Estate of Jelke v. Comm'r

T.C. Memo. 2005-131

UNITED STATES TAX COURT

ESTATE OF FRAZIER JELKE III, DECEASED, WACHOVIA BANK, N.A.,
f.k.a. FIRST UNION NATIONAL BANK, PERSONAL REPRESENTATIVE,
Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 3512-03. Filed May 31, 2005.

D’s gross estate included a 6.44-percent interest
in a closely held corporation (C) whose assets
consisted primarily of marketable securities. C had
been in existence for many years, was well managed, and
had a relatively high rate of return in the form of
annual dividends coupled with capital appreciation of
approximately 23 percent annually for the 5-year period
before D’s death. Also during this 5-year period,
there was no intent to completely liquidate C, and its
securities turnover (sales) averaged approximately 6
percent annually. At the time of D’s death, the
securities had a market value of approximately $178
million and a built-in capital gain tax liability of
approximately $51 million if all of the securities were
to be sold on the valuation date. The net asset value
of C without consideration of the effect of the built-
in capital gain tax liability was approximately $188
million. The estate contends that the $188 million
value should be reduced by the entire $51 million
 - 2 -

before considering discounts for lack of control and
marketability. R contends that the built-in capital
gain tax liability should be discounted (indexed) to
account for time value because it would be incurred in
the future rather than immediately. Under R’s approach
the reduction for built-in capital gain tax liability
would be approximately $21 million. The parties also
disagree about the discounts for lack of control and
marketability.

Held: The built-in capital gain tax liability
should be discounted to reflect when it is reasonably
expected to be incurred.

Held further: Amounts of discounts for lack of
control and marketability decided.

Sherwin P. Simmons and Veronica Vilarchao, for petitioner.

W. Robert Abramitis, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

GERBER, Chief Judge: Respondent determined a $2,564,772

deficiency in estate tax. After concessions,1 the issue for our

consideration concerns the fair market value of decedent’s

interest in a closely held corporation, and in particular, the

reduction, if any, for built-in long-term capital gain tax

liability, and discounts for lack of marketability and control.

1
The parties agree that the gross estate should be
increased by decedent’s right to receive a $116,784 income tax
refund for 1999 and decreased by net administrative expenses of
$23,680.
 - 3 -

FINDINGS OF FACT2

Frazier Jelke III (decedent) died on March 4, 1999, at a

time when his legal residence was in Miami, Florida. Wachovia

Bank, N.A., f.k.a. First Union National Bank (Wachovia), was

appointed personal representative of decedent’s estate. At the

time the petition was filed, Wachovia maintained a business

office in Deerfield Beach, Florida, and its principal office in

North Carolina.

Commercial Chemical Co. of Tennessee, a chemical

manufacturing company, was incorporated on August 16, 1922, and

Oleoke Corp. was incorporated on December 7, 1929, in Delaware.

On or about October 4, 1937, Oleoke Corp. changed its name to

Commercial Chemical Co. (CCC) and acquired the company’s assets.

Until 1974, CCC manufactured products, including calcium arsenate

and arsenic acid. During 1974, CCC sold its chemical

manufacturing business assets to an unrelated third party. Since

that time, CCC’s only activity has been to hold and manage

investments for the benefit of its shareholders. CCC has at all

relevant times been a C corporation for Federal income tax

purposes.

CCC is closely held (through trusts) by related Jelke family

members. On March 4, 1999, the date of decedent’s death,

2
The parties’ stipulations of fact are incorporated by this
reference.
 - 4 -

decedent owned 3,000 shares of common stock (a 6.44-percent

interest) in CCC through a revocable trust. The other CCC

shareholders were irrevocable trusts holding interests in CCC

ranging in size from 6.181 percent to 23.668 percent. The terms

of the Jelke family trusts did not prohibit the sale or transfer

of CCC stock.

Decedent held beneficial interests in three trusts in

addition to the one holding the CCC stock to be valued. One of

the three provided income for decedent’s and his sisters’ benefit

and was to terminate upon the death of the last survivor.

Decedent’s sisters were 59 and 65 at the time of his death. A

second trust provided income to decedent and his two sisters and

was to terminate on March 4, 2019. Finally, a trust document

created three more trusts with decedent and each of his two

sisters as individual beneficiaries. Each of the separate trusts

was to terminate upon the beneficiary’s death, at which time the

assets were to be distributed to the beneficiary’s issue.

Wilmington Trust Corp. (Wilmington Trust) was the trustee of all

but one of the Jelke family trusts. The trusts for which

Wilmington Trust was trustee collectively owned 77.186 percent of

the outstanding stock of CCC, including decedent’s 6.44-percent

interest. From 1988 to the time of the trial in this case, there

had been no sales or attempts to sell CCC stock.
 - 5 -

CCC’s portfolio was well managed by experienced individuals.

Wilmington Trust provided custodial and advisory services at a

charge of 0.26 percent of asset value, and a stockholder-elected

board of directors (none of whom was a shareholder) managed CCC.

The shareholders of CCC were not allowed to participate in the

operation or management of CCC. In addition, the trust

beneficiaries showed little interest in participating in CCC,

attending about 12 board meetings over 20 years. Likewise, trust

beneficiaries did not attend CCC stockholders meetings.

CCC’s primary investment objective was long-term capital

growth, resulting in low asset turnover and large unrealized

capital gains. As of the date of decedent’s death, CCC’s board

of directors had no plans to liquidate an appreciable portion of

CCC’s portfolio, and they intended to operate CCC as a going

concern. The payment of dividends to CCC’s shareholders steadily

rose from $12.35 a share in 1974 to $34 a share in 1999. CCC’s

asset turnover for 1994 to 1998 was:

1994 1995 1996 1997 1998

6.74% 5.06% 4.66% 9.80% 3.48%

CCC’s net asset value increased from $59.5 million at the

end of 1994 to $139.0 million at the end of 1998, corresponding

to an average annual increase that exceeded 23 percent. On the

date of decedent’s death, the net asset value (assets less

liabilities) of CCC was $188,635,833, as follows:
 - 6 -

Assets

Marketable securities $178,874,899
Money market funds 11,782,091
Accounts receivable 53,081
Furniture and fixtures 2,665
Petty cash, misc. 54,244
Total assets 190,766,980

Liabilities

General liabilities 679,170
Current income taxes 1,451,977
Total liabilities 2,131,147

Net assets 188,635,833

CCC’s securities portfolio, if sold on the valuation date, would

have produced a capital gain tax liability of $51,626,884. The

$188,635,833 net asset value, as of the date of decedent’s death,

did not include any reduction for any potential tax liability.

