Thomas H. Holman, Jr. and Kim D.L. Holman v. Commissioner

130 T.C. No. 12

UNITED STATES TAX COURT

THOMAS H. HOLMAN, JR. AND KIM D.L. HOLMAN, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 7581-04. Filed May 27, 2008.

Ps transferred D stock of substantial value to a
newly formed family limited partnership and then made
gifts of limited partnership units (LP units) to a
custodian for one of their children and in trust for
the benefit of all of their children. Ps made a large
gift in 1999 and smaller gifts in 2000 and 2001. In
valuing the gifts for Federal gift tax purposes, they
applied substantial discounts for minority interest
status and lack of marketability. With respect to the
1999 gift, R argues that the gift should be treated as
an indirect gift of D shares and not as a direct gift
of LP units. For all of the gifts treated as gifts of
LP units, R argues that the restrictions in the
partnership agreement on a limited partner’s right to
transfer her interest should be disregarded pursuant to
I.R.C. sec. 2703(a)(2). R also disagrees with Ps’
application of discounts.

1. Held: The limited partnership was formed and
the shares of D stock were transferred to it almost 1
week in advance of the 1999 gift, so that, on the facts
before us, the transfer cannot be viewed as an indirect
gift of the shares to the donees under sec. 25.2511-
1(a) and (h)(1), Gift Tax Regs.
 - 2 -

2. Held, further, the 1999 gift may not be viewed
as an indirect gift of the shares to the donees under
the step transaction doctrine.

3. Held, further, in valuing the gifts, the
transfer restrictions are disregarded pursuant to
I.R.C. sec. 2703(a)(2).

4. Held, further, values of the gifts determined.

John W. Porter, Stephanie Loomis-Price, and J. Graham

Kenney, for petitioners.

Lillian D. Brigman and Richard T. Cummings, for respondent.

HALPERN, Judge: By separate notices of deficiency (the

notices), respondent determined deficiencies in each petitioner’s

Federal gift tax of $205,473, $8,793, and $16,009 for 1999, 2000,

and 2001, respectively. In response to the notices, petitioners

jointly filed a single petition. Respondent answered, and, by

amendment to answer, he increased by $2,304 and $13, the

deficiencies he had determined for each petitioner for 1999 and

2001, respectively.

Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the years in issue, and

all Rule references are to the Tax Court Rules of Practice and

Procedure.

After concessions, the principal issues for decision are (1)

whether petitioners’ transfer of assets to a family limited

partnership constitute an indirect gift to another member of the

partnership; (2) if not, whether, in valuing the gifts of limited
 - 3 -

partner interests that are the subject of this litigation, we

must disregard certain restrictions on the donees’ rights to sell

those interests; and (3) assuming that we must value those

interests, those values.

FINDINGS OF FACT

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

The stipulation of facts, with accompanying exhibits, is

incorporated herein by this reference. Petitioners resided in

St. Paul, Minnesota, at the time they filed the petition.

Background

Petitioners are husband and wife. They have four minor

children, the initials of whose first names are L., C., V., and

I. (collectively, the children).

Petitioner Thomas H. Holman, Jr. (Tom), was employed by Dell

Computer Corp. (Dell) from October 1988 through November 2001.

While employed by Dell, Tom received substantial stock options,

some of which he has exercised. Tom and petitioner Kim D.L.

Holman (Kim) have purchased additional shares of Dell stock.

In 1996 and 1997, as their net worth increased, petitioners

grew more concerned with managing their wealth, particularly as

their wealth might affect the children.

Texas UTMA Accounts
Beginning in 1996, when they lived in Texas, and continuing

through early 1999, petitioners made annual gifts of Dell stock

to three custodial accounts under the Texas Uniform Transfer to

Minors Act (Texas UTMA), one for each of their then three
 - 4 -

daughters, L., C., and V. Tom served as custodian for the three

Texas UTMA accounts until August 1999, when, for estate planning

reasons, he resigned and was replaced by his mother, Janelle S.

Holman (Janelle). At the time of his resignation, each of the

Texas UTMA accounts held 10,030 shares of Dell stock.

Move to Minnesota and Discussions with Mr. LaFave

In August 1997, the Holman family moved from Texas to St.

Paul, Minnesota. At that time, petitioners had no wills.

In late 1997, petitioners met with business and estate

planning attorney E. Joseph LaFave (Mr. LaFave) to discuss estate

planning and wealth management issues. They continued those

discussions with Mr. LaFave and with others over the next 2

years. They recognized that they were wealthy, and they

anticipated transferring substantial wealth to the children.

They wished to make the children feel responsible for the wealth

they expected them to receive. They discussed with Mr. LaFave

and others various ways simultaneously to meet their goals of

transferring their wealth to the children and making the children

feel responsible for that wealth. They learned from Mr. LaFave

about family limited partnerships. Mr. LaFave discussed with

petitioners forming a partnership, contributing property to it,

and making gifts of interests in the partnership to (or for the

benefit of) the children. Mr. LaFave described, and Tom

understood, the gift tax savings from valuation discounts that

could result if Tom made gifts of limited partner interests

rather than gifts of some or all of the property contributed to
 - 5 -

the partnership. Tom discussed those tax savings with Kim.

Tom’s understanding of the potential for gift tax savings played

a role in his decision to form a family limited partnership and

make gifts (indirectly) to the children of limited partner

interests. Tom had four reasons for forming a family limited

partnership: “very long-term growth”, “asset preservation”,

“asset protection”, and “education”. At trial, he elaborated:

Long-term asset growth to us means that we’re looking
at assets for the benefit of the family over decades.
Preservation really means that we wanted a vehicle
where our children would be demotivated and
disincentivized to spend the assets. Protection –- we
were worried that the assets that the girls would
eventually come into would be sought after by third
party people, friends, spouses, potential creditors.
The fourth one [education] is interesting in that we
wanted something that we could use to educate our
daughters on business management concerns.

