Estate of Maggos v. Commissioner

T.C. Memo. 2000-129

UNITED STATES TAX COURT

ESTATE OF MARY D. MAGGOS, DECEASED, CATHERINE M. ADKINS,
SPECIAL ADMINISTRATOR, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 20877-93. Filed April 11, 2000.

McGee Grigsby, Stanley Y. Mukai, R. John Seibert, Kimberly

Rae McCorkle, William C. McCorriston, Nathan Jerold Cohen,

Jeffrey W. Ferguson, Michael Rosenthal, and Julian Y. Kim, for

petitioner.

Henry E. O’Neill, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

RUWE, Judge: Respondent determined a deficiency of

$2,229,350 in petitioner’s Federal gift tax for 1987. The issue
 - 2 -

for decision is whether a transaction in which Mary D. Maggos’

shares of stock in a family-owned company were redeemed

constitutes a taxable gift by Mary D. Maggos for purposes of

section 2512.1

FINDINGS OF FACT

Some of the facts have been stipulated and are so found.

The original petition in this case was filed on behalf of Mary D.

Maggos, who at the time resided in Honolulu, Hawaii. Mary D.

Maggos (decedent) died on September 3, 1996, at the age of 89.

During 1987, Pepsi-Cola Alton Bottling, Inc. (PCAB), was an

Illinois corporation engaged in the business of operating a

Pepsi-Cola bottling franchise in southwestern Illinois

(hereinafter the franchise). The franchise was initially

acquired in 1936 by decedent’s husband, Gust Maggos. The

franchise was subsequently incorporated as PCAB. Until his death

in June 1954, Gust Maggos supervised and directed the business

affairs of PCAB on a day-to-day basis. During the course of

their marriage, Gust and decedent had two children, Nikita Maggos

and Catherine M. Adkins. Subsequent to Gust Maggos’ death,

Nikita Maggos assumed control of the business on a day-to-day

1
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the year in issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
 - 3 -

basis. From the time PCAB was incorporated until May 1, 1987,

decedent was a member of the board of directors of PCAB.

On July 28, 1960, all outstanding shares in PCAB were

divided between decedent, who held 567 shares, and Nikita Maggos,

who held 433 shares. On July 29, 1960, decedent and Nikita

Maggos entered into a written “Declaration of Trust”, and

decedent conveyed her 567 PCAB shares and certain real property

located in Illinois into the trust. As a consequence of

decedent’s conveyance of her shares to the trust, PCAB canceled

stock certificates representing decedent’s personal ownership of

the 567 PCAB shares and issued new certificates for those shares

to Nikita Maggos and decedent as cotrustees of the trust.

Under the written terms of the trust, decedent and Nikita

Maggos were cotrustees and had the following rights and

beneficial interests: Decedent had a right to the net income of

the trust during her life and had a limited power of appointment

over the beneficial shares of the remainder interests among the

named residual beneficiaries. The corpus of the trust could be

invaded for the care, comfort, medical attention, support,

maintenance, or education of decedent, at the discretion of the

trustees. Unless the trust was amended, Nikita Maggos, if he

survived decedent, was entitled to the corpus of the trust upon

decedent’s death. As cotrustees, decedent and Nikita Maggos

could jointly, in their sole discretion, revoke or amend the
 - 4 -

terms of the trust. The trustees had the power to vote any stock

or other voting securities held in the trust. In case of death,

resignation, refusal, removal, or inability to act of either of

the trustees, the remaining trustee was to act as sole trustee.

Redemption Transaction

In 1987, after discussions between decedent and Nikita

Maggos, attorneys for Nikita Maggos and PCAB prepared documents

which effected the transaction at issue in this case. All

documents that were prepared to effect the transaction were

executed together as part of an integrated transaction. Pursuant

to the above-mentioned documents, Nikita Maggos and decedent, as

cotrustees, transferred 567 PCAB shares from the trust to

decedent (in her individual capacity) on May 1, 1987. PCAB then

redeemed the 567 PCAB shares from decedent. Decedent received

the redemption price from PCAB in the form of a promissory note

with a $3 million face amount and a 10-year maturity. The note

provided for interest to be paid annually at a rate of 8 percent

per annum and principal to be repaid in a single balloon payment

at maturity. As a result of the redemption transaction, Nikita

Maggos became the sole owner of PCAB.2

2
The redemption was subject to a pledge agreement that acted
as a security for the performance of the promissory note.
 - 5 -

Decedent was represented by independent and experienced

counsel in the transaction.3 The redemption transaction was

designed to be an “estate freeze”. The purpose of an estate

freeze, to minimize estate taxes, was explained to decedent by

her counsel before the redemption. The redemption price of $3

million was determined in part because Nikita Maggos’ attorney

believed they could support such a valuation for gift tax

purposes.4 In part, the price was determined by the amount

Nikita Maggos thought he could afford. Decedent and Nikita

Maggos did not negotiate the redemption price. Neither Nikita

Maggos nor decedent sought a formal valuation of the company

prior to the redemption. However, in January 1987, Nikita

Maggos’ accountants wrote to Robert T. Shircliff & Associates,

Inc. (Shircliff & Associates), requesting that Shircliff &

Associates review the draft financial results of PCAB to October

31, 1986, so that they could advise Nikita on the value of PCAB.

The purpose of obtaining the valuation was for estate planning.

Shircliff & Associates were in the business of consulting with

Pepsi bottlers and acting as business brokers in the purchase and

sale of Pepsi bottling franchises. Shircliff & Associates

prepared a preliminary valuation of PCAB’s business based in part

3
Decedent’s attorney was Robert Hite.
4
Nikita Maggos’ attorney was Victor Bezman, a partner in the
firm of Katten Muchin & Zavis.
 - 6 -

on a complete valuation of the business that Shircliff &

Associates had conducted in 1983 and on the recent draft

financial information that had been provided. Shircliff &

Associates formed the view that the business as a whole could be

sold for between $9,764,144 and $13,169,366.5

Pleadings

The initial petition alleges in relevant part:

The Commissioner erred by determining that the common
stock of Pepsi-Cola Alton Bottling, Inc. owned by the
Petitioner had a fair market value of $8,056,000.00 as
of May 1, 1987. [Emphasis added.]

Petitioner’s amended petition alleges:

4. The determination of gift tax set forth in the
Notice of Deficiency is based of the following errors:
(a) The Respondent erred by determining that
a deficiency in gift tax of $2,229,350 is due from the
Petitioner for the year ended December 31, 1987.
(b) The Respondent erred by determining an
increase of $5,056,000 in taxable gifts.
(c) The Respondent erred by determining that
the total amount of taxable gifts is $5,057,000.
(d) The Respondent erred by determining the
tax on total taxable gifts is $2,422,150.
(e) The Respondent erred by determining that
the redemption of the Petitioner’s stock of Pepsi-Cola
Alton Bottling, Inc. (“PCAB”) was a gift since the
redemption was fraudulently induced and resulted in
Petitioner being swindled out of the full value of her
PCAB stock.
(f) The Respondent erred by determining that
the redemption of the Petitioner’s PCAB stock was a
gift since the redemption constituted a bona fide,
arms-length transaction which proved to be a bad
bargain for the Petitioner.