As of the date of decedent’s death, the composition of CCC’s

securities portfolio was 92 percent domestic equities and

8 percent international equities. CCC’s portfolio comprised

mostly large-cap stocks, devoting only a small portion of its

portfolio to emerging growth stocks. CCC benchmarked its large-

cap portfolio holdings against the S&P 500 Index and its emerging

growth portfolio holdings against the Russell 2000 Index.

Securities held by CCC were all publicly traded. Market values

for CCC’s portfolio were readily available at nominal or no cost.
 - 7 -

Among the larger holdings in this widely diversified portfolio of

marketable securities were Exxon, General Electric, Hewlett

Packard, Microsoft, and Pepsico.

On the estate’s Federal estate tax return filed on December

6, 1999, $4,588,155 was included in the gross estate as

representing the value of decedent’s 6.44-percent interest in CCC

(which decedent held through his revocable trust). The estate

computed the $4,588,155 value by reducing CCC’s $188,635,833 net

asset value by $51,626,884 for built-in capital gain tax

liability and then applying 20-percent and 35-percent additional

discounts to decedent’s stock interest for lack of control and

marketability, respectively.

In the notice of deficiency issued to the estate,

respondent, among other things, determined that the value of

decedent’s 6.44-percent interest in CCC was $9,111,111.

Respondent indicated that this $9,111,111 value included

“reasonable” discounts for lack of control and lack of

marketability.

OPINION

The primary question presented for our consideration

concerns the fair market value of an interest in a closely held

family corporation. Decedent held (through a trust) a 6.44-

percent minority interest in the corporation. The corporation in

this case is a holding company with a portfolio of widely traded
 - 8 -

securities that have readily ascertainable values. Accordingly,

the parties have agreed on the value of the subject corporation’s

assets. The controversy that remains involves the discounts or

reductions from that agreed value. In addition to disagreement

about control and marketability discounts, the parties differ as

to the amount of the reduction from the value for the potential

capital gain tax liability that would arise upon sale of the

marketable securities held by the corporation. In particular, we

must decide whether the value of the corporation should be

reduced by the full amount of the built-in capital gain tax

liability (as asserted by the estate) or by a lesser amount in

which the reduction is based on the present value of the built-in

capital gain tax liability discounted to reflect when it is

expected to be incurred (as asserted by respondent).

A. The Burden of Proof

The estate contends that the burden of proof should shift to

respondent under the provisions of section 7491(a)3 on the issue

considered by the Court.4 Section 7491(a)(1) provides:

3
All section references are to the Internal Revenue Code,
and all Rule references are to the Tax Court Rules of Practice
and Procedure, unless otherwise indicated.
4
At trial, the estate filed a motion seeking to shift the
burden to respondent. The Court intimated that it was not
disposed to grant the estate’s motion, but allowed the parties to
further address this matter on brief. For the reason explained
on the record and in this opinion, the estate’s motion will be
denied.
 - 9 -

If, in any court proceeding, the taxpayer introduces
credible evidence with respect to any factual issue
relevant to ascertaining the liability of the taxpayer
for any tax imposed under subtitle A or B, the
Secretary shall have the burden of proof with respect
to such issue.

As a prerequisite to the shifting of the burden under

section 7491(a) a taxpayer must: (1) Comply with statutory

substantiation and record-keeping requirements, sec.

7491(a)(2)(A) and (B); (2) cooperate with reasonable requests by

the Commissioner for “witnesses, information, documents,

meetings, and interviews”, sec. 7491(a)(2)(B); and (3) in cases

of partnerships, corporations, and trusts, meet the net worth

requirements set forth in section 7430(c)(4)(A)(ii), sec.

7491(a)(2)(C). Taxpayers bear the burden of showing that these

requirements are met. Higbee v. Commissioner, 116 T.C. 438, 440-

441 (2001); H. Conf. Rept. 105-599, at 240 (1998), 1998-3 C.B.

747, 994; S. Rept. 105-174, at 45 (1998), 1998-3 C.B. 537, 581.

The estate contends that it has complied with or met the

requirements and that it has presented credible evidence in the

form of its expert’s report and the stipulated facts and

exhibits. The evidentiary posture presented in this case is

similar to that in Estate of Deputy v. Commissioner, T.C. Memo.

2003-176. No fact witnesses were called to testify in this case.

As in Estate of Deputy, the parties here have stipulated the

operative facts and documents, and the testimony presented at

trial consisted of the cross-examination of the parties’ tendered
 - 10 -

experts on their opinions on the question of value. In that

regard, we note that the parties’ experts’ reports constitute

opinion testimony, and such testimony is not fact for purposes of

our ultimate findings. Accordingly, there exists no dispute

about the underlying facts, and, ultimately, we are asked to

decide the amount of reduction for built-in capital gain tax

liability and the discounts for lack of marketability and

control. In the setting of this case, those questions will be

resolved on the basis of essentially agreed facts along with any

assistance we may find helpful in the parties’ experts’ opinions,

not on the basis of which party bears the burden of proof.

In such circumstances the question of who has the burden of

proof or who should go forward with the evidence is irrelevant.

See, e.g., Estate of Hillgren v. Commissioner, T.C. Memo. 2004-

46; Estate of Green v. Commissioner, T.C. Memo. 2003-348; Estate

of Deputy v. Commissioner, supra. Therefore, there is no need to

decide whether the estate met the “credible evidence”

requirement.

B. CCC’s Value on March 4, 1999

The controversy presented for our decision concerns the

value of a 6.44-percent interest in CCC, a corporation closely

held by the Jelke family. For estate tax purposes, property

includable in decedent’s gross estate is generally valued as of

the date of death. See sec. 2001. The fair market value is
 - 11 -

determined by considering the price at which the property would

change hands between a willing buyer and a willing seller,

neither being under any compulsion to buy or to sell, and both

having reasonable knowledge of relevant facts. Sec. 20.2031-

1(b), Estate Tax Regs. The determination of the fair market

value of property is a factual determination, and the trier of

fact must weigh all relevant evidence of value and draw

appropriate inferences. Helvering v. Natl. Grocery Co., 304 U.S.

282, 294 (1938); Symington v. Commissioner, 87 T.C. 892, 896

(1986); sec. 20.2031-1(b), Estate Tax Regs.

The determination of the fair market value of a closely held

(unlisted) stock may be effectively established by reference to

arm’s-length sales of the same stock within a reasonable time

before or after the valuation date. See, e.g., Ward v.

Commissioner, 87 T.C. 78, 101 (1986). Absent an arm’s-length

sale, fair market value is normally determined using the

hypothetical willing buyer and seller model. Estate of Hall v.

Commissioner, 92 T.C. 312, 335-336 (1989). Implicit in that

model is the axiom that the seller would attempt to maximize

profit and the buyer to minimize cost. Estate of Curry v. United

States, 706 F.2d 1424, 1429 (7th Cir. 1983); Estate of Newhouse

v. Commissioner, 94 T.C. 193 (1990).
 - 12 -

The particular aspect of the valuation question we consider

here concerns the reduction for potential tax liability for gains

“built in” to the securities held in CCC’s corporate solution.

