Agreement, Joseph and Cyril were concerned about the future of their businesses. Cyril had begun dating women after the death of his wife, Anna, and Joseph wanted to ensure that the business would remain in the family and that Cyril's shares of stock would not go to one of these women. Cyril, on the other hand, was concerned about control of the business upon Joseph's death. Control of the business was very important to Cyril; he saw control of the business as a means to enhance his social, political, and business position in the community. Cyril also feared that if he had to share control with his children, he might someday be fired by them.
As of October 31, 1951, JM had issued and outstanding 255,174 shares of stock, consisting of 72,717 shares of preferred stock and2001 Tax Ct. Memo LEXIS 41">*45 182,457 shares of common stock, all of which had voting rights. 2001 Tax Ct. Memo LEXIS 41">*46 ______
Total 72,112 86,079
Thus, Joseph held 28.26 percent of the voting power of JM, and Cyril held 33.73 percent of the voting power; together their shares represented 61.99 percent of the voting power.
As of October 31, 1951, Specialty had issued and outstanding 101,000 shares of stock, consisting of 1,000 shares of voting common stock and 100,000 shares of nonvoting preferred stock. The ownership of Specialty stock as of that date is unclear, but it appears that Jean Blum owned 500 shares of the common stock and 50,000 shares of the preferred stock, and Cyril, Joseph, and Donner Factors together owned the remaining 500 shares of common stock and 50,000 shares of preferred stock. For purposes of valuing the respective stock interests of Cyril and Joseph, both parties' experts assumed the following share ownership in Specialty: 2001 Tax Ct. Memo LEXIS 41">*47 Joseph Cyril
______ _____
Voting common stock 112.5 47.5
Nonvoting preferred stock 25,000 25,000
On October 31, 1951, Cyril also held certain options to acquire JM stock. On October 31, 1945, Joseph had granted to Cyril and Anna (as joint tenants with the right of survivorship) an option to purchase 18,158 shares of Joseph's common stock in JM at $ 1 per share. The option could be exercised only within 90 days after Joseph's death. Cyril also held various options to purchase 7,185 shares of JM common and 11,850 shares of JM preferred stock owned by Edward R. and Mae C. Nichols, which were granted by four agreements dated between April 4, 1941, and May 6, 1943 (the Nichols options). 2001 Tax Ct. Memo LEXIS 41">*48 PERFORMANCE OF OCTOBER 31, 1951, AGREEMENT
Joseph died on April 29, 1953. Cyril was the executor of Joseph's estate. Joseph's Last Will and Testament bequeathed all his stock in JM and Specialty to Cyril in trust and provided that Cyril was to divide the stock into four separate trusts. One-half of the stock was to be placed in the Cyril Magnin Trust for the benefit of Cyril. One-sixth of the stock was to be placed in each of the three remaining trusts, one trust for the benefit of each of Joseph's three grandchildren. As the trustee of the four trusts, Cyril had the power to vote the stock. These provisions were as promised by Joseph to Cyril under the October 31, 1951, agreement. Additionally, Cyril received a life interest in the income from the Cyril Magnin Trust.
On May 25, 1971, Cyril created three trusts, one for each of his three children. He transferred, inter alia, the proceeds of his JM stock that had been sold in a 1969 buyout of all JM stock by Amfac, Inc. Under the terms of each trust, Cyril retained an income interest for his life, and upon Cyril's death, the trust was to terminate, and the principal and undistributed income were to be distributed to the beneficiary. 2001 Tax Ct. Memo LEXIS 41">*49 This transfer to the 1971 trusts was made in fulfillment of Cyril's obligations under the October 31, 1951, agreement with Joseph.
FACTS RELATED TO VALUE OF JM AND SPECIALTY
JM originally operated one location in downtown San Francisco. In 1928, a second store was opened in Palo Alto, California, and three other stores were opened between 1943 and 1950 -- one in San Mateo and two in Sacramento, California. JM did not begin to expand considerably until the mid-1950's, eventually operating 32 stores by the end of 1969. JM was primarily engaged in the sale of women's clothing and accessories, and it also provided beauty salon services. JM catered toward younger women between the ages of 20 and 30 years old and in middle- to upper-income brackets.
In January 1940, Cyril, Joseph, and Jean Blum formed Specialty for the purpose of operating a branch store in Reno, Nevada. At that time, JM lacked the capital to open a new store. Specialty opened a second store in Oakland, California, in 1948, and a third store in Lake Tahoe, Nevada, in 1950. All Specialty's stores were operated under the JM name and by JM management, and they had merchandise and customers similar to JM's.
Whenever possible, 2001 Tax Ct. Memo LEXIS 41">*50 JM and Specialty elected to lease rather than own their store locations. The companies did not have a great deal of available capital, and leasing store locations permitted them to expand.
Relevant financial data from the financial statements of JM for the fiscal years ending January 31, 1949 through 1952, are as follows:
Fiscal Year Ending January 31
_____________________________
(In Thousands)
______________
1949 1950 1951 1952
______ ______ ______ ______
Assets $ 1,778 $ 1,886 $ 1,983 $ 2,161
Earned surplus 645 749 757 782
Sales 4,994 4,856 5,239 5,591
Net income 117 58 41 38
Similarly, relevant data from the financial statements of Specialty2001 Tax Ct. Memo LEXIS 41">*51 for the fiscal years ending January 31, 1949 through 1952, are as follows:
Fiscal Year Ending January 31
_____________________________
(In Thousands)
______________
1949 1950 1951 1952
______ ______ ______ ______
Assets $ 452 $ 405 $ 385 $ 432
Earned surplus 120 103 127 148
Sales 742 644 593 677
Net income 35 6 24 21
On his 1948 gift tax return, Joseph valued the JM common stock at $ 1.86 per share. On his 1950 gift tax return, Joseph valued the JM common stock between $ 1.98 and $ 2.25 per share. On his 1949 gift tax return, Cyril valued the JM common stock at $ 2.25 per share and the JM preferred stock at $ .90 per share2001 Tax Ct. Memo LEXIS 41">*52 as of December 24, 1949. Cyril's 1949 gift tax return was not filed until 1957, and it acknowledged that the values were in line with the stock values determined in connection with the settlement of Joseph's estate. Joseph died on April 29, 1953. Joseph's estate tax return included the value of JM and Specialty stock as follows:
_____ _______________
18,158 shares JM subject to option
at $ 1 per share $ 1.00
33,490 shares JM, common 1.50
21,464 shares JM, preferred .90
112-
The IRS estate tax examiner proposed certain adjustments to Joseph's taxable estate, including an increase in the per-share value of JM common and preferred stock to $ 2.25 and $ 1, respectively. The estate agreed to these changes. 2001 Tax Ct. Memo LEXIS 41">*53 DEFICIENCY AMOUNT
Cyril died testate on June 8, 1988, in San Francisco, California. Donald Isaac Magnin, Cyril's oldest son, is the executor of Cyril's estate, and he filed a timely Federal estate tax return. The estate tax return identified the 1951 Agreement and stated that Cyril received adequate and full consideration under the Agreement.