5
This was based on a range of values between $5.19 and $7
per case times 1,881,338 cases sold. The valuation worksheet
also shows a total valuation of $10,061,000.
 - 7 -

(g) The Respondent erred in treating the
redemption of the stock of PCAB owned by the Petitioner
as a gift since the redemption was free of donative
intent.
(h) The Respondent erred by determining that
the redemption of the Petitioner’s PCAB stock was a
gift since the fraudulent inducement described in
subparagraph (e) constituted a theft of the
Petitioner’s PCAB stock.
(i) The Respondent erred by determining that
the stock of PCAB owned by the Petitioner had a fair
market value of $8,056,000 as of May 1, 1987.
(j) The Respondent erred by determining that
the transfer of the stock of PCAB owned by the
Petitioner was for less than adequate and full
consideration.
(k) The Respondent erred by determining that
the Petitioner made a gift of $5,056,000 to Nick
Maggos.

5. The facts upon which the Petitioner relies as
a basis of her case are as follows:
* * * * * * *
(b) At all relevant times herein prior to
May of 1987, the Petitioner was the owner and/or
beneficial owner of approximately 56.7% of the stock of
PCAB, while Nick Maggos (“Nick”), the Petitioner’s only
son, was the owner and/or beneficial owner of all of
the remaining issued and outstanding stock of PCAB.
[Emphasis added.]

Respondent’s answer to the amended petition admitted

paragraph 5(b) of petitioner’s amended petition.

Pretrial Order of July 15, 1997

The Court issued the following pretrial order:

For cause, it is

ORDERED that each of the parties shall file no
later than September 15, 1997, a memorandum setting
forth--

(1) (a) The issues of fact (including any
issues subsidiary to ultimate issues) and (b) the
issues of law (including any issues subsidiary to
 - 8 -

ultimate issues) to be resolved by the Court. Such
issues should be set forth in sufficient detail to
enable the Court to decide the case in its entirety by
addressing each of the issues listed.

(2) A clear, complete, and concise
exposition of each party’s position and the theory
underlying that position with respect to each of the
issues that are set forth pursuant to (1) above. In
this regard each party shall include a statement in
narrative form of what each party expects to prove.

It is further

ORDERED that the statement of issues set forth
pursuant to (1) above shall control the admissibility
of evidence at trial and evidence offered at trial will
[be] deemed irrelevant unless it pertains to one or
more of the issues set forth pursuant to (1) above. It
is further

ORDERED that neither party will be allowed to
advance a position or theory underlying that position
with respect to any of the issues set forth pursuant to
(1) above that is different from the positions or
theories set forth pursuant to (2) above. [Emphasis
added.]

Petitioner’s Amended Memorandum of Issues

Petitioner’s memorandum filed in response to the Court’s

order states the following factual basis for asserting petitioner

is not liable for the gift tax assessed:

The redemption transaction does not constitute a
taxable gift because the transaction was the result of
a theft procured by fraud. Petitioner intends to
prove: (1) a lack of donative intent on the part of
Petitioner; (2) actual and/or constructive fraud on the
part of Nikita; and alternatively (3) the redemption
was a bad business bargain; and in the further
alternative, (4) the value of the stock on the date of
the redemption ($3 million) was equal to fair market
value.

As issues of law, petitioner states:
 - 9 -

1. Theft.
The redemption constituted a theft under state law.
* * *

2. Fraud.
No gift was made because Petitioner was swindled. * * *

3. Mistake.
Under Hawaii law, a party to a contract may rescind a
contract on the basis of unilateral mistake. * * *

4. Bad Business Bargain.
A transaction entered into in the ordinary course of
business will be considered as made for full and
adequate consideration in money or money’s worth. * * *
Since the redemption was entered into in the ordinary
course, there was no gift. Moreover, the fact that a
familial relationship existed between Petitioner and
the buyer does not preclude the defense of a bad
business bargain. [Citations Omitted.]

Petitioner’s memorandum concludes:

Petitioner intends to prove that the redemption
was a theft procured by fraud, that she lacked donative
intent and the transaction must be rescinded on the
basis of mistake. Alternatively, the redemption was a
bad business bargain. As a further alternative theory,
Petitioner will prove that the fair market value of the
stock was $3 million on the date of redemption. Under
either theory, no gift tax is owed.

Respondent’s Memorandum of Issues

Respondent’s memorandum sets out the following issues of

fact:

1. Whether the redemption of Petitioner’s 56.7%
interest in Pepsi-Cola Alton Bottling, Inc. (PCAB) on
May 1, 1987, for $3,000,000, payable by way of a 10-
year promissory note (providing for monthly payments of
interest only at 8% for the entire 10-year term)
constituted a taxable gift to her son, Nikita Maggos
(Nikita), the owner of the remaining 43.3% of PCAB.

A. Whether the redemption of
Petitioner’s PCAB stock at a stated redemption
 - 10 -

price of $3,000,000 constituted a sale in the
ordinary course of business (a transaction that
was bona fide, at arm’s length, and free from any
donative intent) within the meaning of Treas. Reg.
§ 25.2512-8.

B. Whether Nikita, E. Lawrence
Helm, CPA (Helm) and Victor Bezman, Esq.
(Bezman) engaged in a conspiracy to defraud
Petitioner in connection with the redemption
of her PCAB stock.

C. Whether the redemption of
Petitioner’s PCAB stock at a stated
redemption price of $3,000,000 constituted a
bad business bargain by Petitioner,
irrespective of whether she was defrauded by
Nikita, Helm and/or Bezman.

2. Whether the fair market value of Petitioner’s
56.7% interest in PCAB as of May 1, 1987, was
$3,000,000 (the stated redemption price), or was
$8,056,000 as determined by Respondent.

Civil Litigation

In 1994, after receiving advice from her daughter, Catherine

Adkins, decedent ceased her association with Robert Hite, her

attorney of many years, and retained new counsel.

Subsequent to retaining new counsel on May 31, 1994,

decedent disinherited her son, Nikita Maggos. Based on advice

from new counsel, on August 23, 1994, decedent commenced suit in

the U.S. District Court for the District of Hawaii against Nikita

Maggos and PCAB (Civil No. 94-00649ACK) (the District Court

litigation). On August 17, 1995, decedent commenced suit in the

Circuit Court of the First Circuit of Hawaii against Helm, Huber,
 - 11 -

Ring, Helm & Co.,6 Bezman, and Katten Muchin & Zavis (Civ. No.

95-2973-08). The circuit court litigation was removed to the

Federal District Court in Hawaii (Civil No. 95-00784 SPK) and was

ultimately consolidated with the District Court litigation. In

the District Court litigation, decedent sought both damages and

the rescission of the redemption transaction based on a number of

claims asserted against Nikita Maggos and PCAB, including common

law fraud, breach of fiduciary duty (against Nikita in his

capacity as a fiduciary being the president and a director of

PCAB and the decedent’s son), and breach of the Illinois Business

Corporation Act. Decedent also asserted similar claims, as well

as professional malpractice claims, against Helm, Huber, Ring,

Helm & Co. (her former accountants), Bezman, and Katten Muchin &

Zavis (Nikita’s, and PCAB’s attorneys)

Petitioner’s attorneys requested Coopers & Lybrand to

determine the fair market value of a 100-percent and a 56.7-

percent interest in PCAB. Coopers and Lybrand prepared an expert

report for the District Court litigation in support of

petitioner’s contention that decedent had been defrauded by

Nikita Maggos. Coopers & Lybrand concluded that on May 1, 1987,

a 100-percent interest in PCAB was worth between $14 million and

$18 million and a 56.7-percent interest was worth between

$7,144,200 and $9,185,400. That study determined that the

6
The accountants whom Nikita Maggos and PCAB employed.
 - 12 -

appropriate “marketability discount” that should be applied to

the value of a 56.7-percent interest was 10 percent. Petitioner

filed the Coopers & Lybrand report in the District Court

litigation on or about December 10, 1996, in support of

decedent’s assertion that her interest in PCAB was worth

substantially in excess of what she received in the May 1, 1987,

redemption. The District Court litigation was settled out of

court in early 1998.7

OPINION

In May 1987, decedent and PCAB entered into a redemption

transaction designed to minimize decedent’s estate and gift taxes

and to achieve decedent’s other testamentary goals. The evidence

supporting this conclusion is explained more fully later in this

opinion.