He further elaborated on his understanding of asset preservation:

“The preservation of capital is important to us. We did not want

our daughters to just go blow this money.” And: “[W]e really

are concerned about negatively affecting their lives with the

wealth, so by creating a partnership, we can establish a vehicle

that preserves the wealth and such that the kids won’t go off and

spend it.” Asset preservation motivated Tom to include transfer

restrictions in the limited partnership agreement described

infra. He testified with respect to those restrictions:

“Remember, the big goal of this thing is to preserve the assets

and to disincentivize the girls from getting rid of these assets,

spending these assets, feeling entitled to these assets.”
 - 6 -

Minnesota UTMA Account

I., the Holmans’ youngest daughter, was born in June 1999.

In August 1999, Tom opened an account at Dean Witter (now Morgan

Stanley Dean Witter; hereafter, MSDW) for I.’s benefit. He

opened the account under the Minnesota Uniform Transfers to

Minors Act (Minnesota UTMA). Janelle was appointed custodian.

Tom caused MSDW to transfer 30 shares of Dell stock to that

account on August 16, 1999.

Wills

On November 2, 1999, petitioners executed wills prepared by

Mr. LaFave.

The Trust

Mr. LaFave drafted an agreement (the trust agreement)

establishing “The Holman Irrevocable Trust U/A dated September

10, 1999” (the trust). The trust agreement names petitioners as

grantors, Janelle as trustee, and the children as the primary

beneficiaries. Petitioners executed the trust agreement on

November 2, 1999, and Janelle executed it on November 4, 1999.

The trust agreement provides that it is effective as of September

10, 1999. Previously, on August 3, 1999, Tom had opened an

account at MSDW for the to-be-established trust. Tom caused MSDW

to transfer 100 shares of Dell stock and $10,000 to that account

on August 16, 1999.
 - 7 -

The Holman Limited Partnership

An attorney in Mr. LaFave’s office drafted an agreement (the

partnership agreement) to establish the Holman Limited

Partnership (the partnership), a Minnesota limited partnership.

The partnership agreement recites that petitioners are both

general and limited partners and Janelle, as trustee of the trust

(as trustee) and as custodian, separately, for each of the

children, is a limited partner. Tom suggested changes to

preliminary drafts of the partnership agreement to insure that

his goals of long-term growth, asset preservation, asset

protection, and education were reflected in the final agreement.

Petitioners executed the partnership agreement on November 2,

1999. Janelle executed it thereafter.

November 2, 1999, Transfers

On November 2, 1999, Janelle, as trustee, caused MSDW to

transfer 100 shares of Dell stock from the trust’s account to a

new MSDW account established for the partnership (the

partnership’s account). On that same date, Tom caused MSDW to

transfer 70,000 shares of Dell stock owned one-half by him and

one-half by Kim from another MSDW account to the partnership’s

account. In exchange for their contributions to the partnership,

petitioners and Janelle, as trustee, received the following

general and limited partner interests:1

1
Each contributor received an interest in the partnership
equal to the number of Dell shares contributed by that individual
divided by the total number of Dell shares contributed by all of
the individuals. In that respect, no distinction was drawn
(continued...)
 - 8 -

Table 1

Shares of Dell Partnership
Partner Class Stock Contributed Units % Owned
Tom General 625 89.16 0.89
Kim General 625 89.16 0.89
Tom Limited 34,375 4,903.71 49.04
Kim Limited 34,375 4,903.71 49.04
Trust Limited 100 14.26 0.14
Total 70,100 10,000.00 100.00

The partnership was formed on November 3, 1999, pursuant to

the partnership agreement and the laws of Minnesota, when a

certificate of limited partnership for it was filed with the

Minnesota secretary of state.

Since its creation, the partnership has been a validly

existing Minnesota limited partnership.

Partnership Agreement

The following are among the provisions of the partnership

agreement:

1.6 Family. “Family” means Thomas H. Holman, Jr.
and Kim D.L. Holman and their descendants.

1.7 Family Assets. “Family Assets” mean all
property owned by the Family, individually, in trust or
in combination with others, which has been contributed
to or acquired by the Partnership.

* * * * * * *

3.1 Purposes. The purposes of the Partnership
are to make a profit, increase wealth, and provide a
means for the Family to gain knowledge of, manage, and
preserve Family Assets. The Partnership is intended to
accomplish the following:

1
(...continued)
between general and limited partner interests.
 - 9 -

(1) maintain control of Family Assets;

(2) consolidate fractional interests in Family
Assets and realize the efficiencies of
coordinated investment management;

(3) increase Family wealth;

(4) establish a method by which gifts can be made
without fractionalizing Family Assets;

(5) continue the ownership of Family Assets and
restrict the right of non-Family persons to
acquire interests in Family Assets;

(6) provide protection to Family Assets from
claims of future creditors against Family
members;

(7) provide flexibility in business planning not
available through trusts, corporations, or
other business entities;

(8) facilitate the administration and reduce the
cost associated with the disability or
probate of the estates of Family members; and

(9) promote the Family’s knowledge of and
communication about Family Assets.

* * * * * * *

6.1 Management. The General Partners shall have
exclusive management and control of the business of the
Partnership, and all decisions regarding the management
and affairs of the Partnership shall be made by the
General Partners. * * * [Specifically,] they shall
have the power and authority * * * :

(1) to determine the investments and investment
strategy of the Partnership;

* * * * * * *

8.4 No Withdrawal. No Limited Partner may
withdraw from the Partnership except as may be
expressly provided in this Agreement.

* * * * * * *

9.1 Assignment of Interest. A Limited Partner
may not without the prior written consent of all
 - 10 -

Partners assign (including by encumbrance), whether
voluntarily or involuntarily, all or part of his or her
Interest in the Partnership, except as permitted by
this Agreement. * * *

9.2 Permitted Assignments. A Limited Partner may
assign all or any portion of his or her Interest in the
Partnership to a revocable trust the entire beneficial
interest of which is owned by the Partner. In
addition, a Limited Partner may assign all or any
portion of his or her Interest in the Partnership, at
any time or from time to time, during lifetime or upon
death, to a Family member; to a custodian for a Family
member under an applicable Uniform Transfers to Minors
Act; to another Partner; or to trustees, inter vivos or
testamentary, holding property in trust for Family
members (notwithstanding that someone who is not a
Family member may also be a beneficiary of such trust.)
* * *

9.3 Acquisition of Partnership Interest in Event
of Non-Permitted Assignment. If an assignment of a
Partnership Interest occurs which is prohibited or
rendered void by the terms of this Agreement, but the
General Partners determine that such assignment is
nevertheless effective according to then applicable
law,[2] the Partnership shall have the option (but not
the obligation) to acquire the Interest of the assignee
or transferee upon the following terms and conditions:

(1) The Partnership will have the option to
acquire the Interest by giving written notice
of its intent to purchase to the transferee
or assignee within ninety (90)days from the
date the Partnership is notified in writing
of the transfer or assignment.