In the notice of deficiency, respondent determined a deficiency of $ 1,921,528 in Federal estate tax. The deficiency was based in large part on respondent's determination that the value of the three trusts created in 1971, in which Cyril retained a life interest, was includable in the gross estate. In the notice of deficiency, respondent determined that the value of the three trusts includable in the gross estate was $ 3,789,849, which was calculated by taking the value of the three trusts at the appropriate valuation date ($ 3,833,727), less the value of consideration received by Cyril in connection with the 1951 Agreement ($ 43,878). 2001 Tax Ct. Memo LEXIS 41">*54 In an amended answer, respondent asserted a deficiency in estate tax of $ 2,079,213, based in part on respondent's revised determination that Cyril received no consideration for the transfers and that the entire value of the three trusts was includable in the gross estate. Respondent's assertion in the amended answer that there was no consideration increased the original deficiency. We held that the issue of whether the consideration was less than $ 43,878 was a new matter, and that the burden of proof was on respondent with respect to this issue. See
Both parties' experts used a valuation date of October 31, 1951, to determine the values of the interests exchanged between Joseph and Cyril. On brief, respondent argued that the amount of the consideration received by Cyril was limited to approximately $ 30,500, based on the report and testimony of an expert appraiser, Stephen A. Stewart (Mr. Stewart). The estate argued that the consideration received by Cyril was $ 58,146, based on the report and testimony of its expert appraiser, Bryan H. Browning (Mr. Browning). Mr. Stewart assigned a value of $ 244,000 to Cyril's2001 Tax Ct. Memo LEXIS 41">*55 entire stock interest, $ 123,000 of which was allocated to Cyril's remainder interest. Mr. Browning assigned a value of $ 83,600 to Cyril's entire stock interest, $ 42,000 of which was allocated to Cyril's remainder interest.
PRIOR COURT PROCEEDINGS
The main issue for decision in this case was whether Cyril's 1971 transfers in trust with retained life estates were includable in his gross estate, or whether they were excluded from the estate because they were bona fide sales for "adequate and full consideration" within the meaning of
2001 Tax Ct. Memo LEXIS 41">*57 The estate appealed our decision. The Court of Appeals for the Ninth Circuit declined to follow its previous holding in
The Court of Appeals also discussed our previously mentioned footnote in which we said that even if the proper measure of full consideration had been the remainder interest, the estate had not shown that Cyril received adequate consideration for that interest. 2001 Tax Ct. Memo LEXIS 41">*58 See
2001 Tax Ct. Memo LEXIS 41">*59 OPINION
A decedent's gross estate generally includes the value of all property interests transferred by the decedent during his life in which he retained for his life the right to the possession, enjoyment, or income from the property. See
2001 Tax Ct. Memo LEXIS 41">*60 As a result of the 1971 transfers in trust of the proceeds of Cyril's shares, Cyril retained a life estate within the meaning of
In determining the value of unlisted stocks, actual arm's- length sales of such stock conducted in the normal course of business within a reasonable time before or after the valuation date are the best indicia of market value. See
(a) The nature of the business and the history of the
enterprise from its inception.
(b) The economic outlook in general and the condition and
outlook of the specific industry in particular.
(c) The book value of the stock and the financial condition
of the business.
(d) The earning capacity of the company.
(e) The dividend-paying capacity.
(f) Whether or not the enterprise has goodwill or other
intangible value.
(g) Sales of the stock and the size of the block of stock
to be valued.
(h) The market price of stocks of corporations engaged in
the same or a similar line of business having2001 Tax Ct. Memo LEXIS 41">*63 their stocks
actively traded in a free and open market, either on an exchange
or over-the-counter.
[
Both parties relied on the reports and testimony of expert witnesses to assign values to the consideration received by Cyril and the property interest transferred by Cyril. While expert opinions may assist in evaluating a claim, we are not bound by these opinions and may reach a decision based on our own analysis of all the evidence in the record. See
Respondent applied the hypothetical willing buyer and willing seller standard set forth under
Respondent relied on the report and testimony of an expert appraiser, Mr. Stewart. The parties agree that Mr. Stewart qualifies as an expert for purposes of this case.
Mr. Stewart determined the value of the property interests in issue in the following manner. He determined the values of the preferred stocks of JM and Specialty by comparing them to five companies which he felt had similar characteristics. Mr. Stewart then valued JM and Specialty using a market approach. To determine the overall values of the common stocks under his market approach, Mr. Stewart subtracted the value he assigned to the preferred stocks from the values he assigned to JM and Specialty and then applied a marketability discount. 2001 Tax Ct. Memo LEXIS 41">*67 and received by Cyril to arrive at his valuation of the interests at issue.
i. VALUATION OF JM AND SPECIALTY
In applying the market comparable method to value JM, Mr. Stewart compared JM's financial performance and position with five publicly traded companies listed on the New York Stock Exchange (NYSE). The companies used were: (1) Allied Stores Corp.; (2) Marshall Field & Co.; (3) May Department Stores; (4) Federated Department Stores; and (5) R.H. Macy & Co. Mr. Stewart chose these five companies based on such factors as line of business, geographic location, sales, total assets, market capitalization, and number of outstanding shares. All five companies were department stores which were substantially larger in terms of total assets 2001 Tax Ct. Memo LEXIS 41">*68 a wider variety of products for sale. Also, other than one Macy's store in San Francisco, none of the five companies had stores located in San Francisco or Reno. Mr. Stewart compared JM to the companies using the following measures: (1) Invested capital to revenue; (2) earnings before depreciation, interest expense and taxes (EBDIT); and (3) price-to-book value. These measures indicated values of the aggregate minority interest in JM ranging from $ 906,000 to $ 1.31 million. Giving greater weight to the price-to-book measure, Mr. Stewart determined that JM had an overall value of approximately $ 1 million.