Respondent contends that PCAB redeemed decedent’s shares in

PCAB for less than their fair market value, resulting in Nikita

Maggos’ owning 100 percent of PCAB. Respondent argues that this

transaction resulted in a gift to decedent’s son Nikita Maggos

that is subject to gift tax. Respondent’s measure of the gift is

7
Pursuant to the terms of the settlement, Nikita Maggos paid
$1,400,000 and conveyed an apartment in Honolulu, Hawaii, to the
Estate of Mary Maggos, and the Estate obtained a release from the
counterclaims asserted by Nikita Maggos. Petitioner also
obtained an indemnity from Nikita Maggos for any gift tax
liability that might be due as a result of the May 1, 1987,
redemption.
 - 13 -

the alleged difference between the fair market value of

decedent’s stock and the redemption price.

Section 2501(a) provides for a tax on gifts by individuals.

Section 2512(a) provides that the value of a gift of property at

the date of the gift shall be considered the amount of the gift.

Section 2512(b) provides:

SEC. 2512(b). Where property is transferred for
less than an adequate and full consideration in money
or money’s worth, then the amount by which the value of
the property exceeded the value of the consideration
shall be deemed a gift, and shall be included in
computing the amount of gifts made during the calendar
year.

If the value of the property given up by decedent exceeded

the value of the property she received, decedent made a gift for

the purposes of the Federal gift tax. The amount of any such

excess augmented the value of Nikita Maggos’ common stock in PCAB

and would be a taxable gift from decedent to Nikita. See Kincaid

v. United States, 682 F.2d 1220, 1224 (5th Cir. 1982); Tilton v.

Commissioner, 88 T.C. 590 (1987); sec. 25.2511-1(h)(1), Gift Tax

Regs.8

8
Sec. 25.2511-1(h)(1), Gift Tax Regs., provides:

(h) The following are examples of transactions
resulting in taxable gifts and in each case it is
assumed that the transfers were not made for an
adequate and full consideration in money or money’s
worth:

(1) A transfer of property by a corporation to B
is a gift to B from the stockholders of the
(continued...)
 - 14 -

Petitioner argues in the alternative: Decedent did not own

the 567 shares that were redeemed in 1987 (ownership argument);

the redemption transaction was not a completed gift in 1987

because a breach of fiduciary duty owed to decedent occurred or

decedent was defrauded and either or both events would entitle

decedent to rescind the transaction (incomplete gift argument);

and, finally, the redemption price was either full and adequate

consideration for decedent’s interest in the 567 shares or

alternatively was a bad business bargain.

Respondent argues that petitioner should be precluded from

raising or relying on the argument that decedent was not the full

beneficial owner of the redeemed stock.

Petitioner’s counsel on brief now asserts:

Respondent’s argument rests on the erroneous belief
that the 567 PCAB shares redeemed in 1987 were owned by
Mary Maggos. They were not. Mary Maggos neither owned
these 567 PCAB shares nor had power to exercise control
over the stock consistent with ownership. Rather, the

8
(...continued)
corporation. If B himself is a stockholder, the
transfer is a gift to him from the other stockholders
but only to the extent it exceeds B’s own interest in
such amount as a shareholder. A transfer of property by
B to a corporation generally represents gifts by B to
the other individual shareholders of the corporation to
the extent of their proportionate interests in the
corporation. However, there may be an exception to this
rule, such as a transfer made by an individual to a
charitable, public, political or similar organization
which may constitute a gift to the organization as a
single entity, depending upon the facts and
circumstances in the particular case. [Emphasis
added.]
 - 15 -

Trust owned the 567 PCAB shares, and Mary Maggos merely
had a life estate interest in the income of the Trust
corpus.

Respondent, with a great deal of justification, asks this

Court to preclude petitioner from arguing that decedent had only

a limited interest in the redeemed PCAB shares. Respondent

argues that this is a new issue that petitioner is improperly

raising for the first time on brief, and the Court should apply

the doctrine of judicial estoppel9 to prevent petitioner’s taking

a position on the “ownership” of the PCAB shares that is

inconsistent with petitioner’s position in the District Court

litigation.

Petitioner’s argument that decedent had less than a full

beneficial ownership interest in the 567 shares of PCAB common

stock is not mentioned in the petition, amended petition,

memorandum filed in response to our pretrial order of July 15,

1997, or petitioner’s pretrial memorandum that was submitted just

prior to trial. In fact, petitioner’s pleadings and the pretrial

memorandum assert that decedent was “owner and/or beneficial

owner” of the PCAB shares. Petitioner took the same position in

the District Court litigation. We have no doubt that

9
The doctrine of judicial estoppel is also known as the
doctrine of preclusion of inconsistent positions. See Helfand v.
Gerson, 105 F.3d 530, 534 (9th Cir. 1997). In this opinion, for
convenience, we adopt the term “judicial estoppel” when referring
to the doctrine.
 - 16 -

petitioner’s counsel were aware that the pleadings and the

pretrial memorandum in this case and the District Court

litigation were totally inconsistent with petitioner’s present

argument that decedent had no ownership interest in the PCAB

shares. We also have no doubt that had petitioner amended the

pleadings in this case in order to take such a position, it would

have been prejudicial and possibly fatal to petitioner’s District

Court litigation.

We agree with respondent that petitioner first asserts the

ownership argument on brief.10 While this Court is seldom

inclined to consider an argument raised for the first time on

brief, there is no absolute rule barring such consideration. As

we said in Ware v. Commissioner, 92 T.C. 1267, 1268 (1989), affd.

906 F.2d 62 (2d Cir. 1990):

The rule that a party may not raise a new issue on
brief is not absolute. Rather, it is founded upon the
exercise of judicial discretion in determining whether
considerations of surprise and prejudice require that a
party be protected from having to face a belated
confrontation which precludes or limits that party’s
opportunity to present pertinent evidence. * * *
[Citations omitted.]

Every representation by petitioner, until the opening brief was

filed, had been that decedent was the owner or beneficial owner

of the redeemed shares. The Court’s pretrial order of July 15,

10
We do not agree that petitioner’s “incomplete gift
argument”, which is based on alternative grounds of fraud, theft,
and mistake, is a new argument raised for the first time on
brief.
 - 17 -

1997, required that each of the parties file a memorandum setting

forth:

(1) (a) The issues of fact (including any
issues subsidiary to ultimate issues) and (b) the
issues of law (including any issues subsidiary to
ultimate issues) to be resolved by the Court. * * *

(2) A clear, complete, and concise
exposition of each party’s position and the theory
underlying that position with respect to each of the
issues that are set forth pursuant to (1) above. * * *

The order further stated:

ORDERED that neither party will be allowed to
advance a position or theory underlying that position
with respect to any of the issues set forth pursuant to
(1) above that is different from the positions or
theories set forth pursuant to (2) above. [Emphasis
added.]

