T.C. Memo. 1996-49
UNITED STATES TAX COURT
ESTATE OF JOSEPH R. CLOUTIER, JOSEPH A. CLOUTIER,
FIDUCIARY, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 8905-94. Filed February 13, 1996.
C is a corporation whose stock is not listed on an
exchange. D owned 100 percent of the stock when he
died. D’s stock was valued at $12,582,000 on the
estate’s Federal estate tax return. After R determined
that the stock should have been valued at $15,440,000,
the parties stipulated that the stock was worth
$12,250,000, without regard to any marketability
discount or control premium that would otherwise apply.
The parties’ stipulation followed their receipt of
appraisals of the stock’s value. R’s sole appraisal
stated that the stock was worth $12,619,000. F’s three
appraisals stated that the stock was worth $11,625,000,
$11,652,555 and $11,850,000, respectively. In making
these appraisals, none of the appraisers determined the
stock’s value by reference to the price of comparable
listed stock. Held: Because the stipulated value has
not been shown to be representative of C’s “freely
traded value”, no discount for marketability is
allowable.
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Jon F. Spadorcia, S. Douglas Trolson, and Robert J. Milford,
for petitioner.
Russell D. Pinkerton, for respondent.
MEMORANDUM OPINION
LARO, Judge: The Estate of Joseph R. Cloutier, Joseph A.
Cloutier, Fiduciary, petitioned the Court to redetermine
respondent's determination of a $1,212,230 deficiency in the
Federal estate tax of the Estate. Following concessions, we must
decide whether a discount for lack of marketability applies to
the stipulated value of stock owned by the Decedent at the time
of his death, and, if so, the amount of this discount.1 We hold
that no discount applies. Unless otherwise indicated, section
references are to the Internal Revenue Code in effect as of the
date of the Decedent's death. Rule references are to the Tax
Court Rules of Practice and Procedure. We refer to Joseph R.
Cloutier as the Decedent. We refer to the Decedent’s estate as
1
At trial, the Fiduciary made an oral motion that the Court
seal the record as to financial information concerning the
Estate. We did not rule on the Fidiciary’s motion at that time,
taking the matter under advisement pending release of our
Memorandum Opinion herein. The oral motion to seal the record
will be denied. Official records of this Court are open to the
public for inspection, Richmond Newspapers, Inc. v. Virginia, 448
U.S. 555, 567-568 (1980), unless a moving party shows that
sufficient countervailing interests outweigh the public interest
in access, Willie Nelson Music Co. v. Commissioner, 85 T.C. 914,
917-920 (1985). Petitioner has failed to make such a showing.
See Estate of Murphy v. Commissioner, T.C. Memo. 1990-346.
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the Estate. We refer to the Estate’s fiduciary (Joseph A.
Cloutier) as the Fiduciary.
Background
The stipulations and attached exhibits are incorporated
herein by this reference. The Decedent died on December 11,
1989, while a resident of Indiana. The Fiduciary, a resident of
Indiana when he petitioned the Court, filed a Form 706, United
States Estate (and Generation-Skipping Transfer) Tax Return, on
behalf of the Decedent's estate. Form 706 reflects the
Fiduciary’s election of an alternate valuation date under section
2032. The alternate valuation date is June 11, 1990.
Corporation for General Trade (CGT) is a corporation whose
stock is not listed on an exchange. CGT’s stock was entirely
owned by the Decedent when he died. CGT’s principal asset at the
time of the Decedent’s death was 100 percent of the stock of
Thirty-Three, Inc. (Thirty-Three). Thirty-Three owned and
operated the NBC television affiliate in Fort Wayne, Indiana.2
Other assets of CGT at the time of the Decedent’s death included
rental real estate and a motor home.
On the Form 706, the Decedent’s CGT stock was valued at
$13,969,000 on the date of his death, and $12,582,000 on the
alternate valuation date. These values were based on two
2
After the Decedent died, but before the alternate
valuation date, Thirty-Three was merged into CGT, so that only
CGT existed on the alternate valuation date.
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appraisals, neither of which is in the record and neither of
which included a marketability discount. Respondent determined
that the Decedent’s CGT stock was worth $15,440,000 on the
alternate valuation date. The parties have since stipulated that
the June 11, 1990, value of the Decedent’s CGT stock was
$12,250,000, without regard to any marketability discount or
control premium that may otherwise apply. The parties’
stipulation followed their receipt of appraisals of the stock’s
value as of June 11, 1990. Respondent’s sole appraisal stated
that the stock was worth $12,619,000. Petitioner’s three
appraisals stated that the stock was worth $11,625,000,
$11,652,555 and $11,850,000, respectively.