2001 Tax Ct. Memo LEXIS 41">*69 In applying the income approach to JM, Mr. Stewart projected net income 5 years forward from the year ending January 31, 1952. 2001 Tax Ct. Memo LEXIS 41">*70 Mr. Stewart used the same appraisal procedures to value Specialty. In applying the market comparable method, Mr. Stewart used the same five companies that he used in valuing JM. The invested capital to revenue, EBDIT, and price-to-book value measures indicated values of the aggregate minority interest in Specialty ranging from $ 178,000 to $ 327,000. Giving greater weight to the price-to-book value, Mr. Stewart determined that Specialty had a value of approximately $ 300,000. Mr. Stewart applied the same valuation methodology under the DCF method that he used in valuing JM. On the basis of the considerations and findings, Mr. Stewart determined that the value of Specialty under the DCF method was $ 358,000.
ii. VALUATION OF JM AND SPECIALTY PREFERRED STOCK
Mr. Stewart determined the value of the preferred stocks of JM and Specialty by analyzing data relating to dividends paid by the same five companies he used in valuing JM and Specialty because he believed they had similar preferred stock characteristics (such as paid dividends, dividends cumulative, and voting rights). Mr. Stewart concluded that an investor seeking to buy JM preferred stock would require a 6-percent dividend rate. 2001 Tax Ct. Memo LEXIS 41">*71 This rate was higher than the 4.1- percent to 4.6-percent rate he felt was required by investors in publicly traded stocks because of a lack of access to a liquid market and possible transfer restrictions. Because JM preferred stock had an 8-percent dividend rate, Mr. Stewart determined the value to be 8 percent divided by 6 percent, or $ 1.33 per share. On the basis of the total number of preferred shares, 72,717, Mr. Stewart determined that the aggregate preferred stock value of JM was $ 97,000.
Mr. Stewart felt that an investor would require an 8- percent dividend rate with respect to the Specialty preferred stock. This determination was based on the facts that Specialty preferred stock was noncumulative, nonvoting, carried a 5-percent dividend rate, had not paid dividends yet, did not have access to a liquid market, and that the corporation had rights concerning redemption and first refusal. Mr. Stewart divided the 5-percent rate by 8 percent, the yield he believed an investor would require, and arrived at a value of 62.5 percent of par value. Specialty preferred stock had a par value of $ 1 per share; thus, Mr. Stewart concluded that the value of Specialty preferred stock was2001 Tax Ct. Memo LEXIS 41">*72 $ 0.625 per share. On the basis of the total number of preferred shares, 100,000, Mr. Stewart determined that the aggregate preferred stock value of Specialty was $ 62,500.
iii. VALUATION OF JM AND SPECIALTY COMMON STOCK
To determine the value of JM common stock under the market approach, Mr. Stewart took the value he assigned to JM, $ 1 million, and subtracted the value he assigned to the JM preferred stock, $ 97,000. This resulted in an aggregate common stock value of $ 903,000, before any discounts. Mr. Stewart then applied a 35-percent lack of marketability discount to this figure and determined a value of $ 585,000 for the total common stock value of JM. 2001 Tax Ct. Memo LEXIS 41">*73 the value of JM common stock under the DCF method, before marketability and minority discounts, to be $ 578,000, or $ 3.17 per share. 2001 Tax Ct. Memo LEXIS 41">*74 Mr. Stewart gave approximately equal weight to the market approach and the income approach, which results in an aggregate value of JM common stock of $ 440,000, or $ 2.41 per share.
To determine the value of the Specialty common stock under the market approach, Mr. Stewart took the overall value he assigned to Specialty, $ 300,000, and subtracted the value he assigned to the Specialty preferred stock, $ 62,500. Mr. Stewart then applied a 35- percent lack of marketability discount to this figure and determined a value of $ 155,000 for the total common stock of Specialty. 2001 Tax Ct. Memo LEXIS 41">*75 was made by taking the value he assigned to Specialty under the income approach, $ 358,000, and subtracting the value he assigned to the Specialty preferred stock, $ 63,000. 2001 Tax Ct. Memo LEXIS 41">*76 allocated the $ 1 option price to Joseph. Mr. Stewart then subtracted the $ 1 option price from the value he placed on the JM common stock, $ 2.41, and allocated $ 1.41 per share to Cyril for the JM common stock subject to the option. With respect to the Nichols options, Mr. Stewart did not determine that any portion of the value of the stock should be apportioned to Cyril. Respondent has not assigned a value to the Nichols options, nor has respondent argued that the Nichols options must be considered in determining the value of the interest transferred by Cyril. 2001 Tax Ct. Memo LEXIS 41">*77 of Mr. Stewart. Respondent determined this amount by first multiplying the stock interests Joseph held in JM and Specialty by the values per share that Mr. Stewart determined in his report. The following chart summarizes these calculations:
Entity No. of Shares Per Share Value Total Value
______ _____________ _______________ ___________
JM:
Common 32,490 $ 2.41 $ 78,301
Preferred 21,464 1.33 28,547
Common option 18,158 1.00 18,158
Specialty:
Common 112.5 152.00 17,100
Preferred 25,000 .625 15,625
2001 Tax Ct. Memo LEXIS 41">*78 _______
Total 157,731
Mr. Stewart then used a factor for calculating a life interest of a 52-year-old male to take effect upon the termination of the life of an 83-year-old male. Mr. Stewart applied this life-interest factor of .36380 to the $ 158,000 figure he determined to be the value of Joseph's stock interests in JM and Specialty, yielding a total life interest amount of $ 57,000. Mr. Stewart then divided this number in half because Cyril had received only a 50-percent life interest in Joseph's stock. Mr. Stewart, in recognizing that Cyril had obtained voting control over 100 percent of Joseph's stock, applied a right- to-vote value of 7 percent on the other 50 percent of stock Joseph transferred, $ 28,500, and arrived at a value of approximately $ 2,000 for voting rights in 50 percent of Joseph's stock. Mr. Stewart used the 7-percent figure based on valuation publications which suggest that voting rights for minority interests are accorded little or no value unless they are significant. Mr. Stewart added the 50-percent life-income interest, $ 28,500, 2001 Tax Ct. Memo LEXIS 41">*79 to the voting rights interest in the other 50 percent of Joseph's stock, $ 2,000, to determine an overall value of approximately $ 30,500.
vi. VALUE OF REMAINDER TRANSFERRED BY CYRIL
Respondent assigns a total value of $ 244,000 to Cyril's entire stock interests, of which $ 123,000 is allocated to the remainder interest transferred by Cyril. The following chart summarizes how respondent determined the value of Cyril's entire stock interest:
Entity No. of Shares Per Share Value Total Value
______ _____________ _______________ __________
JM:
Common 75,044 $ 2.41 $ 180,856
Preferred 11,035 1.33 14,677
Common option 18,158 1.41 25,603
Specialty:
Common 47.5 152.00 7,220
Preferred 25,000 .625 15,625
________
Total 2001 Tax Ct. Memo LEXIS 41">*80 243,981
Mr. Stewart applied a remainder factor of .50413 to the $ 244,000 figure he determined to be the value of Cyril's entire stock interests in JM and Specialty as of October 31, 1951, yielding a remainder interest amount of $ 123,000. Thus, Mr. Stewart determined that the value of the property interest transferred by Cyril as of October 31, 1951, was $ 123,000.