(2) Unless the Partnership and the transferee or
assignee agree otherwise, the purchase price
for the Interest, or any fraction to be
acquired by the Partnership, shall be its
fair market value based upon the assignee’s
right to share in distributions from the
Partnership, as determined by an appraisal
performed by an independent appraiser
selected by the General Partners.

2
As examples of assignments of a partnership interest that
would be violative of the partnership agreement but still
effective, petitioners suggest transfers upon death or divorce of
a limited partner and a transfer to a creditor.
 - 11 -

(3) The valuation date for the determination of
the purchase price of the Interest will be
the date of death in the case of an
assignment due to death or, in all other
cases, the first day of the month following
the month in which the Partnership is
notified in writing of the assignment.

(4) The closing of the purchase of the Interest
shall occur no later than one hundred eighty
(180) days after the valuation date, as
defined in (3) above.

(5) In order to reduce the burden upon the
resources of the Partnership, the Partnership
will have the option, to be exercised in
writing delivered at closing, to pay ten
percent (10%) of the purchase price at
closing and pay the balance of the purchase
price in five (5) equal annual installments
of principal (or equal annual installments
over the remaining term of the Partnership if
less than five (5) years), together with
interest at the Applicable Federal Rate (as
that term is defined in the Code) which is in
effect for the month in which the closing
occurs. The first annual installment of
principal, with accrued interest, will be due
and payable exactly one year after the date
of closing, and subsequent annual
installments of principal, with accrued
interest, will be due and payable each year
thereafter on the anniversary date of the
closing until five (5) years after the date
of closing (or shorter term, if applicable),
when the remaining amount of the obligation,
with unpaid accrued interest, shall be paid
in full. The Partnership will have the right
to prepay all or any part of the remaining
obligation at any time without penalty.

(6) By consent of the Partners (other than the
Partner whose interest is to be acquired),
the General Partners may assign the
Partnership’s option to purchase to one or
more Partners and when done, any rights or
obligations imposed upon the Partnership will
instead become, by substitution, the rights
and obligations of such Partners.

(7) If the option to purchase under this
paragraph 9.3 is not exercised, the assignee
 - 12 -

may retain the assigned Interest provided the
assignee agrees in writing to be bound by the
terms and conditions of this Agreement. The
assignee shall not become a Limited Partner
unless all of the other Partners consent,
which consent may be granted or withheld in
their sole discretion, and the other
conditions for admission contained in this
Article IX are satisfied. The rights of an
assignee who does not become a Limited
Partner shall be limited to the right to
receive, to the extent assigned, only the
distributions to which the assignor would be
entitled under this Agreement.

* * * * * * *

12.1 Events Causing Dissolution. The Partnership
shall be dissolved and its affairs shall be wound up
upon the first to occur of the following:

(1) on December 31, 2049, * * * ;

* * * * * * *

(4) written consent of all Partners; * * *

* * * * * * *

November 8, 1999, Gift

As of November 8, 1999, petitioners made a gift of limited

partner interests (LP units) in the partnership to Janelle, both

as custodian for I. under the Minnesota UTMA and as trustee.

Apparently, the gift to Janelle as custodian for I. was one step

in petitioners’ plan to equalize gifts among their daughters.

Each petitioner transferred (1) 713.2667 LP units (together,

1,426.5334 LP units) to Janelle as custodian for I. and (2)

3,502.6385 LP units (together, 7,005.367 LP units) to Janelle as

trustee. As a result of that gift, the partnership was owned as

follows:
 - 13 -

Table 2

Partnership
Partner Class Units % Owned

Tom General 89.16 0.89
Kim General 89.16 0.89
Tom Limited 687.76 6.88
Kim Limited 687.76 6.88
Trust Limited 7,019.63 70.20
I. Custodianship Limited 1,426.53 14.26
Total 10,000.00 100.00

Each petitioner timely filed a Form 709, United States Gift

(and Generation-Skipping Transfer) Tax Return, for 1999, electing

to split gifts (i.e., treating gifts made to third parties as

being made one-half by each spouse) and reporting the fair market

value of the November 8, 1999, transfer of LP units from each

petitioner (one-half of the total gift) as $601,827 on the basis

of an independent appraisal of the LP units transferred. The

appraiser making that appraisal applied a discount of 49.25

percent to the partnership’s net asset value (the value of the

Dell shares) in reaching his conclusion as to the value of 1 LP

unit on November 8, 1999.

December 13, 1999, Transfers

On December 13, 1999, MSDW transferred 10,030 shares of Dell

stock to the partnership’s account from each of three custodial

accounts maintained for L., C., and V. under the Texas UTMA.

Also on December 13, 1999, MSDW transferred 30 shares of

Dell stock to the partnership’s account from the custodial

account maintained for I. under the Minnesota UTMA.
 - 14 -

As a result of those transfers, the partnership owned

100,220 shares of Dell stock, and the partners held interests in

the partnership as follows:3

Table 3

Partnership
Partner Class Units % Owned

Tom General 89.16 0.62
Kim General 89.16 0.62
Tom Limited 687.76 4.81
Kim Limited 687.76 4.81
Trust Limited 7,019.63 49.10
I. Custodianship Limited 1,430.81 10.01
L. Custodianship Limited 1,430.81 10.01
C. Custodianship Limited 1,430.81 10.01
V. Custodianship Limited 1,430.81 10.01
Total 14,296.71 100.00

January 4, 2000, Gift

As of January 4, 2000, petitioners transferred 469.704 LP

units to Janelle as custodian, one quarter (117.426 LP units) for

each of the daughters.

