T.C. Memo. 1996-156
UNITED STATES TAX COURT
ESTATE OF RUTH J. CASEY, DECEASED, FIRST INTERSTATE
BANK OF NEVADA, SPECIAL ADMINISTRATOR, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 19512-94. Filed March 27, 1996.
Casey W. Vlautin, for petitioner.
Paul L. Dixon, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
GERBER, Judge: Respondent determined a $716,355 deficiency
in petitioner’s Federal estate tax. The parties have agreed to
the fair market value of certain property included in the estate
before the application of any discount, but they disagree about
the amount of any such discount.
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FINDINGS OF FACT1
Ruth J. Casey, decedent, was domiciled in California at the
time of her death, May 2, 1990. Decedent was employed as a nurse
by George Whittell (Whittell). Whittell died in 1969 leaving,
among other things, a residence, along with the 50 acres of land
on which it was situated (Residence), in trust for his wife for
her life and then to decedent for her life, with a remainder to
various charities. Whittell funded a trust (Maintenance Trust)
with $1 million to maintain Residence. Whittell also created a
trust for the support of decedent during her life (Support
Trust).
Whittell’s wife died in 1979, and decedent occupied
Residence from that time forward. By the mid-1980's, Maintenance
Trust was approaching depletion and contained less than $150,000,
an amount which was anticipated to be insufficient to maintain
Residence for decedent’s remaining life expectancy. The
Residence was appraised at market values of $3,740,000 and
$5,400,000 during 1985 and 1986, respectively. A disagreement
concerning the maintenance of Residence arose between decedent
and the charitable remaindermen. The remaindermen asserted that
it was decedent’s obligation to maintain Residence and pay the
taxes in the event the Maintenance Trust was insufficient.
Decedent asserted that, if the Maintenance Trust was
1
The parties’ stipulation of facts and exhibits is
incorporated by this reference.
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insufficient, she would seek partition of her interest from that
of the charitable remaindermen.
The dispute was settled during August 1987, and the parties
agreed to the following: (1) The Support Trust would be
terminated with its assets divided, 55 percent for decedent and
45 percent for the charitable remaindermen, and (2) the assets
remaining in the Maintenance Trust (including Residence, its
furnishings, and cash) would be distributed to a liquidating
trust (Liquidating Trust). The Liquidating Trust was chosen in
order to provide centralized management and to assist in
representing the multiplicity of interests in selling the
property. The Liquidating Trust was to terminate by
approximately August 1990. The Liquidating Trust continued
beyond its prescribed termination date due to controversy over
the trustee’s fees. Decedent had a 50-percent interest in the
Liquidating Trust, and seven charitable organizations had varying
percentage shares in the remaining 50 percent.
The Liquidating Trust instrument provided that, except for
transfers by will or by the laws of intestate succession, no
trust beneficiary could assign or transfer an interest to any
party other than to another beneficiary. The express purposes of
the Liquidating Trust were to:
hold the property * * * [Residence and related assets
from the Maintenance Trust], to liquidate the Property
in an efficient manner, to manage and maintain the
Property in an efficient manner during the process of
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liquidation, and to effect eventual distribution of the
proceeds of the Property to the beneficiaries * * *.
During 1989, the Liquidating Trust instrument was amended to
permit decedent to transfer her interest to her living trust for
estate planning purposes, and, in all other respects, the
restrictions on alienation of an interest in the Liquidating
Trust remained in force. The Liquidating Trust instrument could
be amended only by the consent of at least 71 percent of the
beneficiaries. The trustee of the Liquidating Trust had the
power to sell Residence without the consent of the beneficiaries,
and, accordingly, decedent’s living trust had no direct control
over the terms or conditions of the sale.
After Residence was placed in the Liquidating Trust, the
trustee began receiving offers which, during 1988, ranged from
$4,500,000 to $9,600,000, with the majority of them placing near
$7 million. The offers were generally contingent on soil and
geologic testing and, in some cases, approval to subdivide. The
trustee, after deciding that the offers received up to that point
were unacceptable, began looking for a wealthy purchaser in order
to exploit Residence’s unique character and to maximize its
selling price. To avoid possible contingencies, the trustee, at
the expense of the Liquidating Trust, caused soil and earthquake
tests to be conducted during 1988 and 1989. An auction of the
Liquidating Trust personalty, which attracted 2,500 people, was
conducted during September 1989. Gross proceeds of the auction
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were about $800,000, which resulted in a $100,000 cash
distribution to decedent’s living trust during December 1989.
All testing of the realty had been completed during the
spring of 1990; thereafter, the trustee set a $24 million asking
price for Residence. Decedent, throughout the entire time and
until the date of her death on May 2, 1990, resided in Residence.