2. THE ESTATE'S EXPERT
The estate relied on the report and testimony of its expert appraiser, Mr. Browning. The parties agree that Mr. Browning qualifies as an expert for purposes of this case.
Mr. Browning determined the values of the property interests in issue in the following manner. Mr. Browning, using a combination of market and income approaches, determined the business enterprise values 2001 Tax Ct. Memo LEXIS 41">*81 interests transferred and received by Cyril, adjusting for the control value he believed Cyril received in connection with JM, in order to value the interests at issue.
i. VALUATION OF JM AND SPECIALTY
Mr. Browning used the market comparable and the discounted cash-flow methods of valuation to determine the value of JM. Mr. Browning compared JM with the following companies: (1) City of Paris; (2) Emporium Capwell Co.; (3) Roos Bros., Inc.; and (4) Western Department Stores. All four companies were publicly traded, though not on the NYSE, had stores located in the San Francisco area, and were closer in size in terms of total assets 2001 Tax Ct. Memo LEXIS 41">*82 (EBITDA). These measures indicated a business enterprise value of JM ranging from $ 500,000 to $ 800,000. On the basis of this range, Mr. Browning determined that the total business enterprise value of JM was $ 650,000.
In applying the income approach to JM, Mr. Browning used a 10-year projection period beginning November 1, 1951. Mr. Browning considered JM's projected sales, cost of sales, operating expenses, depreciation, taxes, capital expenditures, and working capital changes. After discounting projected cash-flows and residual value, Mr. Browning determined2001 Tax Ct. Memo LEXIS 41">*83 that the total business enterprise value of JM was $ 660,000.
After reviewing the analyses and available information, Mr. Browning determined that the total business enterprise value of JM was $ 655,000. Mr. Browning then subtracted the debt value to determine the equity value of JM. On the basis of the present value of future interest and principal payments, Mr. Browning determined that JM had a debt value of $ 220,000 as of January 31, 1951. Mr. Browning subtracted the debt value from the total business enterprise value, yielding a total equity value of JM of $ 435,000 as of October 31, 1951.
The appraisal procedures used by Mr. Browning to value Specialty were the same as those used to value JM. In applying the market approach to value Specialty, Mr. Browning used the same four companies that he used in valuing JM. The debt-free earnings, EBIT, and EBITDA measures indicated a business enterprise value of Specialty ranging from $ 160,000 to $ 180,000. On the basis of this range, Mr. Browning determined that the total business enterprise value of Specialty was $ 170,000. Mr. Browning then applied the same appraisal procedures that he used in valuing JM under the income approach. 2001 Tax Ct. Memo LEXIS 41">*84 On the basis of the considerations and findings, Mr. Browning determined that the total business enterprise value of Specialty under the income approach was $ 230,000.
After reviewing the analyses and available information, Mr. Browning determined that the total business enterprise value of Specialty was $ 200,000. Mr. Browning determined that Specialty had no debt outstanding as of October 31, 1951; thus, he valued the total equity of Specialty at $ 200,000.
ii. VALUATION OF JM AND SPECIALTY PREFERRED STOCK
Mr. Browning determined the values of the preferred stocks of JM and Specialty in the following manner. He divided the annual dividend rate by a market dividend yield rate that he felt was consistent with the risk and return characteristics of the preferred stock. Mr. Browning then multiplied this figure by the number of preferred shares outstanding. Finally, he applied a marketability and liquidity discount. JM's annual dividend rate was 8 percent. To determine an appropriate market dividend yield rate, Mr. Browning looked at two companies, City of Paris and Emporium Capwell Co., and concluded that 8 percent was the appropriate market dividend yield rate. Using the formula2001 Tax Ct. Memo LEXIS 41">*85 described above, Mr. Browning determined an aggregate JM preferred stock value of $ 72,717 (8 percent divided by 8 percent, multiplied by 72,717 outstanding preferred shares). Mr. Browning applied a 5-percent discount for lack of marketability and liquidity, resulting in a value of $ 69,081 for the JM preferred stock or $ .95 per share.
Mr. Browning determined the value of the preferred stock of Specialty by taking the preferred stock's par value and applying discounts for marketability and liquidity, and minority interest considerations. Mr. Browning did not include the dividend rates in his calculations because no dividends were ever paid prior to 1951, and the dividends were noncumulative without preferred dividend accruals. The par value of Specialty preferred stock, $ 1, multiplied by the number of outstanding shares, 100,000, yielded a prediscount value of $ 100,000. Mr. Browning applied a marketability and liquidity discount of 35 percent and a minority interest discount of 25 percent based on lack of dividend distributions, a long-term investment holding period, and minority shareholder interest positions. Mr. Browning combined the two percentages and applied a 60-percent2001 Tax Ct. Memo LEXIS 41">*86 discount, resulting in a value for the Specialty preferred stock of $ 40,000, or $ .40 per share.
iii. VALUATION OF JM AND SPECIALTY COMMON STOCK
The common equity values for JM and Specialty were calculated by subtracting the total preferred stock values from the total equity values and then applying discounts for marketability and liquidity, and minority interest considerations. The total preferred stock values of JM and Specialty, $ 69,000 and $ 40,000, were subtracted from the total equity values, $ 435,000 and $ 200,000, which produced prediscount common equity values of $ 366,000 and $ 160,000, respectively. Mr. Browning selected a 35-percent lack of marketability and liquidity discount for the common equity of JM and Specialty based on considerations that the companies had low collateral values, high industry and customer concentration, transaction costs, a relatively small shareholder base, and a minority interest position. Mr. Browning selected a 25-percent minority interest discount for the common equity of JM and Specialty based on the considerations that no dividends were paid before 1951, no dividends were expected to be paid, and that the shareholders were expected2001 Tax Ct. Memo LEXIS 41">*87 to have a long liquidation period before they could sell their shares. Mr. Browning combined the discount rates and applied a 60-percent discount to the common equity value of JM and Specialty, resulting in values of $ 146,000 and $ 64,000, respectively. These values yielded per-share values of $ .80 for JM common stock and $ 64 for Specialty common stock.