As a result of those transfers, interests in the partnership

were held as follows:

3
Janelle, as custodian for the various custodial accounts,
received a limited partner interest in the partnership equal to
the number of Dell shares contributed from each account divided
by the total number of Dell shares contributed then, or before,
by all of the partners.
 - 15 -

Table 4

Partnership
Partner Class Units % Owned

Tom General 89.16 0.62
Kim General 89.16 0.62
Tom Limited 452.91 3.17
Kim Limited 452.91 3.17
Trust Limited 7,019.63 49.10
I. Custodianship Limited 1,548.24 10.83
L. Custodianship Limited 1,548.24 10.83
C. Custodianship Limited 1,548.24 10.83
V. Custodianship Limited 1,548.24 10.83
Total 14,296.73 100.00

Each petitioner timely filed a Form 709 for 2000, electing

to split gifts and reporting the fair market value of the January

4, 2000, transfer of LP interests from each petitioner (one-half

of the total gift) as $40,000 on the basis of an independent

appraisal of the LP interests transferred (which, as with the

appraisal of the 1999 gift, applied a discount of 49.25 percent

to the partnership’s net asset value to determine the value of 1

LP unit on January 4, 2000).

January 5, 2001, Transfers

On January 5, 2001, petitioners contributed an additional

10,880 shares of Dell stock to the partnership (allocated as

5,440 from each), and each received 1,552.07 new LP units, which

increased each of their limited partner interests in the

partnership by 4.58 percent.
 - 16 -

As a result of those transfers, the partnership owned

111,100 shares of Dell stock, and the partners held interests in

the partnership as follows:4

Table 5

Partnership
Partner Class Units % Owned

Tom General 89.16 0.56
Kim General 89.16 0.56
Tom Limited 1,229.08 7.75
Kim Limited 1,229.08 7.75
Trust Limited 7,019.63 44.29
I. Custodianship Limited 1,548.24 9.77
L. Custodianship Limited 1,548.24 9.77
C. Custodianship Limited 1,548.24 9.77
V. Custodianship Limited 1,548.24 9.77
Total 15,849.07 99.99

February 2, 2001, Gift

As of February 2, 2001, petitioners transferred 860.772 LP

units to Janelle as custodian, one quarter (215.193 LP units) for

each of the daughters.

As a result of those transfers, interests in the partnership
were held as follows:

4
Petitioners received limited partner interests equal to
the number of Dell shares contributed by each divided by the
total number of Dell shares contributed then, or before, by all
of the partners.
 - 17 -

Table 6

Partnership
Partner Class Units % Owned

Tom General 89.16 0.56
Kim General 89.16 0.56
Tom General 798.70 5.04
Kim Limited 798.70 5.04
Trust Limited 7,019.63 44.29
I. Custodianship Limited 1,763.43 11.13
L. Custodianship Limited 1,763.43 11.13
C. Custodianship Limited 1,763.43 11.13
V. Custodianship Limited 1,763.43 11.13
Total 15,849.07 100.01

Each petitioner timely filed a Form 709 for 2001, electing

to split gifts and reporting the fair market value of the

February 2, 2001, transfer of LP interests from each petitioner

(one-half of the total gift) as $40,000 on the basis of their

estimates of the value of the transferred interests in the light

of prior independent appraisals of LP interests transferred.

Assets and Operation of the Partnership

Upon formation of the partnership, Tom had no immediate plan
other than that it would hold the Dell shares it had received.

At no time from formation through 2001 did the partnership have a

business plan.

The partnership has no employees and no telephone listing in

any directory.

At formation and on each of the dates for valuing the

transfers here in question, the partnership’s assets consisted

solely of shares of stock of Dell.
 - 18 -

From the formation of the partnership through 2001, the

partnership prepared no annual statements.

At the time Tom decided to create the partnership, he had

plans to make the gifts of LP units that were made in 1999, 2000,

and 2001.

The partnership had no income to report, and it filed no

Federal income tax return for 1999, 2000, or 2001.

On December 5, 2001, the partnership received $67,573.84 on

the sale of covered call options on some of its Dell shares.

That transaction was not reportable for Federal income tax

purposes until the following year, when the options expired.

Values of Dell Shares

For the dates indicated, the high, low, average, and closing

prices of a share of Dell stock were as follows:

Table 7

Date High Low Average Closing

Nov. 2, 1999 $41.19 $40.13 $40.660 $41.1875
Nov. 8, 1999 40.94 39.31 41.125 40.1250
Jan. 4, 2000 49.25 46.50 47.875 46.6250
Feb. 2, 2001 27.25 25.00 26.125 25.1875

The Notices

As pertinent to the issues before us, in support of each

notice, respondent made the following adjustments with respect to

the gifts of LP units described above:
 - 19 -

Table 8

Gifts of LP Units

Respondent’s
Year Determined Value Reported Value Increase

1999 $1,184,684 $601,827 $582,857
2000 78,912 40,000 38,912
2001 78,760 40,000 38,760

Respondent explained those adjustments for 1999 as follows:

(1) It is determined that the transfer of assets to
the Holman Limited Partnership, [sic] is in
substance an indirect gift within the meaning of
I.R.C. Section 2511 of the assets to the other
partners.

(2) Alternatively, it is determined that in substance
and effect the taxpayer’s interest in Holman
Limited Partnership is more analogous to an
interest in a trust than to an interest in an
operating business, and should be valued as such
for federal transfer tax purposes.

(3) Alternatively, it is determined that the
transferred interest in the Holman Limited
Partnership should be valued without regard to any
restriction on the right to sell or use the
partnership interest within the meaning of I.R.C.
Section 2703(a)(2).

(4) Alternatively, it is determined that certain
restrictions on liquidation of the Holman Limited
Partnership interests contained in the articles of
organization and operating agreement should be
disregarded for valuation purposes pursuant to
I.R.C. Section 2704(b).