The trustee received a $17,500,000 cash offer on June 8, 1990,
from a former Apple Computer executive, which was accepted on
June 11, 1990. The sale closed on June 29, 1990. Decedent’s
living trust received a $6,300,000 distribution during August
1990.
After the real estate closing, a dispute arose over the fee
of the trustee of the Liquidating Trust. During September 1991,
decedent’s living trust received a $1,500,000 distribution from
the Liquidating Trust. After the settlement of the litigation
concerning the trustee’s fee, an additional $190,000 was received
by decedent’s living trust. The parties agree that the
Liquidating Trust’s net value (without any discount) at the time
of decedent’s death was $16,779,630.
The original estate tax return, filed August 2, 1991,
reported a $6,948,806 value for decedent’s interest in the
Liquidating Trust (including a 15-percent discount). Following
respondent’s issuance of the notice of deficiency, petitioner
filed a refund claim using a 25-percent discount for
marketability. Petitioner, at trial and on brief, seeks a 50-
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percent discount, and respondent, on brief, seeks a 9.5-percent
discount.
OPINION
This case presents the recurrent issue of estate tax asset
valuation. The parties have agreed to the undiscounted value of
the asset at the time of decedent’s death. The unresolved
controversy concerns the percentage discount that should be
applied. Petitioner argues that this case involves a fractional
interest to which control and marketability discounts should be
applied. Conversely, respondent argues that, in a case where the
property is being liquidated, no control or marketability
discount should be applied. Respondent, however, would adjust
the agreed value for the time value of money or the time it takes
to liquidate the property. Converting the parties’ arguments to
numerical equivalents, petitioner and respondent would apply
discounts of 50 percent and 9.5 percent, respectively.
Property is generally included in the gross estate at its
fair market value on the date of a decedent's death. Sec.
2031(a);2 sec. 20.2031-1(b), Estate Tax Regs. Fair market value
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
2
Unless otherwise indicated, section references are to the
Internal Revenue Code in effect on the date of decedent’s death.
Rule references are to this Court’s Rules of Practice and
Procedure.
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knowledge of relevant facts." United States v. Cartwright, 411
U.S. 546, 551 (1973); Estate of Hall v. Commissioner, 92 T.C.
312, 335 (1989); Estate of Heckscher v. Commissioner, 63 T.C.
485, 490 (1975); sec. 20.2031-1(b), Estate Tax Regs. All
relevant facts and elements of value as of the applicable
valuation date shall be considered in every case. Commissioner
v. Scottish Am. Inv. Co., 323 U.S. 119, 123, 125 (1944); Skripak
v. Commissioner, 84 T.C. 285, 320 (1985); sec. 20.2031-1(b),
Estate Tax Regs.
Valuation is an inexact process, Buffalo Tool & Die
Manufacturing Co. v. Commissioner, 74 T.C. 441, 452 (1980), and
we may accept or reject in full or in part experts’ opinions
proffered by the parties. Helvering v. National Grocery Co.,
304 U.S. 282, 294-295 (1938); Seagate Tech., Inc., & Consol.
Subs. v. Commissioner, 102 T.C. 149, 186 (1994). Petitioner
bears the burden of proving that respondent’s determination is in
error. Rule 142(a); Welch v. Helvering, 290 U.S. 111 (1933);
Estate of Gilford v. Commissioner, 88 T.C. 38, 51 (1987).
Petitioner’s expert compares the Liquidating Trust to
situations where partners or shareholders have a fractional
interest in an entity which, in turn, holds real estate. He then
postulates that the value of the fractional interest is derived
from the value of the underlying assets and/or potential
earnings. Finally, he explains that “Less-than-controlling
equity interests in real property * * * may not be worth a pro
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rata portion of a 100 percent (controlling) interest in the
underlying net asset value.” Petitioner’s expert further
explained that discounts are used to reflect a lack of control
and/or marketability. A lack of control is the inability to
change corporate or business attributes (dividends, capital,
etc.). A lack of marketability is a reduced liquidity because of
no ready market for part of a closely held entity. The expert
then concluded that decedent’s interest in the property, because
it was held in the Liquidating Trust, had the same attributes as
an interest in a corporation or partnership and should be subject
to the same discounts. Following that conclusion and valuing the
Liquidating Trust interest as though it were a commercial or
investment activity, petitioner’s expert reached a 30-percent
discount for lack of control and a 30-percent discount for lack
of marketability. After considering the sequential effect of the
two discounts at about 51 percent, petitioner’s expert opined
that 50 percent was the appropriate combined discount for the
lack of marketability and control.
Respondent’s expert considered language contained in the
Liquidating Trust that limited its purpose to the efficient
liquidation of the trust property and the general prohibition
from engaging in a trade or business. Although respondent’s
expert generally agreed with petitioner’s expert’s methodology,
respondent’s expert deemed petitioner’s approach irrelevant,
because the purpose of the trust was to liquidate assets and it
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was not a “going concern”. Instead, respondent’s expert opined
that a willing buyer would be concerned with the question of
liquidity because of the time required to liquidate Residence.