Petitioner’s memorandum in response to our order lists theft,

fraud, mistake, and bad business bargain as the issues to be

tried.11 Petitioner’s counsel do not offer any justification for

their apparent disregard of the pretrial order. Respondent would

be prejudiced if we were to allow petitioner, contrary to our

previous order, to disclaim full beneficial ownership of the

redeemed shares for the first time on posttrial brief.12 For

11
The Court’s order is set out in full supra pp. 7-8, and
the relevant portions of petitioner’s amended memorandum of
issues are set out supra pp. 8-9.
12
In addition to petitioner’s pleadings and the
representation to the Court that decedent owned full beneficial
interest in 567 shares of PCAB, both decedent and her son treated
the stock as if it were decedent’s by having the trust transfer
the shares to her prior to the redemption.
 - 18 -

this reason, we refuse to allow petitioner to assert that

decedent had less than the full beneficial ownership of the

redeemed shares.

The doctrine of judicial estoppel also supports our refusal

to allow petitioner to raise the issue of decedent’s ownership in

the redeemed stock. While the contours of the doctrine of

judicial estoppel are not yet fully settled,13 we have held that

the doctrine of judicial estoppel is available in the Tax Court.

See Huddleston v. Commissioner, 100 T.C. 17 (1993).

In Helfand v. Gerson, 105 F.3d 530, 534 (9th Cir. 1997), the

Court of Appeals for the Ninth Circuit summarized the doctrine,

stating:

“Judicial estoppel, sometimes also known as the
doctrine of preclusion of inconsistent positions,
precludes a party from gaining an advantage by taking
one position, and then seeking a second advantage by
taking an incompatible position.” Rissetto v. Plumbers
and Steamfitters Local 343, 94 F.3d 597, 600 (9th Cir.
1996). It is an equitable doctrine intended to protect
the integrity of the judicial process by preventing a
litigant from “playing fast and loose with the courts.”
Russell v. Rolfs, 893 F.2d 1033, 1037 (9th Cir.1990),
(quoting Rockwell Int’l Corp. v. Hanford Atomic Metal
Trades Council, 851 F.2d 1208, 1210 (9th Cir.1988)),

13
The doctrine of judicial estoppel is a vintage
doctrine whose popularity varies from court to court
nearly as greatly as its contours do. And yet, it is
gaining renewed currency. The Ninth Circuit Court of
Appeals is one of the courts to have infused it with
renewed life and vigor. That court applied judicial
estoppel most recently to an estate planning case in
Hawaii. * * * [Sumner v. Michelin N. Am., Inc., 966 F.
Supp. 1567, 1571 (M.D. Ala. 1997) (referring to Helfand
v. Gerson, 105 F.3d 530 (9th Cir. 1997)).]
 - 19 -

cert. denied, 501 U.S. 1260, 111 S.Ct. 2915, 115
L.Ed.2d 1078 (1991) (internal quotation marks omitted).
“[F]ederal law governs the application of judicial
estoppel in federal court.” Rissetto, 94 F.3d at 603.

The Courts of Appeals are divided into what has been

described by the Court of Appeals for the Ninth Circuit as the

majority and minority positions.14 See Rissetto v. Plumbers &

Steamfitters Local 343, 94 F.3d 597 (9th Cir. 1996). In Yanez v.

United States, 989 F.2d 323, 326 (9th Cir. 1993) (quoting Morris

v. California, 966 F.2d 448, 452-453 (9th Cir. 1992)), the court

characterized the positions, stating:

“The majority of circuits recognizing the doctrine hold
that it is inapplicable unless the inconsistent
statement was actually adopted by the court in the
earlier litigation * * * The minority view, in
contrast, holds that the doctrine applies even if the
litigant was unsuccessful in asserting the inconsistent
position, if by his change of position he is playing
‘fast and loose’ with the court.... In either case,
the purpose of the doctrine is to protect the integrity
of the judicial process. * * *”

This case is appealable to the Court of Appeals for the

Ninth Circuit; as a consequence, we apply the doctrine as

enunciated by the Court of Appeals for the Ninth Circuit.

14
The Court of Appeals for the Tenth Circuit has firmly
established that it will not be bound by the doctrine of judicial
estoppel. See Rascon v. U.S.W. Communications, Inc., 143 F.3d
1324 (10th Cir. 1998); see also the position of the Court of
Appeals for the District of Columbia Circuit expressed in United
Mine Workers of Am. 1974 Pension v. Pittston Co., 984 F.2d 469,
477 (D.C. Cir. 1993) (noting that this circuit has “not
previously embraced” judicial estoppel).
 - 20 -

In Rissetto v. Plumbers & Steamfitters Local 343, supra at 601,

the court stated: “This Circuit has not yet had occasion to

decide whether to follow the ‘majority’ view or the ‘minority’

view.” (Fn. ref. omitted.) In that case, like the instant case,

it was unnecessary to decide which view is correct. The court in

Rissetto had to consider whether the obtaining of a favorable

settlement in the earlier proceeding would be sufficient to

satisfy the “majority view” requirement that the inconsistent

statement was actually adopted by the court in the earlier

litigation. The court stated:

We are thus confronted with the question whether
obtaining a favorable settlement is equivalent to
winning a judgment for purposes of applying judicial
estoppel. We answer in the affirmative. In our view,
the fact that plaintiff prevailed by obtaining a
favorable settlement rather than a judgment should have
no more relevance than in the context of civil rights
attorney’s fees awards, i.e., none whatever. See Maher
v. Gagne, 448 U.S. 122, 100 S.Ct. 2570 * * * (1980)
(party who obtains consent decree is “prevailing party”
no less than one who obtains a judgment on the merits).
[Id. at 604-605; fn. ref. omitted; emphasis added.]

Petitioner obtained a substantial settlement of the District

Court litigation on the basis of the factual assertion that

decedent was entitled to the legal or beneficial ownership of

56.7 percent of the issued and outstanding capital of PCAB. In

the District Court litigation, decedent had asserted a value of

her interest on the basis of full ownership rights. Petitioner’s

expert report filed in the District Court litigation valued her

interest in PCAB at the time of the 1987 redemption between
 - 21 -

$7,144,200 and $9,185,400. Petitioner’s counsel on brief now

assert contrary positions. Petitioner argues the value of

decedent’s beneficial interest is less than $3 million, and

decedent had less than a full beneficial ownership.

In Helfand v. Gerson, supra at 535-536, the Court of Appeals

for the Ninth Circuit recently stated:

The integrity of the judicial process is threatened
when a litigant is permitted to gain an advantage by
the manipulative assertion of inconsistent positions,
factual or legal.

* * * * * * *

Judicial estoppel seeks to prevent the deliberate
manipulation of the courts * * *

Petitioner’s assertion of both full ownership of the PCAB

shares and a value for the shares in excess of the consideration

received by decedent was essential in order for petitioner to

succeed in the District Court litigation. Petitioner’s new

position on brief in the case before us is inconsistent with the

position taken in the District Court.

We cannot in good conscience allow petitioner to benefit

from having claimed full beneficial ownership in one court and

then to come to this Court and make an inconsistent argument in

an attempt to avoid the incidence of gift tax. If petitioner

received full value for what decedent owned and gave up, decedent

cannot have been entitled to any recovery in the District Court

litigation. Petitioner is allowed to have it only one way.
 - 22 -

While petitioner may make arguments in the alternative in a

single litigation, it is not allowed to succeed twice in

different suits on inconsistent factual and legal assertions. We

hold that petitioner’s conduct gives rise to circumstances that

demand the application of the doctrine of judicial estoppel. We

therefore hold that petitioner is estopped from asserting: (1)

Decedent had less than a full beneficial interest in the PCAB

shares at the time of the redemption, and (2) the shares had a

value that was equal to or less than $3 million.15

Petitioner next argues that the redemption transaction was

not a completed gift in 1987 because a breach of fiduciary duty

owed to the decedent occurred and/or because decedent was

defrauded. Petitioner argues that either or both events entitle

decedent to rescind the transaction. We disagree.