(5) Alternatively, it is determined that the fair
market value of such gifts is $871,971.00, after
allowance of a discount for lack of marketability
or minority interest of 28%.

Respondent’s explanations of his adjustments for 2000 and

2001 are the same except that, in the fifth alternative, the
 - 20 -

determination of the fair market value of the gifts is $56,817

and $56,707 for 2000 and 2001, respectively.

OPINION

I. Introduction

Petitioners transferred Dell stock of substantial value to a

newly formed family limited partnership and then made gifts of

limited partnership units in the partnership (LP units) to a

custodian for one of their children and in trust for the benefit

of all of their children. Petitioners made a large gift in 1999

and smaller gifts in 2000 and 2001 (collectively, the gifts;

individually, the 1999, 2000, or 2001 gift, respectively). In

valuing the gifts for Federal gift tax purposes, they applied

substantial discounts for minority interest status and lack of

marketability. With respect to the 1999 gift, respondent argues

that the gift should be treated as an indirect gift of Dell

shares and not as a direct gift of LP units. For all of the

gifts treated as gifts of LP units, respondent argues that the

restrictions contained in the partnership agreement on a limited

partner’s right to transfer her interests in the partnership

should be disregarded pursuant to section 2703(a)(2). Respondent

also disagrees with petitioners’ application of discounts.

Respondent has abandoned his reliance on section 2704(b)

(“Certain restrictions on liquidation disregarded.”), and he no

longer argues that the partnership should be treated as if it

were a trust. We shall address respondent’s remaining arguments

in turn.
 - 21 -

II. Indirect Gifts

A. Law

Section 2501(a) imposes a tax on the transfer of property by

gift during the year. The tax is imposed on the values of the

gifts made during the year. See sec. 2502(a). The amount of a

gift of property is the value thereof on the date of transfer.

See sec. 2512(a). That value of a gift of property is determined

by the value of the property passing from the donor and not

necessarily by the measure of enrichment resulting to the donee

from the transfer. Sec. 25.2511-2(a), Gift Tax Regs. Where

property is transferred for less than adequate and full

consideration in money or money’s worth (hereafter, simply,

adequate consideration), then the excess of the value of the

property transferred over the consideration received is generally

deemed a gift. See sec. 2512(b). The gift tax applies whether

the gift is direct or indirect. Sec. 2511(a). Section 25.2511-

1(h)(1), Gift Tax Regs., illustrates an indirect gift made by a

shareholder of a corporation to the other shareholders of the

corporation. The shareholder transfers property to the

corporation for less than adequate consideration. The regulation

concludes that, generally, such a transfer represents gifts by

the shareholder to the other individual shareholders to the

extent of their proportionate interests in the corporation.

Similarly, if a partner transfers property to a partnership for

less than adequate consideration, the transfer generally will be

treated as an indirect gift by the transferor to the other
 - 22 -

partners. See, e.g., Shepherd v. Commissioner, 115 T.C. 376, 389

(2000), affd. 283 F.3d 1258 (11th Cir. 2002). Indeed, in

affirming the Tax Court, the Court of Appeals said: “[G]ifts to

a partnership, like gifts to a corporation, are deemed to be

indirect gifts to the stakeholders ‘to the extent of their

proportionate interests’ in the entity. See * * * [sec. 25.2511-

1(h)(1), Gift Tax Regs.].” Shepherd v. Commissioner, 283 F.3d at

1261.

B. Parties’ Arguments

1. Respondent’s Indirect Gift Arguments

Respondent’s arguments are simple and straightforward:

The gift tax is imposed on the donor, and is based
on the value of the transferred property on the date of
the gift. * * * Here, the property that passed from
the donors is Dell stock, not the * * * LP units.
Therefore, Tom and Kim’s transfers of Dell stock, not
the * * * LP units, as of November 8, 1999, are taxed
under the terms of § 2501(a)(1).

Alternatively, the formation, funding, and gifts
of * * * LP units dated as of November 8, 1999 are
steps of an integrated donative transaction. Once the
intermediate steps are collapsed, Tom and Kim’s gifts
are gifts of Dell stock in the form of * * * LP units.
* * *

2. Petitioners’ Responses
Petitioners’ responses are equally simple and

straightforward:

First, no donative transfer occurred on formation
of the Partnership because each partner contributed
Dell stock to the Partnership, and each received
interests in the Partnership precisely in proportion to
the assets contributed by each. Further, because the
Partnership was clearly and properly established under
Minnesota law on November 3, 1999, Petitioners’ gifts
of Partnership interests on November 8, 1999, to the
Trust and to the Minnesota UTMA Account cannot
 - 23 -

constitute indirect gifts of the Dell stock owned by
the Partnership on that date.

C. Discussion

1. A Gift to the Partners on Account of a Transfer to
the Partnership

Respondent’s first alternative indirect gift argument

invokes the illustration in section 25.2511-1(h)(1), Gift Tax

Regs., of an indirect gift made by a shareholder of a corporation

to the other shareholders of the corporation. The regulation

concludes that, generally, where a shareholder transfers property

to a corporation for less than adequate consideration, the

transfer represents gifts by the shareholder to the other

shareholders to the extent of their proportionate interests in

the corporation. Respondent asks us to compare the facts at hand

to the facts in Shepherd and in Senda v. Commissioner, T.C. Memo.

2004-160, affd. 433 F.3d 1044 (8th Cir. 2006), in both of which

we concluded that transfers by a partner to a partnership were

indirect transfers to the other partners.

In Shepherd v. Commissioner, 115 T.C. at 380-381, the

taxpayer transferred real property and shares of stock to a newly

formed family partnership in which he was a 50-percent owner and

his two sons were each 25-percent owners. Rather than allocating

contributions to the capital account of the contributing partner,

the partnership agreement provided that any contributions would

be allocated pro rata to the capital accounts of each partner

according to ownership. Id. at 380. Because the contributions

were reflected partially in the capital accounts of the
 - 24 -

noncontributing partners, the values of the noncontributing

partners’ interests were enhanced by the contributions of the

taxpayer. Accordingly, we held that the transfers to the

partnership were indirect gifts by the taxpayer to his sons of

undivided 25-percent interests in the real property and shares of

stock. Id. at 389.