The estate contends that the market value of CCC’s holdings

should be reduced by the entire amount of the built-in capital

gain tax liability that would be due if all of the assets

(securities) were sold as of decedent’s date of death.

Respondent, admitting that there should be a discount or

reduction,5 contends that the potential tax liability should be

discounted in accordance with time value of money principles.

The estate attempts to support its position through an

expert who purports to use a net asset approach to valuation,

which the estate contends requires an assumption of liquidation

on the valuation date.6 The estate relies on the rationale of an

appellate court to which appeal would not normally lie in this

case. Respondent attempts to support his position through an

expert who contends that an assumption of liquidation is not

5
Because the built-in capital gain tax liability is a
corporate liability, it reduces the total value of the
corporation. The parties here and some courts have described the
built-in capital gain tax liability as something to be considered
in the process of discounting the value of the interest being
valued. In this case we treat the built-in capital gain tax
liability as a liability that reduces the value of the assets
before the consideration of discounts from the value of the
interest for lack of control or marketability.
6
If CCC were liquidated on the valuation date, it would
essentially be selling readily marketable securities that would
result in long-term capital gains and tax liability thereon.
 - 13 -

appropriate in this case and that the tax liability for the

capital gain should be calculated on the basis of CCC’s

established history of securities turnover. We agree with

respondent. However, before we delve into the parties’ arguments

and their experts’ opinions, it is helpful to review the legal

history of the effect of built-in capital gain tax liability in

the valuation of corporations.

Before 1986, this Court recognized that gain on appreciated

corporate assets could be avoided at the corporate level under

the principles of the General Utilities doctrine.7 That doctrine

was based on the holding in Gen. Utils. & Operating Co. v.

Helvering, 296 U.S. 200 (1935), that there would be no

recognition by the distributing corporation of inherent gain on

appreciated corporate property that was distributed to

shareholders. Accordingly, a corporation could distribute its

appreciated property to shareholders or liquidate without paying

capital gain tax at the corporate level.

On the basis of that understanding and before 1986, this

Court consistently rejected taxpayers’ attempts to discount the

value of a corporation on the basis of any inherent capital gain

tax liability on appreciated corporate property. See, e.g.,

Estate of Piper v. Commissioner, 72 T.C. 1062, 1087 (1979);

7
The General Utilities doctrine, as codified in former
secs. 336 and 337, was repealed by the Tax Reform Act of 1986,
Publ. L. 99-514, sec. 631(a), 100 Stat. 2269.
 - 14 -

Estate of Cruikshank v. Commissioner, 9 T.C. 162, 165 (1947).

Indeed, only in rare instances before the repeal of the General

Utilities doctrine did courts consider a built-in tax liability

in deciding the value of a corporation. See, e.g., Obermer v.

United States, 238 F. Supp. 29, 34-36 (D. Hawaii 1964).

Since the repeal of the General Utilities doctrine, this

Court has, on several occasions, considered the impact of built-

in capital gain tax liability in valuing corporate shares. Our

approach to adjusting value to account for built-in capital gain

tax liability has varied and has often been modified or overruled

on appeal. See, e.g., Estate of Davis v. Commissioner, 110 T.C.

530, 552-554 (1998); Estate of Dunn v. Commissioner, T.C. Memo.

2000-12, revd. 301 F.3d 339 (5th Cir. 2002); Estate of Jameson v.

Commissioner, T.C. Memo. 1999-43, revd. 267 F.3d 366 (5th Cir.

2001); Estate of Welch v. Commissioner, T.C. Memo. 1998-167,

revd. without published opinion 208 F.3d 213 (6th Cir. 2000);

Eisenberg v. Commissioner, T.C. Memo. 1997-483, revd. 155 F.3d 50

(2d Cir. 1998); Gray v. Commissioner, T.C. Memo. 1997-67.

In one case, we held that a discount for built-in capital

gain tax liability was appropriate because even though corporate

liquidation was unlikely, it was not likely the tax could be

avoided. See Estate of Davis v. Commissioner, supra. However,

this Court has not invariably held that discounts or reductions

for built-in capital gain tax liability were appropriate where it
 - 15 -

had not been shown that it was likely the corporate property

would be sold and/or that the capital gain tax would be incurred.

See, e.g., Estate of Welch v. Commissioner, supra; Eisenberg v.

Commissioner, supra; Gray v. Commissioner, supra.

Appellate courts in two of these cases reversed our

decisions that a reduction in value for built-in capital gain tax

liability was inappropriate. The Court of Appeals for the Second

Circuit reasoned that, although realization of the tax may be

deferred, a willing buyer would take some account of the built-in

capital gain tax. Eisenberg v. Commissioner, 155 F.3d at 57-58.

Likewise, the Court of Appeals for the Sixth Circuit disagreed

with our specific holding that the potential for a capital gain

tax liability was too speculative. Estate of Welch v.

Commissioner, supra. The Court of Appeals for the Sixth Circuit,

to some extent, agreed with the Court of Appeals for the Second

Circuit’s approach in Eisenberg. Neither the Court of Appeals

for the Second Circuit nor the Court of Appeals for the Sixth

Circuit prescribed the amount of reduction or a method to

calculate it.

The Commissioner has since conceded the issue of whether a

reduction for capital gain tax liability may be applied in

valuing closely held stock by acquiescing to the Court of Appeals

for the Second Circuit’s decision in Eisenberg. See 1999-1 C.B.

xix. In addition, in this case the parties agree and we hold
 - 16 -

that a reduction for built-in capital gain tax liability is

appropriate. However, controversy continues with respect to

valuing such a reduction. In two such cases involving the

question of valuing reductions for built-in capital gain tax

liabilities, the Court of Appeals for the Fifth Circuit has

reversed our holdings. See Estate of Dunn v. Commissioner,

supra; Estate of Jameson v. Commissioner, supra.

In Estate of Jameson, the decedent held a controlling

interest in a corporation that generated income primarily through

the sale of appreciated timber. The corporation in Estate of

Jameson focused on future appreciation in value, and there was no

intent to liquidate the corporation as of the valuation date.

This Court held that the fair market value was best determined

using the asset approach because the company was a holding

company rather than an operating company. We also held that the

net asset value should be reduced for built-in capital gain tax

liability because of a section 631(a) election that ensured that

gain would be recognized irrespective of whether the corporation

was liquidated. We further held that the amounts of capital gain

tax to be recognized in future years were to be discounted to

present values by assuming a 14-percent overall rate of return

and a 20-percent discount rate of future cashflows.