In making these appraisals, all of the appraisers relied
primarily upon transactional and financial data compiled by
Paul Kagan Associates, Inc. (Kagan), and none of the appraisers
determined CGT’s value by reference to the price of stock that
was listed on a public exchange. The transactions reported by
Kagan included recent transactions in which stock of television
stations was transferred at arm's length. All of the appraisers
also considered the nature of CGT, its history, its position in
the industry, its economic outlook, and other factors listed in
Rev. Rul. 59-60, 1959-1 C.B. 237 (regarding the valuation of
stock for Federal estate tax purposes).
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Discussion
We must determine whether a marketability discount applies
to the stipulated value of the Decedent’s CGT shares, and, if so,
the amount of this discount. Respondent determined no
marketability discount for the shares and adheres to that
position. The Fidiciary included no marketability discount in
the value of the CGT shares reported on the Form 706, but he now
argues for a 25-percent discount. The Fidiciary must prove the
applicability and amount of a marketability discount. Rule
142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933); Estate of
Gilford v. Commissioner, 88 T.C. 38, 50-51 (1987); see also
Mandelbaum v. Commissioner, T.C. Memo. 1995-255.
Property includable in a decedent's gross estate is included
at its fair market value on either: (1) The date of the
decedent's death or (2) the alternate valuation date as provided
under section 2032. Secs. 2031(a) and 2032(a); sec.
20.2031-1(b), Estate Tax Regs. Fair market value is a question
of fact. Commissioner v. Scottish Am. Inv. Co., 323 U.S. 119,
123-125 (1944); Helvering v. National Grocery Co., 304 U.S. 282,
294 (1938). Fair market value represents the price that a
willing buyer would pay a willing seller, both persons having
reasonable knowledge of all relevant facts and neither person
under a compulsion to buy or to sell. Sec. 20.2031-1(b),
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Estate Tax Regs.; see also United States v. Cartwright, 411 U.S.
546, 551 (1973); Estate of Hall v. Commissioner, 92 T.C. 312,
335 (1989). The willing buyer and the willing seller are
hypothetical persons, instead of 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 Bright v.
United States, 658 F.2d 999, 1005-1006 (5th Cir. 1981);
Estate of Newhouse v. Commissioner, 94 T.C. 193, 218 (1990).
Special rules govern the valuation of corporate stock,
depending on whether the stock is listed on an established
securities market. When stock is so listed, its value usually
equals its listed market price. When stock is not listed on an
established market, its value is usually based on the
arm's-length sales (if any) of the unlisted stock that have
occurred within a reasonable time of the valuation date.
Estate of Andrews v. Commissioner, 79 T.C. 938, 940 (1982);
Duncan Indus., Inc. v. Commissioner, 73 T.C. 266, 276 (1979).
In the absence of recent arm's-length sales, the value of
unlisted stock should be determined by taking into account the
value of listed stock of corporations engaged in the same or a
similar line of business. Sec. 2031(b); Estate of Hall v.
Commissioner, supra at 336. Unlisted stock must also be valued
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indirectly by reference to the subject corporation's net worth,
its prospective earning power, its dividend-earning capacity, its
goodwill, its management, its position in the industry, the
economic outlook for its industry, and the degree of control
represented by the block of its stock to be valued. See
Estate of Hall v. Commissioner, supra at 336; Estate of Andrews
v. Commissioner, supra at 940; sec. 20.2031-2(f), Estate Tax
Regs.; see also Estate of Lauder v. Commissioner, T.C. Memo.
1994-527.
When determining the value of unlisted stock by reference to
the value of listed stock, a discount from the listed value is
typically warranted in order to reflect the lack of marketability
of the unlisted stock. Mandelbaum v. Commissioner, supra. Such
a discount, namely, a "lack of marketability discount" (or, more
succinctly, a "marketability discount"), generally reflects the
absence of a recognized market for closely held stock and
accounts for the fact that closely held stock is generally not
readily transferable. See Estate of Hall v. Commissioner, supra;
Estate of Gilford v. Commissioner, supra. A marketability
discount also reflects the fact that a buyer may have to incur a
subsequent expense to register the unlisted stock for public
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sale.3 See Estate of Hall v. Commissioner, supra; Estate of
Gilford v. Commissioner, supra.
Petitioner relies primarily on the testimony and report of
its expert witness, R. James Alerding, to support its claim that
it is entitled to discount the parties’ stipulated value for the
subject shares’ lack of marketability. Mr. Alerding concluded
that petitioner may discount his appraised values by 25 percent
for the shares’ lack of marketability. Mr. Alerding reached his
conclusion, in the main, by attempting to apply the factors
recently set forth in Mandelbaum v. Commissioner, supra.
While expert testimony can sometimes aid the Court in
evaluating a claim, we need not follow an expert's opinion when
it is contrary to our judgment. We may reject an expert’s
opinion in its entirety whenever we believe it is appropriate to
do so. Helvering v. National Grocery Co., supra at 294-295;
Estate of Kreis v. Commissioner, 227 F.2d 753, 755 (6th Cir.