In Senda v. Commissioner, supra, the Commissioner contended

that the taxpayers’ transfers of shares of stock to two family

limited partnerships, coupled with their transfers of limited

partner interests to their children, were indirect gifts of the

shares to those children. In both instances, the stock transfers

and the transfers of the partnership interests occurred on the

same day. We said that the taxpayers’ transfers of shares were

similar to the transfer of property in the Shepherd case: “In

both cases, the value of the children’s partnership interests was

enhanced by their parents’ contributions to the partnership.” We

rejected the taxpayers’ attempt to distinguish the Shepherd case

on the ground that they first funded the partnership and then

transferred the partnership interests to their children. We

found: “At best, the transactions were integrated (as asserted

by respondent) and, in effect, simultaneous.” We held that the

taxpayers’ transfers of the shares of stock to the two

partnerships were indirect gifts of the shares to their children.

The facts in the instant case are distinguishable from those

of both the Shepherd and Senda cases. On November 3, 1999, the

partnership was formed, petitioners transferred 70,000 Dell
 - 25 -

shares to the partnership, and Janelle, as trustee, transferred

100 Dell shares to the partnership. On account of those

transfers, petitioners and Janelle received partnership interests

proportional to the number of shares each transferred to the

partnership. It was not until November 8, 1999, that petitioners

are deemed to have made (and, on that date, they did make)5 a

gift of LP units to Janelle, both as custodian for I. under the

Minnesota UTMA and as trustee. Petitioners did not first

transfer LP units to Janelle and then transfer Dell shares to the

partnership, nor did they simultaneously transfer Dell shares to

the partnership and LP units to Janelle. The facts of the

Shepherd and Senda cases are materially different from those of
the instant case, and we cannot rely on those cases to find that

petitioners made an indirect gift of Dell shares to Janelle,

either as custodian for I. under the Minnesota UTMA or as

trustee. We shall proceed to respondent’s alternative argument.

5
On the basis of stipulated facts, we have found that,
“[a]s of November 8, 1999,” petitioners made a gift of LP units
to Janelle, both as custodian for I. under the Minnesota UTMA and
as trustee. The stipulated facts are based on undated
instruments assigning the LP units “effective November 8, 1999”.
On the basis of a stipulated fact, we have also found that
petitioners each filed a 1999 gift tax return reporting the fair
market value of “the November 8, 1999,” transfer of LP units.
The parties have also stipulated an appraisal of that gift that
recites that the gift was made on Nov. 8, 1999. Respondent’s
valuation expert, Francis X. Burns, assumed that the 1999 gift
was made on Nov. 8, 1999, as did petitioners’ valuation expert,
Troy D. Ingham. While it is not free from doubt, we conclude,
and find, that the 1999 gift was made on Nov. 8, 1999. For
similar reasons, we conclude and find that the gifts made “as of”
Jan. 4, 2000, and Jan. 5, 2001, were made on those dates,
respectively.
 - 26 -

2. Indirect Gift Under the Step Transaction Doctrine

Alternatively, respondent argues that petitioners made an

indirect gift under the step transaction doctrine. As we

recently summarized that doctrine in Santa Monica Pictures,

L.L.C. v. Commissioner, T.C. Memo. 2005-104:

The step transaction doctrine embodies substance
over form principles; it treats a series of formally
separate steps as a single transaction if the steps are
in substance integrated, interdependent, and focused
toward a particular result. Penrod v. Commissioner, 88
T.C. 1415, 1428 (1987). “Where an interrelated series
of steps are taken pursuant to a plan to achieve an
intended result, the tax consequences are to be
determined not by viewing each step in isolation, but
by considering all of them as an integrated whole.”
Packard v. Commissioner, 85 T.C. 397, 420 (1985).

There is no universally accepted test as to when
and how the step transaction doctrine should be applied
to a given set of facts; however, courts have applied
three alternative tests in deciding whether to invoke
the step transaction doctrine in a particular
situation: the “binding commitment,” the
“interdependence,” and the “end result” tests.
Cal-Maine Foods, Inc. v. Commissioner, 93 T.C. 181,
198-199 (1989); Penrod v. Commissioner, supra at
1429-1430. * * *

We have considered the step transaction doctrine in transfer

(gift and estate) tax cases. See, e.g., Daniels v. Commissioner,

T.C. Memo. 1994-591.

Respondent does not explicitly state which of the above

three tests he is relying on, although it appears he is arguing

that the ‘interdependence’ test is applicable. In Santa Monica
Pictures, we described the interdependence test as follows:

Under the “interdependence” test, the step
transaction doctrine will be invoked where the steps in
a series of transactions are so interdependent that the
legal relations created by one transaction would have
been fruitless without a completion of the series. * *
 - 27 -

* We must determine whether the individual steps had
independent significance or whether they had
significance only as part of a larger transaction. * *
* [Citations omitted.]

In his brief, respondent argues:

If none of the individual events occurring between
the contribution of the property to the partnership and
the gifts of partnership interests had any significance
independent of its status as an intermediate step in
the donors’ plan to transfer their assets to their
donees in partnership form, the formation, funding, and
transfer of partnership units pursuant to an integrated
plan is treated as a gift of the assets to a
partnership of which the donees are the other partners.
Treas. Reg. § 25.2511-1(h)(1).

The nub of respondent’s argument is that petitioners’

formation and funding of the partnership should be treated as

occurring simultaneously with their 1999 gift of LP units since

the events were interdependent and the separation in time between

the first two steps (formation and funding) and the third (the

gift) served no purpose other than to avoid making an indirect

gift under section 25.2511-1(h), Gift Tax Regs. While we have no

doubt that petitioners’ purposes in forming the partnership

included making gifts of LP units indirectly to the children, we

cannot say that the legal relations created by the partnership

agreement would have been fruitless had petitioners not also made

the 1999 gift. Indeed, respondent does not ask that we consider

either the 2000 gift (made approximately 2 months after formation

of the partnership) or the 2001 gift (made approximately 15

months after formation of the partnership) to be indirect gifts

of Dell shares. We must determine whether the fact that less
 - 28 -

than 1 week passed between petitioners’ formation and funding of

the partnership and the 1999 gift requires a different result.