The Court of Appeals for the Fifth Circuit reversed our

holding, commenting that the application of a 20-percent discount

rate while assuming no more than a 14-percent annual growth was

“internally inconsistent”. Estate of Jameson v. Commissioner,
 - 17 -

267 F.3d at 372. The Court of Appeals also pointed out that, in

its view, an assumption that a hypothetical buyer would operate a

company whose expected growth was less than the buyer’s required

return was fatally flawed. Id.

In Estate of Dunn v. Commissioner, supra, the decedent owned

a majority interest in a corporation primarily engaged in renting

out heavy construction equipment. This Court, in deciding the

value of the corporation, assumed that a hypothetical buyer and

seller would give substantial weight to an earnings-based

approach because the corporation was an operating company. This

Court also gave some weight to an asset-based approach because

the corporation’s earnings projections were based on an

atypically poor business cycle that would have produced an

unreasonably low value. In accord with that reasoning, this

Court used a 35-percent/65-percent combination of a cashflow

earnings-based approach and an asset-based approach,

respectively, to value the company. By using that combination of

the two approaches, we rejected the estate’s expert’s sole

reliance on an asset-based approach, where he assumed a

liquidation on the valuation date and reduction for the entire

amount of potential built-in capital gain tax liability.

Although the capital gain tax rate at the corporate level was 34

percent, this Court used a 5-percent reduction for the built-in

capital gain tax liability in the asset-based portion of the

value computation to account for the lower likelihood of

liquidation.
 - 18 -

The Court of Appeals for the Fifth Circuit, in reversing our

holding in Estate of Dunn, held that the use of an asset-based

approach to value assets generally assumes a sale of all

corporate assets or a liquidation of the corporation on the

valuation date, requiring a dollar-for-dollar reduction for the

entire built-in capital gain tax liability as a matter of law.

Estate of Dunn v. Commissioner, 301 F.3d at 351-353.8 The Court

of Appeals also concluded that the likelihood of liquidation had

no place in a court’s decision as to whether there should be a

reduction for built-in tax liability under either the asset-based

approach or the earnings-based approach. Id. at 353-354. The

Court of Appeals did indicate, however, that the likelihood of

liquidation would be relevant in assigning relative weights to

the asset and earnings approaches where both methods would be

used to determine value. Id. at 354-357.

With that background, we proceed to consider the

circumstances and arguments in this case. The estate reported

$4,588,155 as the discounted value of the CCC interest.

Respondent determined that the discounted value of the CCC

interest was $9,111,111. Although the estate’s expert, Mr.

Frazier, concluded that the discounted value of the CCC interest

was $4,301,000, the estate is not seeking a value less than that

reported on the estate tax return. Likewise, respondent relies

8
However, the Court of Appeals for the Fifth Circuit
stated that consideration of built-in capital gain would be
inappropriate in an earnings-based approach to value.
 - 19 -

on his expert’s, Mr. Shaked’s, discounted value of $9,225,837 but

does not seek to increase the amount determined in the notice of

deficiency.

We are not constrained to follow an expert’s opinion where

it is contrary to the Court’s own judgment, and we may adopt or

reject expert testimony. Helvering v. Natl. Grocery Co., 304

U.S. at 295; Silverman v. Commissioner, 538 F.2d 927, 933 (2d

Cir. 1976) (and cases cited thereat), affg. T.C. Memo. 1974-285.

In attempting to value the interest in CCC, the estate’s

expert, Mr. Frazier, considered the three traditional valuation

approaches--income, market, and asset. Under the income

approach, value is determined by computing a company’s income

stream. Under the market approach, value is determined by

comparison with arm’s-length transactions involving similar

companies. Finally, under the asset approach, value is

determined by computing the aggregate value of the underlying

assets as of a fixed point in time.

After discussing several methods, Mr. Frazier used what he

described as a combination of the market and asset approaches.

Mr. Frazier used the market approach to value CCC’s securities.

Purporting to rely on the asset approach to valuation, Mr.

Frazier then reduced the total of the market prices for CCC’s

securities by the liabilities shown on CCC’s books and the tax

liability that would have been incurred if all of CCC’s

securities had been sold on decedent’s date of death. Mr.

Frazier did not make adjustments to the tax liability for the
 - 20 -

possibility that sales of CCC’s securities would have occurred

after decedent’s date of death. In other words, Mr. Frazier

relied on the net asset method to employ an assumption of

liquidation as of the valuation date, an event which would

trigger recognition of $51,626,884 in capital gain tax. This

method produced a $137,008,949 million value for CCC. Mr.

Frazier then computed an undiscounted value of $8,823,062 for

decedent’s 6.44-percent interest (3,000 of 46,585.51 shares) held

in trust.

Respondent’s expert, Mr. Shaked, started with the same

market value of CCC’s securities. Mr. Shaked then reduced the

assets by liabilities, but he used a different approach from Mr.

Frazier’s in arriving at a reduction for the built-in capital

gain tax liability. First, he computed CCC’s average securities

turnover by reference to the most recent data (1994-98). Using

that data, Mr. Shaked computed a 5.95-percent average annual

turnover derived from the parties’ stipulated asset turnover

rates for 1994-98. Mr. Shaked believed that the 5.95-percent

rate was conservative,9 because the turnover trend was generally

decreasing. The use of the 5.95-percent turnover rate results in

the capital gain tax’s being incurred over a 16.8-year period

(100 percent divided by 5.95 percent).

Mr. Shaked then divided the $51,626,884 tax liability by 16

years to arrive at the average annual capital gain tax liability

9
The use of a higher turnover rate would increase capital
gain tax and decrease the value of decedent’s CCC shares.
 - 21 -

that would have been incurred each year over this 16-year period-

-$3,226,680.25 ($51,626,884 divided by 16). Next, he selected a

13.2-percent discount rate based on the average annual rate of

return for large-cap stocks in the period from 1926 to 1998, as

described in Ibbotson Associates Stocks, Bonds, Bills &

Inflation, 1999 Yearbook (Ibbotson 1999). He then computed the

present value of the $3,226,680.25 annual tax liability

discounted over 16 years using a 13.2-percent interest rate to

arrive at a present value for the total capital gain tax

liability of $21,082,226. By reducing the $188,635,833 net asset

value by the $21,082,226 future tax liability, Mr. Shaked arrived

at a $167,553,607 value for CCC. Finally, Mr. Shaked concluded

that the undiscounted value for decedent’s 6.44-percent interest

in CCC was $10,789,164 in contrast to Mr. Frazier’s undiscounted

value of $8,823,062. This difference reflects numerically the

parties’ differing approaches to the amount of capital gain tax

that should be used to reduce the net asset value of CCC.

A hypothetical buyer of CCC is investing in a composite

portfolio to profit from income derived from dividends and/or

appreciation in value. A hypothetical buyer of CCC is, in most

respects, analogous to an investor/buyer of a mutual fund. The

buyer is investing in a securities mix and/or performance of the

fund and would be unable to liquidate the underlying securities.