iv. VALUATION OF JM STOCK OPTIONS
Mr. Browning determined that the JM common stock held by Joseph and subject to an option by Cyril did not have any value because he valued the JM common stock at $ .80 per share and the option price was $ 1 per share. If the per-share value had exceeded the option price, then Mr. Browning argues that the option would have been exercised. Because the options were not exercised, Mr. Browning concluded that they did not have any value as of October 31, 1951. 2001 Tax Ct. Memo LEXIS 41">*88 v. VALUE OF CONSIDERATION RECEIVED BY CYRIL
Mr. Browning determined the value of the consideration received by Cyril based upon control value and income value. 2001 Tax Ct. Memo LEXIS 41">*89 of $ 8,593, which was then subtracted from Cyril's total control value of $ 107,880. The estate further adjusted Cyril's life interest in control value based on the fact that Cyril would have only a minority interest in JM for Joseph's lifetime. This adjustment was made by taking the values of Cyril's minority interests in JM common and preferred stock, $ 60,000 and $ 10,500, respectively, and applying Joseph's life interest factor of .14123. This yielded a lifetime minority interest of $ 9,957, resulting in an adjusted control value of $ 89,330. Finally, the estate applied Cyril's life interest factor to the control value because Cyril received control only for his lifetime. In applying a life interest factor of .49587, the estate concluded that Cyril's life interest in control value was $ 44,296.
2001 Tax Ct. Memo LEXIS 41">*90 The estate then computed the value of Cyril's 50-percent life interest in Joseph's stock and added this amount to Cyril's life interest in control value. The following chart summarizes the estate's calculations:
Joseph's Percentage Income Life Total
Entity Net Value Ownership Interest Benefit Factor Value
______ _________ ___________________ _______ ______ _____
JM:
Common $ 146,000 27.8% 50% .35464 $ 7,197
Preferred 69,000 29.5% 50% .35464 3,609
Specialty:
Common 64,000 11.2% 50% .35464 1,271
Preferred 40,000 25.0% 50% .35464 1,773
______
Total 13,850
In adding Cyril's life interest in control value, $ 44,296, to the value of the 50-percent life interest received, $ 13,850, the estate concluded that the total consideration received by Cyril as of October 31, 1951, was2001 Tax Ct. Memo LEXIS 41">*91 $ 58,146.
vi. VALUE OF REMAINDER TRANSFERRED BY CYRIL
The value of the consideration transferred by Cyril was calculated by applying his ownership interests to the determined common and preferred stock values of JM and Specialty and then deducting his life interest in the companies. The following chart summarizes Mr. Browning's calculations:
Cyril's Percentage Cyril's Monetary
Entity Net Value Ownership Interest Ownership Interest
______ _________ __________________ __________________
JM:
Common $ 146,000 41.1% $ 60,000
Preferred 69,000 15.2% 10,500
Specialty:
Common 64,000 4.8% 3,100
Preferred 40,000 25.0% 10,000
______
Total 83,600
Mr. Browning determined the value of the remainder interest by applying a remainder factor of .50413 to Cyril's entire stock interest2001 Tax Ct. Memo LEXIS 41">*92 value of $ 83,600. Thus, Mr. Browning determined that the value of the consideration transferred by Cyril as of October 31, 1951, was approximately $ 42,000.
The valuation reports relied on by the experts are significantly different, both in the application of common valuation techniques and their assumptions regarding the buyer and seller of the property interests. The most notable difference is in the experts' application of discounts and premiums. Discounts for lack of marketability and lack of control are conceptually distinct and are well accepted by the courts in cases involving the value of stock of closely held corporations. See
The minority shareholder discount is designed to reflect the
decreased value of shares that do not convey control of a
closely held corporation. The lack of marketability discount, on
the other hand, is designed to reflect the fact that there is no
ready market for shares in a closely held2001 Tax Ct. Memo LEXIS 41">*93 corporation. * * *
While the appropriate amount of discount to apply in each case is a question of fact, it is unreasonable to argue that no discount should be applied to a minority interest in a closely held corporation. See
Control is an element which must be taken into account for purposes of determining the fair market value of corporate stock, over and above the value attributable to the corporation's underlying assets using traditional valuation methodologies. See
The payment of a premium for control is based on the principle
that the per share value of minority interests is less than the
per share value of a controlling interest. A premium2001 Tax Ct. Memo LEXIS 41">*94 for control
is generally expressed as the percentage by which the amount
paid for a controlling block of shares exceeds the amount which
would have otherwise been paid for the shares if sold as
minority interests * * * [Estate of Salsbury v. Commissioner,
Before analyzing the positions of each party, we note the facts that: (1) Cyril had a higher percentage of voting control in JM than Joseph prior to the 1951 Agreement, and Cyril's total shares were worth more outright under either party's valuation standards; (2) Cyril received only a life estate in one-half of Joseph's shares, although he obtained voting control of all of Joseph's shares; (3) Cyril was required to transfer his shares to his children on his death and could not dispose of the shares during his lifetime for his own personal gain; and (4) under the 1951 Agreement, Joseph agreed to will his shares to Cyril's children and those shares, coupled with the shares Cyril was required to leave to his children under the 1951 Agreement, represented voting control of JM.
Respondent employed a fair market value approach and determined2001 Tax Ct. Memo LEXIS 41">*95 the value of the interests transferred and received by Cyril under a hypothetical willing buyer and willing seller standard. Fair market value for Federal estate and gift tax purposes is 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."
In valuing the interests transferred and received by Cyril, the estate assumes that the hypothetical buyer is a person in the same position as Cyril. The estate then applies a control premium to Joseph's minority block of shares because they will allow the hypothetical buyer in the same position as Cyril to obtain majority voting control of JM. This is not the proper application of the willing buyer and willing seller standard as set forth in the estate and gift tax regulatory provisions and as interpreted by case law because the willing buyer cannot be the actual buyer, he must be a hypothetical person. See
The estate relies on
No calculations were presented by the estate as to the values of the interests if a hypothetical buyer would not gain control as a result of the transfer by Joseph. Accordingly, the estate has failed to present sufficient evidence to establish that the values it assigns to the interests at issue are reliable and accurate under the willing buyer and willing seller standard set forth in the estate and gift tax regulatory provisions.
Although it claims to have used the hypothetical willing buyer and willing seller standard, in reality, the estate applied an actual buyer and actual seller standard because it based its valuation on parties in identical positions as Joseph and Cyril. It chose to look at the actual transaction and the logical inference that Cyril would have paid more for Joseph's minority-interest-voting rights because they would give Cyril voting control when added to his existing minority-interest-voting rights. In applying such a standard, the estate determined that the value of the consideration received by Cyril was approximately $ 58,000, of which approximately $ 44,000 consisted of control value received by Cyril.