Accordingly, respondent’s expert concluded that the agreed fair
market value should simply be adjusted or discounted for the time
value of money (i.e., the delay in realizing the liquidation
value of the assets).
Respondent’s expert used the May 1990 short-term Treasury
rate of 7.8 percent and added a 2.2-percent premium to account
for the lapse of time, arriving at a 10-percent discount rate.
Respondent’s expert noted that the long-term home mortgage rate
was a comparable 10.3 percent during the same time period. Based
on comparable properties, respondent’s expert calculated a 12.4-
month mean and 10-month median of time on the market. Using this
information, respondent’s expert arrived at a range of 9.5 to 11
percent for the discount and a value range of $7,355,141 to
$7,478,238.
Petitioner, citing Propstra v. United States, 680 F.2d 1248
(9th Cir. 1982), argues that a control discount applies because
the liquidating trust is no different from a business entity
holding property, and because decedent lacked control over the
property because she owned less than a majority interest.
Respondent agrees that the discount principles of Propstra v.
United States, supra, would apply in a case where the property in
question was used in a business. Respondent also agrees that
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decedent did not have control over the asset. However,
respondent emphasizes that the property was in a liquidating
trust and not held for investment or as an operating asset in a
business setting, and, accordingly, the typical reasons for
applying a control discount do not exist in this case.
Respondent also emphasizes that the trust document prohibited any
business operation and its sole purpose was to liquidate the
trust assets. See Estate of McMullen v. Commissioner, T.C. Memo.
1988-500.
Petitioner relies heavily on Propstra v. United States,
supra, in which a husband and wife owned several parcels of
realty as community property. In that case the Government argued
that the taxpayer was required to show that the deceased spouse’s
community property interest would likely be sold apart from the
other undivided interest. The Court of Appeals for the Ninth
Circuit held that “unity of ownership” principles did not apply
to property valuations for estate tax purposes. Propstra v.
United States, supra at 1251.
Respondent argues that this case is factually outside the
Court of Appeals’ holding in Propstra because decedent had given
her interest and all other beneficiaries had given theirs to the
liquidating trustee for the express purpose of selling the
property. We agree. The beneficiaries, by relinquishing their
interests in the property and giving the trustee control and
authority to sell, including the authority to decide the selling
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price, transformed their undivided interests into a “unity of
ownership” in the trustee. That is not to say that a discount
should not be applied for some other reason, but it does preclude
a control discount.
The Liquidating Trust was not a business entity, and it
should not be treated as a going concern. The stated purpose of
the trust was to liquidate or sell the realty so that a willing
buyer would not be concerned about control, income, organization
of the enterprise, etc. Instead, the buyer would be purchasing
the right to receive liquidation proceeds upon the property’s
sale.3
As a practical matter, the beneficiaries, by collectively
releasing their individual interests to the trustee, have
obviated most of the traditional concerns underlying the
application of a control discount. A potential buyer of a
partial interest would look to the underlying value of the assets
being liquidated. Accordingly, we hold that no control discount
should be applied to this situation.
The marketability discount relates to the question of
liquidity. Petitioner and respondent have addressed the
liquidity question in different ways. Petitioner, following the
same approach as used for the control-discount question, treats
3
The parties did not argue that there was any limitation on
the sale or transfer of liquidation proceeds. The parties agreed
that an interest in the Liquidating Trust could be transferred
with approval of at least 71 percent of the beneficiaries.
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the trust as a business entity and uses real estate business
examples (ostensibly comparable entities) to arrive at a 30-
percent discount. Respondent, on the other hand, depicts the
question of liquidity as a time value of money concept, rather
than a marketability discount issue. Using time-value concepts,
respondent arrives at a 9.5-percent discount to account for the
delay in realization of the liquidated value.
We do not find it necessary to resolve the debate about
which labels should be used. We simply hold that a willing buyer
would expect a discount for delay in the realization of the
liquidated value. In that regard, petitioner’s approach to
discounting is, in part, due to the fact that decedent had a
fractional interest. As explained above, because all of the
fractional-interest holders gave up their right to control the
liquidation of the property, the resulting effect is to enable
the trustee to liquidate without conditions or hindrances from
beneficial interest holders. Those circumstances would have the
effect of reducing any marketability discount. Considering both
approaches, we find that the agreed value of decedent’s interest
in the trust should be reduced by 15 percent to arrive at the
fair market value for purposes of determining decedent’s gross
estate and petitioner’s estate tax liability.
To reflect the foregoing,
Decision will be entered under
Rule 155.