That is especially true here where we consider a 6.44-percent
 - 22 -

investor who, inherently, is unable to cause liquidation.10 In

addition, the record reveals that there was no intention of the

trusts or the Jelke family shareholders to liquidate. A

hypothetical buyer of a 6.44-percent interest in CCC is in effect

investing in the potential for future earnings from marketable

securities. A hypothetical seller of CCC shares likewise would

not accept a price that was reduced for possible tax on all

built-in capital gain knowing that CCC sells or turns over only a

small percentage of its portfolio annually. In that regard, the

record reflects that CCC had a long-term history of dividends and

appreciation, with no indication or business plan reflecting an

intention to liquidate. In addition, as of the 1999 valuation

date, one of the trusts holding CCC shares was designed so as not

to terminate before 2019, and none of the CCC shareholders had

sold or planned to sell their interests. These factors belie the

use of an assumption of complete liquidation on the valuation

date or within a foreseeable period after the valuation date.

The estate contends that its approach and assumption of

complete liquidation is supported by the holding in Estate of

Dunn v. Commissioner, 301 F.3d 339 (5th Cir. 2002). In

particular, the estate argues that the holding of the Court of

Appeals for the Fifth Circuit requires that an asset-based

10
Even if we were considering the value of a majority
interest in CCC, a hypothetical buyer would not purchase the
shares and then sell the stock to realize the net asset value,
less the built-in capital gain tax liability. All of the
securities held by CCC could have been acquired on the open
market without built-in capital gains.
 - 23 -

approach (as opposed to an income approach) include the

assumption that the assets were sold on the valuation date,

regardless of whether the company was contemplating liquidation.

Accordingly, the estate argues that the value of CCC should be

reduced by the entire $51,626,884 tax liability for built-in

capital gain.

The case we consider here would not normally be appealable

to the Court of Appeals for the Fifth Circuit. We are not bound

by or compelled to follow the holdings of a Court of Appeals to

which our decision is not appealable. See Golsen v.

Commissioner, 54 T.C. 742 (1970), affd. 445 F.2d 985 (10th Cir.

1971). More significantly, there is some question whether the

Court of Appeals for the Fifth Circuit would require a

liquidation assumption when valuing a minority interest. In that

regard, the Court of Appeals tempered its holding in Estate of

Dunn by explaining that if it were valuing a minority ownership

interest, a business-as-usual assumption or earnings-based

approach may be more appropriate. See Estate of Dunn v.

Commissioner, 301 F.3d at 353 n.25.

The Court of Appeals’ reasoning and holding in Estate of

Dunn applied to a majority interest. There is no need to express

agreement or disagreement with the automatic use of an assumption

of liquidation when using an asset-based approach to value a

majority interest, because we are valuing a small minority

interest. To that extent, our holding here may be factually and

legally distinguishable from the holding in Estate of Dunn.
 - 24 -

Accordingly, and unlike the situation in Estate of Dunn,

decedent’s 6.44-percent interest in CCC would be insufficient to

cause liquidation.

The estate also argued that CCC’s relatively low earnings

and modest dividends would cause a hypothetical buyer to prefer

liquidation. We are unpersuaded by the estate’s supposition,

which is contradicted by the record in this case. CCC performed

well and kept pace with the S&P 500, defying the notion that it

is an underperforming company. An investor may seek gain from

dividends, capital appreciation, or a combination of the two.

Accordingly, we hold that neither the circumstances of this case

nor the theory or method used to value the minority interest in

CCC requires an assumption of complete liquidation on the

valuation date.11

Having held that an assumption of complete liquidation on

the valuation date does not apply in this case, we must consider

the amount of the reduction to be allowed for the built-in

capital gain tax liability. Respondent’s expert began with the

total amount of built-in capital gain tax liability

($51,626,884); and after determining when the tax would be

incurred, he discounted the potential tax payments to account for

time value principles. The estate attacks that approach by

11
We also note that we do not assume a rate of return lower
than our discount rate, as we were said to have done in Estate of
Jameson v. Commissioner, 267 F.3d 366, 372 (5th Cir. 2001), revg.
T.C. Memo. 1999-43. Accordingly, our assumption of continuing
operations is not “internally inconsistent”. Id.
 - 25 -

contending that CCC’s securities will appreciate, increasing the

future tax payments and thereby obviating the need to discount.

The estate’s expert, in an effort to support this theory,

testified that if the premise is that the liquidation or sale of

substantially all of a corporation’s assets would occur in the

future, there should also be:

a long term projection * * * that the stock will
appreciate. If the stock appreciates, the capital
gains tax liability will appreciate commensurate [sic].
The present value of the capital gains tax liability
will be the same. Only if you assume there’s no
appreciation in the stock would you discount the
capital gains tax. And that’s a completely
unreasonable assumption.

Thus, the estate through its expert, Mr. Frazier, contends that

irrespective of the unlikelihood of liquidation there should be a

dollar-for-dollar decrease for the built-in capital gain tax

liability, representing the present value of that liability

because the liability will increase over time. In that regard,

the estate argues that Mr. Shaked incorrectly assumed that the

stock would not appreciate.

In addressing this argument, Mr. Shaked explained that the

need to discount the built-in capital gain tax liability is

analogous to the need to discount carryforward losses because

they cannot be used until years after the valuation year. Mr.

Shaked’s approach is to calculate the built-in capital gain tax

liability by determining when it would likely be incurred. We
 - 26 -

agree with Mr. Shaked’s approach of discounting the built-in

capital gain tax liability to reflect that it will be incurred

after the valuation date.

Because the tax liabilities are incurred when the securities

are sold, they must be indexed or discounted to account for the

time value of money. Thus, having found that a scenario of

complete liquidation is inappropriate, it is inappropriate to

reduce the value of CCC by the full amount of the built-in

capital gain tax liability. See Estate of Davis v. Commissioner,

110 T.C. at 552-553.12 If we were to adopt the estate’s reasoning

and consider future appreciation to arrive at subsequent tax

liability, we would be considering tax (that is not “built in”)

as of the valuation date. Such an approach would establish an

artificial liability. The estate’s approach, if used in valuing

a market-valued security with a basis equal to its fair market

value, would, in effect, predict its future appreciated value and

tax liability and then reduce its current fair market value by

the present value of a future tax liability.