Respondent relies heavily on the opinion of the Court of

Appeals for the Eighth Circuit in Senda v. Commissioner, 433 F.3d
1044 (8th Cir. 2006).6 In affirming our decision in the Senda

case, the Court of Appeals concluded that we did not clearly err

in finding that the taxpayers’ transfers of shares of stock to

two family limited partnerships, coupled with their transfers on

the same days of limited partner interests to their children,

were in each case integrated steps in a single transaction. Id.,

at 1049. The taxpayers argued that the order of transfers did

not matter since, pursuant to the partnership agreements in

question, their contributions of the shares of stock were

credited to their partnership capital accounts before being

credited to the children’s accounts. Id. at 1047. Invoking the

step transaction doctrine, the Court of Appeals rejected that

step-dependent argument. Id. at 1048. It said: “In some

situations, formally distinct steps are considered as an

integrated whole, rather than in isolation, so federal tax

liability is based on a realistic view of the entire

transaction.” Id.
This case is distinguishable from Senda because petitioners

did not contribute the Dell shares to the partnership on the same

day they made the 1999 gift; indeed, almost 1 week passed between

6
The Court of Appeals for the Eighth Circuit is the court
to which, barring the parties’ stipulation to the contrary, any
appeal in this case would lie. See sec. 7482(b).
 - 29 -

petitioners’ formation and funding of the partnership and the

1999 gift. Nevertheless, the Court of Appeals in Senda did not

say that, under the step transaction doctrine, no indirect gift

to a partner can occur unless, on the day property is transferred

to the partnership, the partner is (or becomes) a member of the

partnership. As respondent’s failure to argue indirect gifts on

account of the 2000 and 2001 gifts suggests, however, the passage

of time may be indicative of a change in circumstances that gives

independent significance to a partner’s transfer of property to a

partnership and the subsequent gift of an interest in that

partnership to another.

Here the value of an LP unit changed over time. The parties

have stipulated the high, low, average, and closing prices of a

share of Dell stock on November 2, 1999, the date petitioners

initially transferred Dell shares to the partnership’s account,

and the subsequent dates of the gifts, and we have found

accordingly. See supra table 7. Beginning on November 2, 1999,

and ending on the dates of the gifts, the percentage changes in

the average price of a share of Dell stock were as follow:

Table 9
Percentage Changes in the Average Price
of a Share of Dell Stock

Date Percentage

11/2/1999 to 11/8/1999 -1.316
11/2/1999 to 1/4/2000 +17.745
11/2/1999 to 2/2/2001 -35.748
 - 30 -

The value of an LP unit, based on its proportional share of the

average value of the Dell shares held by the partnership, fell or

rose between the dates indicated by the percentage indicated.

Respondent has proposed as a finding of fact, and we have found,

that, at the time Tom decided to create the partnership, he had

plans to make the 1999, 2000, and 2001 gifts. Petitioners bore

the risk that the value of an LP unit could change between the

time they formed and funded the partnership and the times they

chose to transfer LP units to Janelle. Indeed, the absolute

value of the rate of change in the value of an LP unit was

greater from November 2 to November 8, 1999, than it was from

November 2, 1999, to February 2, 2001. Morever, the partnership

held only shares of Dell stock on both November 8, 1999 (the date

of the 1999 gift), and January 4, 2000 (the date of the 2000

gift), and the partnership agreement was not changed in the

interim. Respondent apparently concedes that a 2-month

separation is sufficient to give independent significance to the

funding of the partnership and a subsequent gift of LP units. We

assume that concession to be on account of respondent’s

recognition of the economic risk of a change in value of the

partnership that petitioners bore by delaying the 2000 gift for 2

months. We draw no bright lines. Given, however, that

petitioners bore a real economic risk of a change in value of the

partnership for the 6 days that separated the transfer of Dell

shares to the partnership’s account and the date of the 1999

gift, we shall treat the 1999 gift the same way respondent
 - 31 -

concedes the 2000 and 2001 gifts are to be treated; i.e., we

shall not disregard the passage of time and treat the formation

and funding of the partnership and the subsequent gifts as

occurring simultaneously under the step transaction doctrine.7

D. Conclusion
The 1999 gift is properly treated as a direct gift of LP

units and not as an indirect gift of Dell shares.

III. Section 2703

A. Introduction

In pertinent part, section 2703(a) provides that, for

purposes of the gift tax, the value of any property transferred

by gift is determined without regard to any right or restriction

(without distinction, restriction) relating to the property.

Paragraphs 9.1, 9.2, and 9.3 of the partnership agreement

(paragraphs 9.1, 9.2, and 9.3, respectively), set forth supra,

govern the assignment of LP units, and the parties agree that

those paragraphs contain restrictions on the right of a limited

partner in the partnership (a limited partner) to sell or assign

her partnership interest. Section 2703(b) provides that section

7
The real economic risk of a change in value arises from
the nature of the Dell stock as a heavily traded, relatively
volatile common stock. We might view the impact of a 6-day
hiatus differently in the case of another type of investment;
e.g., a preferred stock or a long-term Government bond.
 - 32 -

2703(a) does not apply to disregard a restriction if the

restriction meets each of the following three requirements:

(1) It is a bona fide business arrangement.

(2) It is not a device to transfer such property
to members of the decedent’s family for less than full
and adequate consideration in money or money’s worth.

(3) Its terms are comparable to similar
arrangements entered into by persons in an arm’s length
transaction.

Because we find that paragraph 9.3 fails at least the first

and second restrictions, we shall disregard it in determining the

values of the LP units transferred.