In May 1987, decedent and her son, Nikita Maggos, entered

into a transaction designed to minimize estate taxes and achieve

decedent’s testamentary goals. Both decedent and Nikita Maggos

were represented by independent and qualified attorneys in the

transaction. Nikita was represented by Mr. Bezman. Decedent’s

attorney at the time of the redemption transaction was Robert

Hite. We found Mr. Hite to be a credible, truthful, and

15
Petitioner filed a motion for summary judgment in this
Court claiming “that the record shows clearly that Ms. Maggos
[decedent] was defrauded because she transferred her PCAB shares
for less than adequate consideration”. Estate of Maggos v.
Commissioner, T.C. Memo. 1997-431.
 - 23 -

disinterested witness. Mr. Hite testified that the purpose of

the transaction was an “estate freeze”, a legitimate estate

planning technique to move an appreciating asset out of

decedent’s estate.16 He further testified that Nikita Maggos’

attorney, Victor Brezman, had planned the transaction. Mr. Hite

did not question the redemption price that decedent and her son,

Nikita Maggos, had agreed upon because it satisfied decedent’s

16
Mr. Hite testified:
Q And do you know who planned this transaction?
A It was Mr. Bezman.
Q And did anyone describe the reasons for the
transaction?
A Right; he explained that the value of this
Pepsi-Cola bottling company was going up, and that they
wanted to stop the value from going up any higher in Mrs.
Maggos’ estate, so they wanted to freeze it at the present
value.
Q They wanted to freeze it at the present value?
A Right.
Q Does a transaction--in the jargon of your trade,
does the--this transaction have a name?
A Well, it’s an estate freeze, is what it is, yes.
Q And were you aware of a concept of an estate
freeze prior to this meeting?
A Yes, of course.
Q Did you have any personal reservations about the
legitimacy of an estate freeze?
A No; it’s a perfectly legitimate legal transaction.
Q Are there any parameters in which the transaction
should fall?
A Well, when you say, “Freeze it at present value,”
obviously the price the transaction is being placed at
should be the fair market value of the property, the present
fair market value of the property.
Q Uh-huh. Was this meeting that occurred in your
office a negotiating session?
A No, it wasn’t. It was--they came in, they said
that they had reached this agreement with Mrs. Maggos, and
that she was going to redeem her stock at the $3 million
figure.
 - 24 -

testamentary plan.17 Mr. Hite testified that decedent “had

promised to leave him [Nikita Maggos] the shares when she

died.”18 The conclusion that the redemption transaction was part

of an estate plan is corroborated by the fact that as part of the

redemption transaction plan, Nikita Maggos’ and PCAB’s attorneys

17
Mr. Hite testified:
Q And did Mrs. Maggos ever ask you to negotiate with
anyone --
A No.
Q -- about the price?
A No. She said, “This is what we want to do; this
is what we’re going to do.”
Q Did you have an understanding of why she did not
ask you to negotiate?
A Well, she was--I knew of the relationship with her
son, and that she was eventually going to give him this
stock upon her death, and she and he had worked out a price
that she was satisfied with, and I just felt that I wasn’t
being asked to question what they had already determined,
and I was just to protect her interests, in making sure she
got what she had bargained for.
Q So you thought she had negotiated the price before
she got there?
A I did.
Q Was Mrs. Maggos present during all of your
discussions with Mr. Helm and Mr. Bezman?
A She was.
Q Did she ask any questions?
A Not that I recall. I remember explaining to her
that this -- this idea of a freeze was a legitimate
transaction, and that it would stop the value of her asset
from going any higher, and that the current -- it would
remain at the current value that it -- that they placed on
it.
Q Did Mrs. Maggos seem pleased with the price?
A She did.
18
Mr. Hite testified:
Q. Okay. And this redemption was part of--came
to be a central part of Mary's overall estate plan?
A. That's correct.
 - 25 -

contacted decedent’s attorney and recommended that decedent

should be convinced to make a gift to decedent’s daughter in 1987

so that the statute of limitations for assessing gift tax would

start to run. We find that decedent and her son entered into the

redemption transaction to fulfill decedent’s estate planning

goals and for no other reasons. Decedent was not concerned with

and did not negotiate or authorize her attorney to negotiate for

the fair market value of her interest in PCAB. The price

received was the price that satisfied decedent’s needs while she

was alive, was the greatest amount her son believed he could pay,

and was the lowest price Nikita’s lawyers thought could be

defended for gift tax purposes. So long as the transaction could

be defended for Federal gift tax purposes, the fair market value

of the PCAB shares that were redeemed was not of material concern

to decedent.

We further find that decedent, after having received

competent independent legal advice, gave a fully informed consent

to the redemption transaction as an estate planning technique.

On the record before us, given the intended nature of the

redemption transaction, we can find no credible evidence that

would support a finding that decedent was defrauded of her

interest in PCAB or that there was any breach of fiduciary duty

by Nikita Maggos which was owed to decedent, thus entitling

decedent to rescind the transaction. We therefore reject
 - 26 -

petitioner’s “incomplete gift argument”, and for the same

reasons, we also reject petitioner’s “bad business bargain” or

“unilateral mistake” arguments.

Valuation

Valuation is a question of fact, and the trier of fact must

weigh all relevant evidence to draw the appropriate inferences.

See Commissioner v. Scottish Am. Inv. Co., 323 U.S. 119, 123-125

(1944); Helvering v. National Grocery Co., 304 U.S. 282, 294-295

(1938).

Fair market value is defined for Federal estate and gift

tax purposes as the price that a willing buyer would pay a

willing seller, both having reasonable knowledge of all the

relevant facts and neither being under compulsion to buy or to

sell. See United States v. Cartwright, 411 U.S. 546, 551 (1973)

(citing sec. 20.2031-1(b), Estate Tax Regs.); see also Snyder v.

Commissioner, 93 T.C. 529, 539 (1989). The willing buyer and the

willing seller are hypothetical persons, rather than specific

individuals or entities, and the individual characteristics of

these hypothetical persons are not necessarily the same as the

individual characteristics of the actual seller or the actual

buyer. See Estate of Curry v. United States, 706 F.2d 1424,

1428-1429, 1431 (7th Cir. 1983); 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); see also
 - 27 -

Estate of Watts v. Commissioner, 823 F.2d 483, 486 (11th Cir.

1987), affg. T.C. Memo. 1985-595. The hypothetical willing buyer

and willing seller are presumed to be dedicated to achieving the

maximum economic advantage. See Estate of Curry v. United

States, supra at 1428; Estate of Newhouse v. Commissioner, supra

at 218. This advantage must be achieved in the context of market

and economic conditions at the valuation date. See Estate of

Newhouse v. Commissioner, supra at 218.

For Federal gift tax purposes, the fair market value of the

subject property is determined as of the date of the gift.

Ordinarily, no consideration will be given to any subsequent

event that may have affected the value of the subject property on

some later date if the event was unforeseeable at the time of the

gift. See sec. 2512(a); sec. 20.2031-1(b), Estate Tax Regs.; see

also First Natl. Bank v. United States, 763 F.2d 891, 893-894

(7th Cir. 1985); Estate of Newhouse v. Commissioner, supra at

218; Estate of Gilford v. Commissioner, 88 T.C. 38, 52 (1987).