The2001 Tax Ct. Memo LEXIS 41">*100 estate argues that a control premium must be applied in this circumstance because an actual, bargained-for transaction occurred in which Cyril obtained control of JM. But even if we were to accept the estate's argument, its application of its own "actual buyer-seller" test is flawed. First, the control premium and control value analysis, even if appropriate, were incorrectly applied. Mr. Browning applied the control value to the combined total of Cyril's share ownership after the 1951 Agreement. Thus, Mr. Browning took into account shares already owned by Cyril in valuing control. If Mr. Browning had applied his control value analysis to the percentage of shares owned only by Joseph, 28.26 percent, and not the combined percentage of the shares of Joseph and Cyril, 61.99 percent, the value of the consideration received by Cyril would have been approximately $ 29,000 using Mr. Browning's valuation methodology. 2001 Tax Ct. Memo LEXIS 41">*101 The estate also failed to address the issue of control in considering what Cyril transferred in exchange for Joseph's shares. Cyril bound himself to transfer a remainder interest in his shares to his children, and those shares, when combined with the shares transferred at death by Joseph to Cyril's children, constituted voting control of JM. The estate's expert agreed at trial that he might have been inconsistent in his approach. The estate did not consider the fact that Joseph bargained for and received from Cyril the right to dispose of control of JM after Cyril's death. Joseph was ensuring that his grandchildren received control of JM upon Cyril's death. If a control premium applies for purposes of valuing what Cyril received from Joseph, then it follows, in the facts of this case, that a control premium should also apply when valuing the interest Cyril transferred to, or at the direction of, Joseph. The application of a control element on both sides of the transaction would significantly increase the value of the remainder interest transferred by Cyril because a control element would attach to the remainder interest in Cyril's shares. The number of shares transferred by Cyril2001 Tax Ct. Memo LEXIS 41">*102 was larger than the number of shares received by Cyril, the full fee-simple interest in the stock was transferred by Cyril at his death, and Cyril's life estate factor in Joseph's shares and the remainder factor in the stock he transferred at death were approximately equal. The estate presented no revised calculations or other evidence establishing that the value transferred by Cyril, when adjusted for this control element, was less than the consideration received from Joseph. The estate has failed to present sufficient evidence to establish that the values it assigns to the interests at issue are reliable and accurate under an actual buyer and actual seller standard.
The valuation methodology of Mr. Browning was questionable in other areas as well. In determining the values of JM common stock and Specialty common and preferred stocks, Mr. Browning applied a lack of marketability and liquidity discount and a minority interest discount on a combined basis, instead of individually. For example, Mr. Browning added together the 35-percent marketability and liquidity discount and the 25-percent minority discount to get a combined discount of 60 percent, which he then applied to the values2001 Tax Ct. Memo LEXIS 41">*103 before him. As we noted earlier, discounts for marketability and minority interest are separate and distinct, and this fact must be taken into account when such discounts are applied in order to avoid distorting the valuation. While expert reports and the courts sometimes apply combined discount rates to determine the value of stock, this is a questionable procedure to use if specific rates are determined for each discount and then added together to reach the combined rate. See Pratt, et al., Valuing a Business: The Analysis and Appraisal of Closely Held Companies 314 (3d ed. 1996). In order to ensure accuracy, the minority interest discount should be applied first and then the marketability and liquidity discount should be applied to this figure. 2001 Tax Ct. Memo LEXIS 41">*104 he applied a minority discount in this situation because if he did not then his market approach generally yielded a value higher than the value determined under his DCF approach. We do not find Mr. Browning's explanation for applying a minority discount in this situation to be satisfactory because it is not based on valuation standards, but rather on the fact that he is adjusting his valuation simply to yield a result closer to that produced under his DCF approach.
The value2001 Tax Ct. Memo LEXIS 41">*105 of the consideration received by Cyril was determined in the notice of deficiency to be $ 43,878. This determination is entitled to the presumption of correctness. See
The estate's valuations of the interests transferred and received2001 Tax Ct. Memo LEXIS 41">*106 by Cyril contain errors under both a hypothetical standard and an actual standard. These errors cast doubt on the estate's overall valuation of the interests in issue, and we accord little weight to the estate's valuations in reaching our decision. Accordingly, the estate has failed to carry its burden of establishing that the value of the consideration received by Cyril was different from the value determined in the notice of deficiency.
Respondent bears the burden of proving any increases in the deficiency asserted in the amended answer (i.e., that the consideration received by Cyril was less than $ 43,878). See
Respondent partially relied on Mr. Stewart's DCF analysis in valuing the interests at issue. After trial, Mr. Stewart corrected his error of not subtracting projected capital expenditures in his original report, but it is troubling that such a large mistake was made in the first place. Also, Mr. Stewart used a valuation date of January 31, 1952, instead2001 Tax Ct. Memo LEXIS 41">*107 of October 31, 1951, because he claims that he would have had to rely on information that was 9 months old. While events occurring after the valuation date are relevant evidence of value if they are foreseeable as of the valuation date, see
2. VALUE OF REMAINDER INTEREST TRANSFERRED BY CYRIL
If the value of the remainder interest transferred by Cyril was equal to $ 43,878 or of approximately the same value, then Cyril received "adequate and full consideration" for his remainder interest. However, if the value of the remainder interest was not approximately equal to $ 43,878, then
The notice of deficiency determined that the amount includable in the gross estate was the value at the time of Cyril's death of the 1971 trusts in which Cyril retained a life interest, minus the value of the consideration received by Cyril in connection with the October 31, 1951, agreement. The estate bears the burden of proving error in respondent's determination. See
Respondent assigns a value of $ 244,000 to Cyril's entire stock interest, of which $ 123,000 is allocated to the remainder interest transferred by Cyril. The estate assigns a value of $ 83,600 to Cyril's entire stock interest, of which $ 42,000 is allocated to the remainder interest transferred by Cyril.
As previously discussed, the estate's valuations contained errors under both a hypothetical standard and an actual standard, and the values it assigns to the respective interests are entitled to little weight. In addition to the problems we identified in its control value analysis, the estate's valuations are questionable in its application of discounts to the JM and Specialty stocks. On the basis of the evidence presented by the estate, we find that it has not met its burden of proof. Our analysis of the evidence in the record leads us to conclude that the correct value is more in line with respondent's determination.
Although we do not find them to be correct in their entirety, 2001 Tax Ct. Memo LEXIS 41">*110 and expert were more reliable and reflected a better approximation of the values of the interests at issue. Mr. Stewart accurately applied the hypothetical willing buyer and willing seller test and was consistent in valuing the stock interests transferred and received by Cyril on a minority basis. Additionally, the marketability and minority discounts were applied separately, and no minority discount was applied under the market approach.