In that same vein, the estate argues that the Government, in

other valuation cases, has offered experts who computed the

capital gain tax on the future appreciated value of assets and

discounted the tax to a present value for purposes of valuing a

corporation. In one of those cases, the Court was valuing a

12
See also Bittker & Lokken, Federal Taxation of Income,
Estates and Gifts, par. 135.3.8, at 135-149 (2d ed. 1993 and
supp. 2004).
 - 27 -

corporation that owned rental realty (shopping centers). Estate

of Borgatello v. Commissioner, T.C. Memo. 2000-264. As part of a

weighting of factors to arrive at a discount, the Commissioner’s

expert calculated the potential for appreciation in the real

estate market and the amount of built-in capital gain tax

liability. This Court, to some extent, relied on the expert’s

methodology in its holding on value. In the other case relied

upon by the estate, although the Commissioner’s expert advanced a

similar analysis, this Court rejected that expert’s approach as

an unsubstantiated theory. Estate of Bailey v. Commissioner,

T.C. Memo. 2002-152.

The guidance of the expert was rejected in one of the cases

cited by petitioner and was part of a discounting approach to

assist the finder of fact (Court) to decide upon a discounted

value in the other case. Although the expert’s guidance in the

latter case was considered in reaching a factual finding, the

expert’s approach does not represent the ratio decidendi of the

case. In our consideration of the value of the marketable

securities in this case, we are not bound to follow the same

approach used by an expert in other cases. More significantly we

do not find that approach to be appropriate in this case.

Therefore, we find that in valuing decedent’s 6.44-percent

interest, CCC’s net asset value need not be reduced by the entire

$51,626,884 potential for built-in capital gain tax liability and

that future appreciation of stock need not be considered. We

find Mr. Shaked’s use of a 13.2-percent discount rate to be
 - 28 -

reasonable.13 In addition, the turnover rate of securities used

by Mr. Shaked is conservative and reasonable under the

circumstances. The asset turnover rate reasonably predicts the

period over which the company’s assets will be disposed of and

thus built-in capital gain tax liability would likely be

incurred. Consequently, we find it appropriate to use a 16-year

period of recognition for the tax liability attributable to the

built-in capital gain. We therefore accept Mr. Shaked’s

computation arriving at a $3,226,680.25 annual tax liability and

a discounted total liability of $21,082,226.

We accordingly hold that the undiscounted value of CCC on

the date of decedent’s death was $167,553,607 ($188,635,833 -

$21,082,226). This holding results in an 11.2-percent reduction

in value for built-in capital gain tax liability ($21,082,226

divided by $188,635,833 equals 11.2 percent).

C. Discounts To Be Applied

1. Discount for Lack of Control

Decedent’s 6.44-percent (minority) interest in CCC must be

discounted for lack of control. The estate’s expert, Mr.

13
We recognize that a discount rate would normally be a
matter of negotiation between a willing buyer and seller. The
estate, in its posttrial briefs, agrees that Mr. Shaked’s
discount rate is an appropriate rate if we were to discount the
built-in capital gain tax liability. Because the estate agrees
with this rate and the parties have provided no further evidence
with regard to a discount rate, we give no further consideration
to this matter.
 - 29 -

Frazier, discounted decedent’s CCC interest by 25 percent for

lack of control. Respondent’s expert, Mr. Shaked, applied a 5-

percent discount.

Mr. Frazier compared CCC to a closed-end and not widely

traded investment fund holding publicly traded securities. He

believed that CCC and a closed-end fund both have a fixed amount

of assets for trading, unlike open-end investment funds (mutual

funds). Because closed-end funds are flowthrough entities taxed

only at the shareholder level, Mr. Frazier concluded that the

discounts reflected in those funds did not include any reduction

for built-in capital gain tax liability. Likewise, because

closed-end funds are typically publicly traded, none of the

discount inherent in those funds would be attributable to lack of

marketability.

With those assumptions, Mr. Frazier reviewed 44 domestic

equity security funds and selected 15 that he believed were

comparable. He removed eight companies from the 15 because,

unlike CCC, they had guaranteed payouts. The remaining seven

companies had an average discount rate of 14.8 percent as of

March 4, 1999. The funds’ discounts and returns compared with

those of CCC, as computed by Mr. Frazier, are reflected in the

following table:
 - 30 -

Market Total Return
Company Discount 3-month 1-year 3-year 5-year

Morgan Grenfell 19.2% 39.3% 45.5% 18.4% 22.1%
Central Securities 17.3 17.0 23.9 13.9 21.7
Tri-Continental 17.3 4.9 11.2 21.4 22.7
Adams Express 17.2 17.5 27.6 26.4 24.9
Royce Micro Cap 17.0 8.7 4.1 8.4 11.7
General American Inv. 8.5 24.2 38.7 37.1 30.0
Salomon Bros. 7.3 23.6 34.7 28.8 33.8

Average 14.8 19.3 26.5 22.1 23.8
75th percentile 17.3 23.9 36.7 27.6 27.5
Median 17.2 17.5 27.6 21.4 22.7

CCC 25.0 6.0 17.8 25.1 22.9

Next, Mr. Frazier eliminated lower discounted funds (General

American and Salomon Brothers) because he concluded the low

discounts were due to the consistently high returns of those

companies. Mr. Frazier believed that CCC’s performance was most

similar to those of the funds in the upper end of the discount

spectrum (Morgan Grenfell, Central Securities, and Tri-

Continental), because of CCC’s inconsistent returns and small

size. Finally, he concluded that CCC was comparable to Morgan

Grenfell, because its assets were slightly less than CCC’s and

Central Securities’ and Tri-Continental’s assets were much

larger.

Ultimately, Mr. Frazier concluded that an investor would

demand a higher rate of return or a larger discount than for the

comparable companies, because: (1) CCC had fewer assets than

almost all comparables; (2) CCC paid fewer dividends than the

average of all comparable companies (excluding Morgan Grenfell,

which did not pay dividends) but paid dividends in amounts
 - 31 -

similar to those of non-guaranteed-payout comparables; and (3)

the companies without guaranteed dividend payouts, on average,

outperformed CCC in the short term (3-month and 1-year returns).

Mr. Frazier compared CCC to the upper quartile of companies

(Morgan Grenfell and Central Securities), noting that the average

discount rate was 18.3 percent and the performance was as

follows:

3 Months 1 year 3 years 5 years

Upper quartile 28.1% 34.7% 16.2% 21.9%
CCC 6.0 17.8 25.1 22.9

In the final analysis, Mr. Frazier concluded that a hypothetical

buyer would seek a lack-of-control discount of 25 percent, which

comprised 20 percent on the basis of the comparables he selected

and an additional 5 percent because of other less significant

dissimilarities with CCC.

In contrast, Mr. Shaked applied a 5-percent discount for

lack of control. His analysis began with an average discount

(8.61 percent) for closed-end funds that he obtained from an

article in the Journal of Economics. Mr. Shaked considered CCC

a well-managed holding company with a diversified portfolio of

marketable securities. Accordingly, he believed that management

decisions, which are more critical in certain types of operating

companies, were less relevant and that a hypothetical buyer/

investor of CCC stock would be less concerned about lack of

control. It was also Mr. Shaked’s view that an investor in CCC,

much like investors of mutual funds, would prefer not to have
 - 32 -

control, making a lack-of-control discount less significant. In

that regard, Mr. Shaked noted that the beneficial owners of the

shares of CCC were not managers of CCC or members of its board of

directors.