1955), affg. T.C. Memo. 1954-139. With respect to the opinion of
Mr. Alerding, we believe that it is appropriate to do so. His
report and testimony are unhelpful to the Court, and we find both
to be unpersuasive. In contrast to the detailed reports that we
3
In certain cases, a buyer's registration costs may be
minimal. For example, registration costs may be minimal to the
buyer if he or she has the right to compel the corporation to
register (or otherwise "piggyback") the unlisted shares at its
expense.
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typically see with respect to an expert’s opinion of valuation,
Mr. Alerding’s report is three pages long and consists mainly of
bald assertions that a 25-percent marketability discount is
warranted. His report contains no meaningful discussion of any
of the factors of valuation; it does not reflect a review of
basic information necessary to render an opinion on valuation;
and it shows undue reliance on appraisals performed by third
parties. As a point of fact, one of the appraisals on which
Mr. Alerding purported to rely was merely a draft of an
appraisal, and Mr. Alerding never spoke to the author concerning
the author’s completion of that draft or about any of the
information contained therein.
Mr. Alerding also relied on studies of property that was not
comparable to the subject property in order to form a “benchmark”
on which to base his conclusion concerning the amount of a
marketability discount. He failed to evaluate properly whether
the Decedent's 100-percent interest in CGT merited a premium for
control, or whether such a premium (if one existed) would
neutralize his proffered marketability discount.4 He focused
4
The Court has often determined a control premium in the
case of a majority interest. See, e.g., Estate of Trenchard v.
Commissioner, T.C. Memo. 1995-121, and the cases cited therein.
A control premium reflects a shareholder's ability to control a
corporation through his or her dictation of its policies,
procedures, or operations. Estate of Chenoweth v. Commissioner,
(continued...)
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exclusively on the hypothetical buyer, to the exclusion of the
hypothetical seller. In this latter regard, we find unpersuasive
Mr. Alerding’s conclusion that a willing seller of a 100-percent
interest in CGT would have to discount the value of that interest
by 25 percent for lack of marketability. See Mandelbaum v.
Commissioner, T.C. Memo. 1995-255; Moore v. Commissioner,
T.C. Memo. 1991-546.
We also note that Mr. Alerding has limited experience with
respect to the valuation at hand. In response to questions from
the Court, Mr. Alerding acknowledged that he had no experience in
valuing television station property, and that he had reached his
conclusion without direct reference to similar publicly traded
property or stock. Although a marketability discount may apply
in some cases where 100 percent of the stock of an unlisted
corporation is held by one shareholder, a discount for lack of
marketability is inapplicable when the value of the unlisted
stock is not determined by reference to the price of listed
stock.5 This is a key point that Mr. Alerding missed when he
4
(...continued)
88 T.C. 1577, 1589 (1987); Estate of Trenchard v. Commissioner,
supra; accord Rev. Rul. 59-60, 1959-1 C.B. 237, 242 (controlling
interest in closely held company may command a higher price than
a minority interest).
5
As we understand the thrust of Mr. Alerding’s thinking
with respect to marketability discounts, the value of a single
asset is significantly reduced by a lack of marketability
(continued...)
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attempted to apply our Mandelbaum analysis to the facts herein.
In Mandelbaum v. Commissioner, supra, the parties stipulated the
freely traded value of the corporation’s shares, and we were
asked to determine the marketability discount that applied to
that value. In the instant case, by contrast, the parties have
given us a stipulated value that neither party claims is the
subject stock’s freely traded value.6 Thus, we find that a
strict application of the Mandelbaum analysis is out of place in
the instant case.
The bottom line to this case is that petitioner asks us to
determine a marketability discount with respect to a value that
does not represent the stock’s freely traded value. This we will
not do. It is inappropriate to discount the value of the stock
for a lack of marketability in these circumstances. The discount
is confined to property that is being valued by reference to
prices paid for assertedly comparable property.
5
(...continued)
whenever the asset is transferred to a corporation that is wholly
owned by a single shareholder. To such a broad proposition, we
do not agree. Suffice it to say that a marketability discount
may be appropriate in such a case, but only to account for the
difference between the value of the shareholder’s stock and the
freely traded value of otherwise comparable stock that is listed
on an exchange.
6
Indeed, in response to a question from the Court at trial,
petitioner’s counsel acknowledged that the stipulated value was
merely a conciliatory amount that the parties reached following
their review of the appraisals.
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Because the record does not show that a marketability
discount applies to the stipulated value of the Decedent’s CGT
shares, we hold that no discount for marketability is allowable.7
In so holding, we have considered all arguments made by
petitioner, and, to the extent not discussed above, have found
them to be without merit.
To reflect the foregoing,
Decision will be entered
under Rule 155.
7
Respondent argues that the fact that the Decedent
controlled CGT means that a control premium exists to the extent
of any marketability discount. Based on our holding, we need
not, and do not, address this argument.