Expert Testimony

Both parties rely primarily on expert opinion evidence to

support their contrary valuation positions. We evaluate the

opinions of experts in light of the demonstrated qualifications

of each expert and all other evidence in the record. See

Anderson v. Commissioner, 250 F.2d 242 (5th Cir. 1957), affg. in

part and remanding in part on another ground T.C. Memo. 1956-178;
 - 28 -

Parker v. Commissioner, 86 T.C. 547, 561 (1986). We have broad

discretion to evaluate the overall cogency of each expert’s

analysis. See Sammons v. Commissioner, 838 F.2d 330, 334 (9th

Cir. 1988), affg. in part and reversing in part T.C. Memo. 1986-

318. We are not bound by the formulas and opinions proffered by

an expert witness and will accept or reject expert testimony in

the exercise of sound judgment. See Helvering v. National

Grocery Co., supra at 295; Anderson v. Commissioner, supra at

249. We may reach a determination of value based on our own

examination of the evidence in the record. See Lukens v.

Commissioner, 945 F.2d 92, 96 (5th Cir. 1991) (citing Silverman

v. Commissioner, 538 F.2d 927, 933 (2d Cir. 1976), affg. T.C.

Memo. 1974-285). Where experts offer divergent estimates of fair

market value, we decide what weight to give these estimates by

examining the factors they used in arriving at their conclusions.

See Casey v. Commissioner, 38 T.C. 357, 381 (1962). We have

broad discretion in selecting valuation methods. See Estate of

O’Connell v. Commissioner, 640 F.2d 249, 251 (9th Cir. 1981),

affg. on this issue and revg. in part T.C. Memo. 1978-191.

Moreover, while we may accept the opinion of an expert in its

entirety, see Buffalo Tool & Die Manufacturing Co. v.

Commissioner, 74 T.C 441, 452 (1980), we may be selective in the

use of any part of such opinion, or reject the opinion in its

entirety, see Parker v. Commissioner, supra at 561. Finally,
 - 29 -

because valuation necessarily results in an approximation, the

figure at which this Court arrives need not be one as to which

there is specific testimony if it is within the range of values

that may properly be arrived at from consideration of all the

evidence. See Silverman v. Commissioner, supra at 933; Alvary v.

United States, 302 F.2d 790, 795 (2d Cir. 1962).

Respondent’s Expert

Respondent employed the services of Business Valuation

Services, Inc. (BVS), to value 567 shares of the common stock of

PCAB as of May 1, 1987. David N. Fuller, a principal of BVS,

gave testimony at the trial. Mr. Fuller has an M.B.A. degree in

finance from Southern Methodist University, and is an accredited

senior appraiser as designated by the American Socy. of

Appraisers and a Chartered Financial Analyst.

The BVS report concluded that the fair market value of 567

shares of the common stock of PCAB on May 1, 1987, was

$7,938,000. This conclusion is based on 100 percent of the

common stock of PCAB having a value of $14 million. To arrive at

this conclusion, BVS prepared several separate analyses. BVS

prepared a discounted cash-flow, a guideline company, a market

transaction, and an acquisition analysis. Each is discussed

below.
 - 30 -

Discounted Cash-Flow Analysis

In the discounted cash-flow (DCF) analysis, the present

value of a company’s projected annual cash-flows over the

forecast period is added to the present value of a company’s

residual value and the value of a company’s nonoperating assets

to arrive at the present value of a company. A DCF analysis

contains an inherent difficulty when used for a company that has

a significant residual value because to determine the present

value of a company, the DCF analysis requires an estimate of what

a company will be worth at the end of the forecast period

(residual value). PCAB’s estimated residual value was neither

minimal nor easily calculated. The BVS report assumes that in 10

years PCAB will be worth 12.5 times net earnings.

In closely held small companies, the use of a DCF analysis

is also suspect when the discount rate is calculated by a

weighted average cost of capital (WACC) determination. Such

determinations often include a determination of the cost of

capital using the “capital asset pricing model” (CAPM). This

Court has recently observed:

We do not believe that CAPM and WACC are the
proper analytical tools to value a small, closely held
corporation with little possibility of going public.
CAPM is a financial model intended to explain the
behavior of publicly traded securities that has been
subjected to empirical validation using only historical
data of the two largest U.S. stock markets. * * *
[Furman v. Commissioner, T.C. Memo. 1998-157.]
 - 31 -

The BVS report uses a WACC determination including a CAPM

determination in arriving at an appropriate discount rate. In

making the CAPM determination, BVS assigned a beta19 of 0.76 as

compared to the market’s normal rate of 1.0. This resulted in a

determination of the cost of equity capital being 14.2 percent in

the CAPM computation. We are not persuaded that the guideline

companies used in the BVS report to determine beta in this case

were appropriate. None of the companies selected were shown to

have had operations that were substantially similar to PCAB. Nor

are we persuaded that PCAB should be assigned a smaller beta than

the guideline companies assuming that they were appropriate. If

a beta of 1.0 were assigned, volatility equal to market, the cost

of equity capital would have been 16 percent rather than the 14.2

percent used in the BVS study. We are also unpersuaded that the

BVS study selected an appropriate rate for debt in the WACC

determination. BVS selected 10.5 percent as the pretax cost of

19
Beta, a measure of systematic risk, is a function of the
relationship between the return on an individual
security and the return on the market as a whole.
Pratt et al. * * * [Valuing a Business (3d ed. 1996)] *
* * at 166. Betas of public companies are frequently
published, or can be calculated based on price and
earnings data. Because the calculation of beta
requires historical pricing data, beta can not be
calculated for stock in a closely held corporation.
The inability to calculate beta is a significant
shortcoming in the use of CAPM to value a closely held
corporation; this shortcoming is most accurately
resolved by using the betas of comparable public
companies. * * * [Furman v. Commissioner, T.C. Memo.
1998-157; fn. ref. omitted.]
 - 32 -

debt. Absent any justification why a hypothetical buyer could

obtain a debt rate less than 2 percent above the Government bond

rate, we see no reason to accept such a low rate as being

appropriate.20 The selection of what we consider to be an

artificially low rate depresses the WACC determination.

The BVS study adopted the CAPM determination as appropriate

for determining the weighted cost of capital. BVS discarded a

constant growth of earnings analysis that yielded an estimate of

18.8 percent because of its “inherent weakness, as compared to

the CAPM methodology”. In noting BVS’s failure to include or

convincingly explain why a small company risk premium should be

excluded from its calculation petitioner’s expert, K. W. McGraw,

testified that an appropriate discount rate would be in the range

of “17 and a half percent, at least”. Having considered all the

evidence before us on this point, we have determined that an

appropriate discount rate would be approximately 17 percent

rather than the 12 percent used in the BVS report or the 22.24-

percent rate used in petitioner’s expert report prepared by

Willamette Management Associates.21

20
The 10.5-percent rate appears to be based on the
assumption that a hypothetical buyer would obtain Baa-rated debt
financing; however, insufficient justification for this
assumption has been provided.
21
See discussion of the Willamette Management Associates
report infra pp. 41-42.
 - 33 -

In addition to the adjustment necessary for the discount

rate, we are not persuaded that other assumptions made in the BVS

cash-flow analysis are warranted. The BVS analysis incorporates

an amount, by way of an add-back item, for amortization of

intangibles. The report assumes that a purchaser of the 56.7-

percent share holding would be allowed to make a section 338

election and, as a consequence, would be able to amortize the

franchise agreement under section 1253. There are a variety of

reasons we find this assumption unwarranted, the most compelling

of which is that a purchaser of 56.7 percent of a company would

not make a “qualified stock purchase”22 as required by section

338, and therefore the postulated election would not be

22
Sec. 338(d)(3) provides:

(3) Qualified stock purchase.--The term “qualified
stock purchase” means any transaction or series of
transactions in which stock (meeting the requirements
of section 1504(a)(2)) of 1 corporation is acquired by
another corporation by purchase during the 12-month
acquisition period.