Both experts agreed that there was an inverse relationship

between a company’s financial performance and a lack-of-control

discount. In other words, as performance improves the discount

decreases. The parties, however, disagree about CCC’s

performance. Respondent argues that CCC outperforms many of the

15 comparables used by Mr. Frazier, if considered over a 3-, 5-

and 10-year period. Conversely, the estate, for the same period,

argues that CCC has underperformed the S&P 500 and most of the

final seven comparables selected by Mr. Frazier. We believe that

CCC has a good performance record. Accordingly, we agree to some

extent with Mr. Shaked’s observation that control would be less

important for CCC.

Mr. Shaked, in support of his 5-percent discount for lack of

control, provided the generalized explanation that CCC was

similar to a closed-end holding company. Mr. Frazier provided

more detail and analysis in support of his 25-percent discount

for lack of control, but some of his analysis overlooks important

aspects and, to some extent, is inconsistent.

First, Mr. Frazier’s reasoning in using some of the

comparables is flawed. He did not provide adequate justification

for eliminating Tri-Continental and Adams Express as comparables.

In addition, he ignored the fact that Royce Micro Cap and Morgan
 - 33 -

Grenfell Smallcap held investments in small-cap funds and that

Central Securities Corp. held less diversified investments. Both

strategies would appear riskier than CCC’s strategy of investing

in a diversified base of large-cap stocks and limiting its

holdings to no more than 25 percent of its total assets in a

single industry. CCC’s investment strategy was more comparable

to that of a diversified stock fund like Salomon Brothers Fund,

which invested in listed NYSE securities. We note that in Mr.

Frazier’s analysis, Salmon Brothers Fund was discounted only 7.3

percent.

We also note that Mr. Frazier did not justify or adequately

explain why he limited his comparison to the two funds with the

highest discounts (18.3-percent average). We find it curious

that his analysis purports to compare CCC to either three or

seven companies, when actually the final universe he selected was

smaller. We also note that Mr. Frazier did not explain or

justify increasing the discount rate from the 18.3-percent

average of these two to 20 percent. Finally, though Mr. Frazier

did show that CCC’s short-term rate of return was lower than

those of the selected companies, CCC had a long-term investment

strategy and, on average, out-performed the comparables in that

respect.

In addition, we are unable to agree with Mr. Frazier’s

assumption that the discounts reflected in the comparable

companies he selected are due solely to lack of control. Part of

the discount may be due to lack of marketability. In that
 - 34 -

regard, Mr. Frazier acknowledges that “lack of the ability to

liquidate [is an] investment characteristic shared by

* * * publicly-traded closed-end investment funds [and] closely-

held corporations.” Lack of liquidity, however, is a

marketability factor and should not be considered in connection

with lack of control. Further, other factors relating to the

comparables could cause them to trade at a discount, such as a

riskier investment strategy as described above, uncertain

management, or some company-specific risk.14

Nevertheless, we generally agree that there are similarities

between closed-end funds and CCC. Like CCC, closed-end funds

operate with a finite amount of capital, and they cannot increase

or decrease the size of their portfolios. This reduced

flexibility in comparison to traditional mutual funds may warrant

some discount in price for the increased risk, and although it is

difficult to categorize this discount, it could fit within the

concept of lack of control. However, it is difficult to quantify

the amount of discount that is attributable to lack of control.

Although we are not convinced that the discounts reflected

in the funds Mr. Frazier compared to CCC were due solely to lack

of control, we note that Tri-Continental, Adams Express, General

14
For example, some funds that have above-average
performance trade at a premium, indicating that even though
investors do not control closed-end funds, some company-specific
factors such as an expectation of future performance are
considered in the fund’s price relative to its net asset value.
See Malkiel, “The Valuation of Closed-End Investment Company
Shares”. J. Fin. 851 (June 1977).
 - 35 -

American, and Salomon Brothers had investment strategies similar

to CCC’s. CCC’s focus was long-term capital growth and it did

not have a guaranteed dividend payout. However, the amount of

discount in these comparable funds that is due to lack of

control, rather than some other factor, is speculative. We also

note that while CCC performed well, it did not perform as well as

some of the comparables. In addition, CCC was relatively small

compared to the comparable investment funds. CCC had a $167

million value compared to billions of dollars in many of the

comparables.

On the other hand, CCC was well diversified, reducing the

investment risk. In addition, investors in CCC would be less

inclined to desire control because of the passive nature of an

investment in this kind of company and its established long-term

performance of good returns. Considering all of these factors,

we hold that a 10-percent lack-of-control discount is

appropriate.

2. Discount for Lack of Marketability

A discount for lack of marketability addresses liquidity or

the ability to convert an asset into cash. See, e.g.,

Mandelbaum v. Commissioner, T.C. Memo. 1995-255, affd. 91 F.3d

124 (3d Cir. 1996). When valuing stock, we assume that the buyer

and seller each have “reasonable knowledge of the relevant

facts.” Sec. 20.2031-1(b), Estate Tax Regs.

Mr. Frazier used a 35-percent and Mr. Shaked used a 10-

percent discount for lack of marketability. Mr. Frazier
 - 36 -

considered studies of operating companies with a minimum

restriction on resale of at least 2 years. Although he

acknowledged that operating companies are inherently riskier than

holding companies, Mr. Frazier believed that the marketability

discount for CCC was comparable to those of operating companies

because CCC was not expected to liquidate for at least 20 years.15

He relied on Rev. Rul. 77-287, section 6.02, 1977-2 C.B. 319,

321-322, for the proposition that “the longer the buyer of the

shares must wait to liquidate the shares, the greater the

discount.”

Mr. Frazier believed that the studies he considered showed

that the following factors were relevant to a marketability

discount: Company revenues, company profitability, company

value, the size of the interest being valued, the company’s

dividend policy, whether the company is an operating or

investment company, and the likelihood the company will go

public. On the basis of CCC’s value, revenues, profitability,

and the size of the interest being valued, Mr. Frazier observed

that comparable discounts ranged anywhere from 14 percent to more

than 35 percent. Mr. Frazier believed that CCC’s dividend-paying

policy and the fact it was an investment company favored an

15
We must note that Mr. Frazier reduces CCC’s asset value
by the entire $51,626,884 built-in capital gain tax liability on
the assumption of a liquidation on the valuation date, whereas
for purposes of his lack of marketability analysis he relies on
the premise that CCC will not be liquidated for at least 20
years. In each instance, the approaches, although internally
inconsistent, produce the best results for his client (the
estate).
 - 37 -

average to below-average discount, while the long 20-year holding

period of CCC shares and the fact that there was no likelihood of

CCC’s going public favored a higher discount for CCC. On the

basis of an analysis of all these factors, Mr. Frazier applied a

35-percent discount rate for lack of marketability.