Respondent's valuation of the underlying shares is also supported by the estate and gift tax returns filed by Joseph and Cyril and the document setting forth the agreed-upon adjustments relating to Joseph's2001 Tax Ct. Memo LEXIS 41">*111 estate tax return. In Joseph's 1950 gift tax return, he valued JM common stock between $ 1.98 and $ 2.25 per share. Joseph's 1953 estate tax return, as adjusted by the IRS estate tax examiner and accepted by the estate, assigned a value of $ 2.25 per share to JM common stock and $ 1 per share to JM preferred stock. The 1953 estate tax return assigned values of $ 1 per share for the JM stock subject to an option held by Cyril, $ 150 per share for Specialty common stock, and $ .90 per share for Specialty preferred stock. These values were accepted as filed by respondent. Additionally, Cyril valued JM common stock at $ 2.25 per share and JM preferred stock at $ .90 per share in his 1949 gift tax return. Cyril's 1949 gift tax return was not filed until 1957, yet it acknowledged that the values it set forth were in line with the stock values determined in connection with the settlement of Joseph's estate. We find the estate and gift tax returns of Joseph and Cyril and the document setting forth the agreed upon adjustments relating to Joseph's estate tax return to be persuasive in reaching our valuation decision. See, e.g.,
The Court of Appeals for the Ninth Circuit emphasized that, on remand, a determination of "adequate and full consideration" requires a finding that the exchanged interests are of "'approximately equal value'".
To reflect the foregoing,
Decision will be entered under Rule 155.
1. Unless otherwise indicated, all section references are to the Internal Revenue Code in effect as of the date of decedent's death, and all Rule references are to the Tax Court Rules of Practice and Procedure.↩
2. The articles of incorporation of Newman, Magnin & Co. (subsequently JM) were silent as to the voting rights of the preferred stock until a 1968 amendment, which expressly provided that the preferred stock was entitled to voting rights equal to those of the common stock. However, it appears that prior to the 1968 amendment, the preferred stock was considered to be voting by the corporation and that the holders of the preferred stock actually did exercise voting rights.↩
3. In respondent's proposed findings of fact, respondent states that both experts assumed these figures were the share ownership of Cyril and Joseph. The estate failed to object, and its valuations assume the same numbers. Both parties relied on the expert reports, and the share ownership of Specialty used in them, in reaching their respective conclusions as to the value of the interests transferred and received by Cyril. Accordingly, these figures are used for purposes of deciding the value of the respective stock interests of Cyril and Joseph.↩
4. In May 1960, Cyril assigned his rights in the Nichols options to the testamentary trust established by Joseph's will of which he was the trustee. On June 3, 1960, Cyril exercised the options on behalf of the trust.↩
5. The parties stipulated that the estate and gift tax returns and the document setting forth the agreed-upon adjustments related to Joseph's estate tax return were "authenticated and are admissible in evidence". Rule 91(d) requires that "Any objection to all or any part of a stipulation should be noted in the stipulation, but the Court will consider any objection to a stipulated matter made at the commencement of the trial or for good cause shown made during the trial." Additionally, "It is a fundamental rule of evidence that an objection not timely made is waived."
6. The amount includable in the gross estate under
7. In a footnote, we stated:
Even if we were to hold that
of adequate and full consideration for only the remainder
interest, we would find that petitioner has not met its burden
of proving that the value of the interest in Joseph's stock that
Cyril received equaled the value of the remainder interest
transferred. We conclude, infra, that the value of the interest
received by Cyril is $ 43,878. The value of the remainder
interest transferred by Cyril is $ 42,000 according to * * * [the
estate] and $ 122,997.64 under respondent's calculations. These
values were determined after the parties made certain posttrial
adjustments to their expert reports. Although we need not
determine the precise value of the remainder interest
transferred by Cyril, we conclude that it was more than $ 43,878.
This conclusion is based on the evidence, including the expert
witnesses' opinions and the values placed on JM and Specialty
stock in gift and estate tax returns filed by Cyril and Joseph
between 1948 and 1953. [Estate of Magnin v. Commissioner, T.C.
Memo 1996-25 n.12.]↩
8. In our prior opinion, we held that the value of what Cyril received should be determined by ascertaining "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."
9.
estate shall include the value of all property to the extent of
any interest therein of which the decedent has at any time made
a transfer (except in case of a bona fide sale for an adequate
and full consideration in money or money's worth), by trust or
otherwise, under which he has retained for his life * * *
(1) the possession or enjoyment of, or the right to
the income from, the property * * *↩
10.
trusts, interests, rights, or powers enumerated and described in
sections 2035 to 2038, inclusive, and section 2041 is made,
created, exercised, or relinquished for a consideration in money
or money's worth, but is not a bona fide sale for an adequate
and full consideration in money or money's worth, there shall be
included in the gross estate only the excess of the fair market
value at the time of death of the property otherwise to be
included on account of such transaction, over the value of the
consideration received therefor by the decedent.↩
11. The estate argues that the consideration received by Cyril must be measured from his standpoint, not that of a hypothetical buyer, but at the same time it relies on Mr. Browning's appraisal which he indicated at trial was based on a hypothetical willing buyer and willing seller. The estate seems at times to argue that its valuation figures would be the same under either standard.↩
12. Throughout their reports, Mr. Stewart and Mr. Browning chose to round off certain numbers while being specific as to other numbers. As a result, our analysis of their reports and the figures we use are generally rounded off with specific numbers used in certain instances.↩
13. Mr. Stewart did not apply a minority discount because, in his opinion, the market approach already produces a per-share value for a minority interest.↩
14. JM's total assets at the time of the 1951 Agreement were approximately $ 2 million while the comparables used had total assets ranging from approximately $ 119 million to $ 230 million. Specialty's total assets were smaller than JM's.↩
15. JM's revenues at the time of the 1951 Agreement were approximately $ 5 million while the comparables used had revenues ranging from approximately $ 223 million to $ 440 million. Specialty's revenues were smaller than JM's.↩
16. Mr. Stewart used a base year ending after the valuation date because, in his opinion, that year had more reliable information than the prior year.↩