Sec. 1504(a)(2) provides:

(2) 80-percent voting and value test.--The
ownership of stock of any corporation meets the
requirements of this paragraph if it–-

(A) possesses at least 80 percent of the
total voting power of the stock of such
corporation, and

(B) has a value equal to at least 80 percent
of the total value of the stock of such
corporation.
 - 34 -

available. As a consequence, the amount added back into the

cash-flows for amortization must be subtracted from the

calculation.

We find that an additional adjustment is warranted in the

determination of the value of the nonoperating assets that are

added to the value of the operating business to achieve the value

of PCAB. The BVS report adds back, inter alia, the following

assets: Cash over $100,000 having a fair market value of

$366,774 and deferred charges having a fair market value of

$243,031. We find no basis for this treatment.

The cash in excess of $100,000 held by PCAB and the deferred

charges are, in our opinion, operating assets. The balance

sheets for the 3 years preceding the valuation date all show cash

on hand substantially in excess of $100,000. Mr. Robert

Shircliff, a witness with considerable experience with Pepsi-Cola

bottlers, testified that the rule of thumb for bottling plants is

that they need working capital of 40 cents per case sold. Mr.

Richard Lawrence, a vice president of Pepsi-Cola Co., also

testified that as a general rule Pepsi-Cola bottlers required

working capital of 40 cents per case. In 1986, PCAB sold

1,884,051 cases. Using this rule of thumb, PCAB would require
 - 35 -

working capital of $753,620,23 well in excess of the $665,815

shown on the 1986 balance sheet.

BVS determined from PCAB’s records that PCAB held notes from

Nikita Maggos in the approximate amount of $1,328,110.24 A

hypothetical purchaser of 56.7 percent of the shares of PCAB from

a hypothetical seller would have relied on PCAB’s financial

statements to determine PCAB’s assets. Neither a hypothetical

purchaser nor a seller would have any reason to cause PCAB to

discharge Nikita Maggos’ debt. A hypothetical purchaser of 56.7

percent of the shares of PCAB would have been in control and

would have logically insisted on repayment of Nikita Maggos’

notes. In the instant case, we think the appropriate treatment

of the shareholder notes, for valuation purposes, is to treat

them consistently with the business records of PCAB as

nonoperating assets.

BVS’ discounted cash-flow analysis, after making the

adjustments detailed above, would result in a value for 100

23
“Working capital” in this context is defined as the sum of
cash on hand, receivables, inventory, and other current assets
less accounts payable and other current liabilities.
24
This number is derived by averaging the notes outstanding
on Oct. 31, 1986 ($1,054,138), and the notes outstanding on Oct.
31, 1987 ($1,602,082). The “Current Market Indicator
Evaluation”, which was prepared by Shircliff contemporaneously
with the redemption transaction, shows notes receivable from
stockholders as being approximately $1,300,000. We note that
Coopers & Lybrand, petitioner’s expert in the District Court
litigation, valued the notes at $1,054,138 in its report.
 - 36 -

percent of PCAB of approximately $8,600,000 and result in a value

for a 56.7-percent interest of approximately $4,900,000.

Guideline Company Analysis and Market Transaction Analysis

BVS performed a guideline company analysis and concluded

“that the fair market value of the common stock in PCAB, as of

May 1, 1987, on a minority interest basis, can be reasonably

represented as: $14,536,000". Two of the companies selected,

Pepsi-Cola, Inc., and Coca-Cola Co., are so dissimilar in both

size and operations25 to PCAB that we doubt the comparisons are

meaningful. The other two guideline companies were also

significantly larger, having market capitalizations of $518.3

million and $4.2 billion. In addition to the large discrepancy

in size, we are not persuaded that the remaining guideline

companies’ bottling operations are similar to PCAB’s operations

which involve a very high percentage, approximately 75 percent,

of resale of product bottled elsewhere. For these reasons, we do

not accept BVS’ guideline company analysis as reflecting the

market value of PCAB shares.

BVS also performed a market transaction analysis that

isolated financial data from 16 acquisitions of bottling

companies ranging in size from $14.9 million to $1.4 billion in

market capital. The report gives no indication whether any of

25
Richard Lawrence, a vice president of Pepsi-Cola Co.,
testified that Pepsi-Cola, Inc., and Coca-Cola Co. were in a
“different business” than PCAB.
 - 37 -

the companies used for comparison had operating characteristics

like PCAB’s. PCAB’s operations involved the sale of a very high

percentage of product bottled elsewhere. We are not convinced

that this is typical of other bottlers. Consequently, we find

the market transaction analysis to be unpersuasive.

Acquisition Analysis

BVS reviewed the sale of PCAB 2 years subsequent to the

valuation date to provide evidence of value. The 1989 sale price

for 100 percent of PCAB was $13,900,000. This price is the

unadjusted base price called for in the contract for sale.

Petitioner argues that a more appropriate amount would be

$12,436,085, which is the amount specified in a subsequent

closing agreement between Nikita Maggos and respondent as the

price obtained for the stock. The BVS report states that due to

the period of time between the valuation date and the 1989 sale

“we placed no weight on this analysis, but present the

information to provide additional information by which to

evaluate the accuracy of our conclusions.”

Petitioner’s Expert

Petitioner employed the services of Corporate Financial

Consultants (CFC). CFC also valued 567 shares of the common

stock of PCAB as of May 1, 1987. Mr. Kenneth McGraw, a principal

of CFC, is the author of the CFC report and testified at trial.
 - 38 -

Mr. McGraw holds a degree in chemistry from Johns Hopkins

University and an M.B.A. from Harvard.

The CFC report concluded that the fair market value of 56.7

percent of PCAB’s stock as of May 1, 1987, was $2,691,458. This

conclusion is based on the whole enterprise value of PCAB being

$6,329,120 and applying a discount of 25 percent for lack of

marketability of the 56.7-percent block of stock being valued.

CFC used a capitalization of cash-flows as the primary valuation

measure.

CFC also performed a reasonableness test using a guideline

(comparative) company approach. Their report states: “This

approach, however, was not used as a primary measure due to the

fact that there were no public companies comparable enough to use

as reliable indicators of value for a small, atypical Pepsi

bottler like PCAB.” CFC also did not use a discounted cash-flow

approach “because of difficulties in forecasting future revenues

and earnings, given significant changes in margins and earnings

in the years preceding the Valuation Date.”

CFC also rejected the use of multiples based on the then-

current sales of other franchises or dollar-per-case valuations.

CFC cited PCAB’s small size and heavy reliance on purchasing

products from other suppliers (about 75 percent of sales) as

reasons to consider PCAB as atypical from other bottlers.
 - 39 -

In calculating the value of the operating business, CFC

found the compensation paid to Nikita Maggos to be reasonable and

therefore made no adjustment to the company’s cash-flows in that

regard. Respondent’s expert noted that a new owner of 56.7

percent of PCAB would be entitled to review and set the

compensation of the executives. We agree with that proposition.

Respondent’s expert estimated that an appropriate level of

compensation for the position held by Nikita Maggos would be in

the vicinity of $100,000 per year.26 Based on PCAB’s size,

revenue, profits, and dividend history, we agree that this amount

is more reasonable than Nikita Maggos’ salary of over $250,000.

A majority owner of PCAB stock, other than Nikita’s mother, would

not likely approve of Nikita’s salary level. As a consequence,

we have adjusted the cash-flow in CFC’s calculation to account

for this fact.

Additionally, we have adjusted the CFC’s calculation of the

value of the nonoperating assets in the same manner as was done

in the discounted cash-flow analysis of respondent’s expert and

for the same reasons. The result of the adjustments yields a

value for 100 percent of PCAB of approximately $8,600,000 and of

$4,900,000 for 56.7 percent.