Mr. Shaked applied a 10-percent discount rate based on his

analysis of the factors described in Mandelbaum v. Commissioner,

supra. The nine factors used in the Mandelbaum case to analyze

the discount were: (1) Financial statement analysis, (2)

dividend policy, (3) outlook of the company, (4) management of

the company, (5) control factor in the shares to be purchased,

(6) company redemption policy, (7) restriction on transfer, (8)

holding period of the stock, and (9) costs of a public offering.

Mr. Shaked began his analysis with the assumption that 20

percent was an average discount and then applied the factors in

the Mandelbaum case to arrive at a 10-percent discount. Mr.

Shaked considered the fact that the securities held by CCC were

readily marketable in arriving at his discount. He believed that

CCC’s well-diversified portfolio resulted in low price volatility

and was a factor in applying a low discount for marketability.

In addition, since CCC’s assets were marketable securities, it

would be easier to find a willing buyer for this company than for

a riskier company whose performance was more speculative.

Respondent contends that Mr. Frazier’s assessment of

restrictions on transferability is misguided, arguing that an

expectation not to liquidate for another 20 years is different
 - 38 -

from a restriction on transferability; and that while sales

cannot take place in the public market, they can in the private

market. Mr. Frazier’s analysis was based on publicly traded

securities with restrictions on resale to which the quotation

from the revenue ruling referred. However, because CCC was a

closely held company with no restrictions on transfer, investors

would not be “locked” into this investment. Despite those

important distinctions, restricted stock resales provide a

limited amount of guidance on the question of lack of

marketability. In particular, the studies concerned actual

resales of the stock in a private market setting as compared to

the price of publicly traded counterparts. Thus, while there

were restrictions on selling the stock in a market transaction,

there were no restrictions on private transfers.

Respondent contends that the companies examined in the

restricted stock studies are not comparable because many of them

were unprofitable or riskier than CCC. Mr. Frazier studied sales

of stock of a number of companies. He acknowledges that a

significant number of those companies reported a loss prior to

the sale of that company’s stock. Studies that focused on

profitable companies, however, resulted in 22- to almost 35-

percent discounts, whereas the studies of unprofitable companies

which respondent contends are not comparable had lower discounts

ranging from 14 to 25 percent.

Finally and despite the estate’s assertions to the contrary,

respondent contends that there is a market for CCC shares. While
 - 39 -

none of the shareholders had a buyback agreement with CCC

allowing them to have their shares redeemed, the minutes of CCC’s

board of directors indicate that the corporation did maintain a

sufficient cash position in the event that the estate requested

redemption of its shares. This, however, does not show that

there is a public market for these shares, nor does it show that

a hypothetical willing buyer would have a market for these

shares.

We disagree with some of Mr. Shaked’s analysis of the

factors from the Mandelbaum case. The holding period of the CCC

stock is different from the holding period of the underlying

assets. Therefore, we find unfounded Mr. Shaked’s assertion that

the holding period of CCC stock is trivial because it can

liquidate its assets (stock holdings). In addition, Mr. Shaked’s

discussion of the marketability of the underlying assets presents

a different question from the marketability of CCC. An owner of

CCC stock cannot purchase and sell securities in CCC’s portfolio.

Finally, the estate is correct in noting that consideration of

the public offering factor should bear on the costs incurred if

the company decided to go public. See Mandelbaum v.

Commissioner, T.C. Memo. 1995-255. Therefore, Mr. Shaked’s

analysis on this factor was somewhat flawed.

Both parties make critical errors in their assumptions and

analysis concerning the appropriate marketability discount. We

generally find their analysis to be only minimally helpful, and,

accordingly, we use our own analysis and judgment, relying on the
 - 40 -

experts’ or parties’ assistance where appropriate. See Helvering

v. Natl. Grocery Co., 304 U.S. at 295; Silverman v. Commissioner,

538 F.2d at 933.

We find the factors considered in Mandelbaum v.

Commissioner, supra, to be a helpful guide to approaching the

question of the amount of marketability discount. We are unable

to give any weight to studies involving the companies Mr. Frazier

deemed comparable, because they were not sufficiently similar to

provide us with meaningful guidance regarding CCC. We do agree

with respondent that CCC’s financial performance justifies a

lower-than-average discount for lack of marketability. The

discount should be lower than average, even though CCC’s

dividends were lower than those of similar companies, because it

had a successful history of long-term appreciation. Because CCC

is a holding company with a diversified spectrum of marketable

blue chip securities, its performance is relatively reliable and

easily verified.

CCC’s financial outlook should also favor a lower-than-

average discount because there is no indication that CCC’s

portfolio or performance will change from its currently and

historically successful course. CCC’s management, as stipulated

by the parties, has performed well, a factor in favor of a lower-

than-average discount. The lack of control in the subject shares

should not cause the discount to vary significantly from the

average because a buyer of a 6.44-percent interest in CCC would
 - 41 -

not be interested in control. Because there are no restrictions

on the transferability of CCC shares, that factor would favor a

lower-than-average discount.

The holding period for CCC stock would favor a higher-than-

average discount because, absent a sale, some of the trusts

holding shares cannot terminate in less than 20 years. In

addition, because gain from the investment relies more heavily on

long-term appreciation, that would also extend the necessary

holding period to realize the investor’s goals in such an

investment. CCC has no redemption policy, although the board

indicated that it would consider redeeming an individual

shareholder’s shares. Accordingly, it is uncertain whether

redemption will occur, and the existence of such uncertainty

warrants a somewhat higher than average discount. There is no

reason to consider “the costs of going public” in the

circumstances of this case.

Accordingly, the factors outlined in Mandelbaum v.

Commissioner, supra, overall, favor a lower-than-average discount

for lack of marketability. We hold that 15 percent is an

appropriate discount for lack of marketability. This discount,

coupled with the 10-percent discount for lack of control produces

a 23.5-percent discount (1-(1-.10)(1-.15)).16 Accordingly, we

16
As already noted, the discounts reflected for the funds
Mr. Frazier found to be comparable in his closed-end fund study
may have reflected more than a lack of control discount.
 - 42 -

hold that the 3,000 shares of CCC had a discounted value of

$8,254,69617 on March 4, 1999, the date of decedent’s death.

To reflect the foregoing,

An appropriate order will

be issued, and decision will

be entered under Rule 155.

17
Fair market value of CCC of $167,553,607, times 6.44-
percent interest equals $10,790,452, less 23.5 percent
($2,535,756) equals $8,254,696.