17. Mr. Stewart did not subtract projected capital expenditures in his original report. At trial, Mr. Stewart admitted that this was an error, and his valuation report was corrected posttrial to adjust for the error.↩
18. Mr. Stewart did not apply a minority discount because, in his opinion, the market approach already produces a per-share value for a minority interest.↩
19. In the proposed findings of fact, respondent states that the prediscount value of the aggregate JM common stock on a minority basis is $ 568,000, instead of the $ 578,000 as listed in Mr. Stewart's valuation findings. Respondent used the $ 568,000 figure in determining a price per share of $ 3.11. This error was most likely due to the fact that Mr. Stewart adjusted his figures posttrial to correct an error in not subtracting projected capital expenditures in determining the values of JM and Specialty stocks under the income approach. We rely on the figures as set forth in Mr. Stewart's findings and note that respondent's computations appear to be based on an error in incorporating Mr. Stewart's adjusted figures into respondent's brief.↩
20. Mr. Stewart did not apply a minority discount because, in his opinion, the market approach already produces a per-share value for a minority interest.↩
21. In his valuation of Specialty common stock, Mr. Stewart rounded the value he assigned to Specialty preferred stock, $ 62,500, up to $ 63,000.↩
22. Mr. Stewart rounded this number down from the $ 153,000 figure that application of the discounts yields.↩
23. Any value assigned to these options would result in a larger interest being transferred by Cyril per the 1951 Agreement and would enlarge any disparity between the remainder interest he transferred and the consideration he received from Joseph.↩
24. In the amended answer, respondent argued that Cyril received no consideration, within the meaning of
25. Mr. Browning defines "business enterprise value" as "the total investment value of a firm which is partitioned into debt and equity values."↩
26. JM's total assets at the time of the 1951 Agreement were approximately $ 2 million, while the comparables used had total assets ranging from approximately $ 7.6 to 38 million. Specialty's total assets were smaller than JM's.↩
27. JM's revenues at the time of the 1951 Agreement were approximately $ 5 million, while the comparables used had revenues ranging from approximately $ 13.2 million to $ 57.8 million. Specialty's revenues were smaller than JM's.↩
28. Note, however, that the estate's brief alleges that Cyril did not have the money necessary to exercise the options.↩
29. Any value assigned to these options would result in a larger interest being transferred by Cyril per the 1951 Agreement and would enlarge any disparity between the remainder interest he transferred and the consideration he received from Joseph.↩
30. In his appraisal, Mr. Browning based his valuation of the consideration received by Cyril on the assumption that Cyril received outright ownership of Joseph's shares. The estate corrected its calculation posttrial and submitted revised valuation calculations for the consideration received by Cyril.↩
31. On a minority interest basis, the JM common stock was valued at $ 146,000 and the JM preferred stock was valued at $ 69,000.↩
32. According to the estate, Cyril lacked funds to purchase Joseph's 28.26 percent of voting stock. The estate states on brief that Cyril lacked the funds to exercise his option to purchase Joseph's 18,158 shares at $ 1 per share.↩
33. This Court did not apply a control premium for voting control in a similar situation where the stock being valued had "'swing vote' potential".
34. In his control value analysis, Mr. Browning determined a control value in JM of $ 174,000. He determined that Cyril was receiving 61.99 percent of this control value, or $ 107,880, before factoring in the life interests of Joseph and Cyril. If one uses the 28.26-percent figure which represents the actual percentage of shares that Cyril was receiving an interest in from Joseph, one arrives at a control value of $ 49,172, before factoring in the life interests of Joseph and Cyril. After applying the same life interest factors used in Mr. Browning's initial analysis, the control value received by Cyril is only $ 15,185, as opposed to the $ 44,296 determined by Mr. Browning. In applying the value determined by Mr. Browning for a 50- percent interest in Joseph's shares, $ 13,850, the result using only Joseph's percentage ownership for control value purposes is $ 29,035.↩
35. The result is the same if the discounts are applied in the reverse order. See
36. For example, if a 25-percent minority discount is applied to a stock value of $ 100, the resulting value is 100 times 75 percent, or $ 75. Application of a 35-percent marketability discount to the new value of $ 75 results in $ 75 times 65 percent, or a value after marketability and minority discounts of $ 48.75. Thus, the combined discount rate is 51.25 percent, not 60 percent.↩
37. The parties agree that the Christmas holiday season represented a large amount of JM's sales. However, the extent to which such a factor influences the results under the DCF analysis using either valuation date has not been established by the evidence in the record.↩
38. Respondent based his valuation determination in part on a market approach. The companies used by respondent were all substantially larger in terms of total assets and revenues, sold a wider variety of merchandise and services to a broader customer base, and, other than a Macy's located in San Francisco, none of the companies had stores located in San Francisco or Reno.↩
39. The application of Cyril's share ownership in JM and Specialty to the 1949 to 1953 estate and gift tax value ranges of $ 1.98 to $ 2.25 per share for JM common stock and $ .90 to $ 1 per share for JM preferred stock, and values of $ 1 per share for the JM option stock, $ 150 per share for Specialty common stock, and $ .90 per share for Specialty preferred stock, yields approximate valuation ranges of $ 206,000 to $ 232,000 for Cyril's entire stock interest, and $ 104,000 to $ 117,000 for his remainder interest.↩
john-a-propstra-personal-representative-of-the-estate-of-arthur-e-price , 680 F.2d 1248 ( 1982 )
Duncan Industries, Inc., etc. v. Commissioner , 73 T.C. 266 ( 1979 )
Buffalo Tool & Die Mfg. Co. v. Commissioner , 74 T.C. 441 ( 1980 )
Estate of Bowers v. Commissioner , 94 T.C. 582 ( 1990 )
United States v. Cartwright , 93 S. Ct. 1713 ( 1973 )
Helvering v. National Grocery Co. , 58 S. Ct. 932 ( 1938 )
Estate of Hall v. Commissioner , 92 T.C. 312 ( 1989 )
Aaron L. Kolom and Serita Kolom v. Commissioner of Internal ... , 644 F.2d 1282 ( 1981 )
Michael L. Rockwell, and Regina Rockwell v. Commissioner of ... , 512 F.2d 882 ( 1975 )
Seymour Silverman v. Commissioner of Internal Revenue , 538 F.2d 927 ( 1976 )
United States v. Robert Lee Jamerson , 549 F.2d 1263 ( 1977 )
Welch v. Helvering , 54 S. Ct. 8 ( 1933 )
Estate of Cyril I. Magnin, Deceased Donald Isaac Magnin v. ... , 184 F.3d 1074 ( 1999 )
Marie H. Hamm v. Commissioner of Internal Revenue, William ... , 325 F.2d 934 ( 1963 )
John Michael Wheeler, Independent of the Estate of Elmore K.... , 116 F.3d 749 ( 1997 )
Estate of Arthur Chase Shafer, Deceased, Chase Shafer, Co-... , 749 F.2d 1216 ( 1984 )
paul-gilbrook-michael-garrison-don-herr-hal-raphael-dana-bowler-joe-wilson , 177 F.3d 839 ( 1999 )