26
Petitioner’s amended complaint in the District Court
litigation alleged that Nikita Maggos, an officer and director of
PCAB, caused PCAB to pay to him a salary which was excessive and
not reasonable.
 - 40 -

Value of 56.7 Percent of PCAB Shares (Aggregated Minority

Basis)27

After making the appropriate adjustments, detailed above,

BVS’ discounted cash-flow analysis and CFC’s capitalization of

cash-flows analysis produce a very narrow range of values. As

stated above, the value of 100 percent of PCAB is approximately

$8,600,000. The corresponding value for a 56.7-percent interest

is approximately $4,900,000. We therefore find $4,900,000 to be

the best estimation of the value of 56.7 percent on an aggregated

minority basis.

Our conclusion is also generally supported by more

contemporaneous evaluations that were made by Robert Shircliff.

On brief petitioner states:

Between 1983 and 1989, there were three occasions on
which the parties retained neither by Petitioner nor
Respondent attempted to place a value on PCAB: the 1983
Shircliff Report; the Worksheet prepared by Shircliff
in 1987; and Pepsi-Metro’s 1989 purchase of 100% of the
stock of PCAB. Unlike the various valuation experts
retained by parties for litigation purposes for this
preceding and the District Court Litigation, the person
performing these valuations had no advocacy role. Each
had every reason to get the number right.

The 1983 Shircliff report valued the operating business at

$6,438,000. Petitioner’s expert calculated an adjustment to the

1983 Shircliff report “to reflect growth in net sales between

27
We use the term “aggregated minority basis” to mean the
value of the company as a whole multiplied by the relevant
percentage of ownership.
 - 41 -

1982 and 1986".28 Assuming that growth rate (28.2 percent), the

value of the operating business would be approximately

$8,250,000. Using the same figure for nonoperating assets as

used to adjust the DCF and capitalization of cash-flows analysis

above results in a total value of approximately $11 million and

$6.2 million for a 56.7-percent interest.

Illiquidity Discount (Marketability Discount)

A discount may be appropriate to reflect illiquidity or

costs of marketing involved in the disposition of an interest in

a small closely held private company. See, e.g., Estate of

Simplot v. Commissioner, 112 T.C. 130 (1999); Estate of Mellinger

v. Commissioner, 112 T.C. 26 (1999); Davis v. Commissioner, 110

T.C. 530 (1998); Estate of Jung v. Commissioner, T.C. Memo. 1990-

5. The parties’ experts disagree about the appropriateness of

the application of a discount to the aggregate minority value of

the 56.7-percent block being valued. Respondent again relies on

the testimony of Robert Fuller and the report prepared by BVS.

BVS, in its original report and in a supplemental report,

concludes that no discount for marketability or illiquidity is

appropriate. Petitioner relies, in part, on CFC’s analysis,

which concludes that a 25-percent “marketability discount” would

be appropriate. Petitioner also relies on a report prepared by

28
Petitioner’s expert opines that growth rate utilized
probably overstates the value of PCAB’s operating business in
1987.
 - 42 -

Willamette Management Associates (Willamette) and the testimony

of Robert F. Reilly, the managing director of that firm.29 The

Willamette report concludes that a 30-percent “illiquidity

discount” would be appropriate.

We found the testimony of Mr. Reilly and Mr. McGraw to be

persuasive with respect to the propriety of an illiquidity

discount and their reports in this matter to be well reasoned.

The facts that PCAB was a small family company and the shares in

the company could not be sold without the approval of Pepsi-Cola,

Inc., favor the conclusion that some discount is appropriate.30

After carefully considering all the relevant evidence, including

the expert reports and testimony, we consider an illiquidity

discount of 25 percent to be appropriate.

Control Premium

As a general proposition, control is an element to be taken

into account for purposes of determining the fair market value of

corporate stock, over and above the value that is attributable to

29
Mr. Reilly, among his other qualifications, has an M.B.A.
degree in finance from Columbia University Graduate School of
Business. He is an accredited senior appraiser as designated by
the American Socy. of Appraisers, a Chartered Financial Analyst,
a C.P.A., and he has coauthored a book entitled “Valuing a
Business”.
30
A lack of marketability discount was applied in a similar
circumstance in Estate of Oman v. Commissioner, T.C. Memo. 1987-
71 (noting that it would be difficult to sell 75.6 percent of the
stock in a family company to an outsider, particularly with
decedent’s sons remaining active in the business, which justified
the application of a marketability discount).
 - 43 -

the corporation’s underlying assets using traditional valuation

methodologies. See Philip Morris, Inc. & Consol. Sub. v.

Commissioner, 96 T.C. 606, 628 (1991), affd. 970 F.2d 897 (2d

Cir. 1992). The sale of a 56.7-percent block of shares in PCAB

would deliver effective operational control to a purchaser and

would need to be considered as one of the factors affecting

value. See Estate of Chenoweth v. Commissioner, 88 T.C. 1577

(1987). While 56.7 percent of the shares would not command total

control of PCAB, it would give the purchaser operational control.

In other cases, we have found a control premium should be applied

in these circumstances. See also id.; Estate of Feldmar v.

Commissioner, T.C. Memo. 1988-429; Estate of Oman v.

Commissioner, T.C. Memo. 1987-71. As we stated in Estate of

Salsbury v. Commissioner, T.C. Memo. 1975-333:

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 premium 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 * * * [Citation
omitted.]

Petitioner’s expert, Mr. Reilly, opined that the proper

control transfer premium was in the range from 34 to 38 percent.

Mr. Reilly’s report indicates he formed his opinion by

calculating the average control price premium paid in the

beverage industry over the years from 1982 to 1986. Mr. Reilly
 - 44 -

finds the “average control price premium was 35.84 percent”. In

his report, Mr. Reilly then argues that the minority shareholder

would have to consent to any sale, and therefore the control

premium should be turned into a discount because the majority

shareholder would need to pay the minority shareholder to get

that consent. We find this reasoning unsupported by authority

and unpersuasive, especially in light of the fact that we

factored potential problems with the minority shareholder into

our determination of an appropriate illiquidity discount.

The transfer of 56.7 percent of the shares would allow day-

to-day control to the purchaser. Considering the level of

control transferred, we find that a control premium of 25

percent, rather than 34 to 38 percent that petitioner’s expert

calculated, would be more appropriate.

The application of both a lack of marketability or

illiquidity discount and a control premium has been found to be

appropriate in other cases. See, e.g., Hutchens Non-Marital

Trust v. Commissioner, T.C. Memo. 1993-600 (10 percent

marketability discount and 35 percent control premium); Estate of

Oman v. Commissioner, supra (20 percent marketability discount

and 20 percent control premium). The application of the control

premium and the marketability discount is offsetting in this

case.
 - 45 -

Property Received

In return for her 567 shares of PCAB, decedent received a $3

million promissory note from PCAB. Respondent determined that

the promissory note had a value of $3 million. The value of the

promissory note is uncontested.

Conclusion

Pursuant to the stock redemption on May 1, 1987, decedent

transferred 567 shares of PCAB stock having a fair market value

of $4.9 million and received property worth $3 million. As a

result of this redemption, Nikita Maggos became the sole

shareholder of PCAB. The value received by Nikita Maggos as a

result of the redemption of 567 PCAB shares on May 1, 1987, was

$1.9 million. Decedent made a taxable gift of $1.9 million to

her son Nikita Maggos when PCAB redeemed her interest in the

company.

Decision will be entered

under Rule 155.