B. Bona Fide Business Arrangement

1. Parties’ Arguments

Respondent argues that paragraph 9.3 is not part of a bona

fide business arrangement since “[c]arrying on a business

requires more than holding securities and keeping records.” As

authority for that proposition, respondent cites an income tax

case, Higgins v. Commissioner, 312 U.S. 212 (1941) (taxpayer’s

managerial activities in connection with collecting interest and

dividends on securities held for investment did not amount to

carrying on a business for purposes of deducting associated

expenses). Besides, respondent adds, Tom’s primary purpose in

forming the partnership were to preserve his Dell wealth and

“disincentivize” the children from spending it, while Kim’s

primary purpose in forming it was to educate the children about

family wealth. Those, respondent argues, “are personal, not
 - 33 -

business[,] goals. Personal goals, with nothing more, do not

create a business arrangement.”

Petitioners argue:

The restrictions on transferability, the right of
first refusal, and the payout mechanism in paragraphs
9.1, 9.2, and 9.3 of the Partnership Agreement serve a
bona fide business purpose * * * by preventing
interests in the Partnership from passing to non-family
members. * * * The creation of a mechanism to ensure
family ownership and control of a family enterprise has
long been held by this Court to constitute a bona fide
and valid business purpose. See Estate of Stone v.
Comm’r, 86 T.C.M. (CCH) 551 (2003); Estate of Bischoff
v. Comm’r, 69 T.C. 32, 39-41 (1977); Estate of Reynolds
v. Comm’r, 55 T.C. 172, 194 (1970), acq., 1971-2 C.B.
1; Estate of Littick v. Comm’r, 31 T.C. 181, 187
(1958), acq., 1984-2 C.B. 1; Estate of Harrison v.
Comm’r, 52 T.C.M. (CCH) 1306, 1309 (1987) (holding that
“[w]ith respect to business purpose, petitioner
presented convincing proof that the partnership was
created as a means of providing necessary and proper
management of decedent’s properties and that the
partnership was advantageous to and in the best
interests of decedent”).

2. Discussion

Section 2703 contains no definition of the phrase “bona fide

business arrangement”. Nevertheless, we have held that the

subject of the restrictive agreement need not directly involve an

actively managed business. See, e.g., Estate of Amlie v.
Commissioner, T.C. Memo. 2006-76 (citing Estate of Bischoff v.

Commissioner, 69 T.C. 32, 40-41 (1977), a pre-section 2073 case

in which we found it irrelevant that the restrictive agreements

necessary to maintain continuity of management in, and control

over, corporations carrying on active businesses were agreements

with respect to the ownership of a holding company not actively

conducting a trade or business and requiring no management). In
 - 34 -

Estate of Amlie, the asset in question was the decedent’s

minority interest in a bank. Before her death the decedent

voluntarily became the ward of a conservator appointed to oversee

her affairs. The conservator entered into a series of agreements

that, among other things, fixed the value of the decedent’s bank

shares for purposes of satisfying the decedent’s obligations to

transfer those shares to a prospective heir both in satisfaction

of promised bequests and by sale upon her death. The fixed value

was lower than the price obtained by the heir on his resale of

the shares a month after the decedent’s death. The Commissioner

sought to disregard the value-fixing agreements entered into by

the conservator. We found that, in securing the agreements, the

conservator “was seeking to exercise prudent management of

decedent’s assets by mitigating the very salient risks of holding

a minority interest in a closely held bank, consistent with the

conservator’s fiduciary obligations to decedent.” We held:

[A]n agreement that represents a fiduciary’s efforts to
hedge the risk of the ward’s holdings may serve a
business purpose within the meaning of section
2703(b)(1). In addition, planning for future liquidity
needs of decedent’s estate, which was also one of the
objectives underlying * * * [one of the relevant
agreements], constitutes a business purpose under
section 2703(b)(1). * * *

In reaching that conclusion, we referred to the legislative

history of section 2703, which includes an informal report of the

Senate Committee on Finance, Informal Senate Report on S. 3209,

101st Cong., 2d Sess. (1990), 136 Cong. Rec. 30,488, 30,539

(1990) (the Committee on Finance report). The Committee on

Finance report observes that buy-sell agreements
 - 35 -

are common business planning arrangements * * * that *
* * generally are entered into for legitimate business
reasons * * * . Buy-sell agreements are commonly used
to control the transfer of ownership in a closely held
business, to avoid expensive appraisals in determining
purchase price, to prevent the transfer to an unrelated
party, to provide a market for the equity interest, and
to allow owners to plan for future liquidity needs in
advance. * * *

Indeed, we have held that buy-sell agreements serve a legitimate

purpose in maintaining control of a closely held business. E.g.,

Estate of Bischoff v. Commissioner, supra; Estate of Reynolds v.
Commissioner, 55 T.C. 172 (1970); Estate of Fiorito v.

Commissioner, 33 T.C. 440 (1959).8

Here, however, we do not have a closely held business. From

its formation through the date of the 2001 gift, the partnership

carried on little activity other than holding shares of Dell

stock. Dell was not a closely held business either before or

after petitioners contributed their Dell shares to the

partnership. While we grant that paragraphs 9.1 through 9.3 (and

paragraph 9.3 in particular) aid in control of the transfer of LP

units, the stated purposes of the partnership, viewed in the

light of petitioners’ testimony as to their reasons for forming

the partnership and including paragraphs 9.1 through 9.3 in the

partnership agreement, lead us to conclude that those paragraphs

do not serve bona fide business purposes. Paragraph 3.1 of the

8
Nevertheless, the existence of a valid business purpose
does not necessarily exclude the possibility that a buy-sell
agreement is a tax-avoidance testamentary device to be
disregarded in valuing the property interest transferred. St.
Louis County Bank v. United States, 674 F.2d 1207, 1210 (8th Cir.
1982).
 - 36 -

partnership agreement includes among the stated purposes of the

partnership: “to * * * provide a means for the Family to gain

knowledge of, manage, and preserve Family Assets.” Tom testified

at some length as to his understanding of the term “preservation”

and his reasons for making asset preservation a purpose of the

partnership. On the basis of that testimony, we find that his

reason for making asset preservation a purpose of the partnership

was to protect family assets from dissipation by the children.

Tom also testified that paragraph 9.1 “lays out pretty strong

limitations on what the limited partners can do in assigning or

giving away their interests to other people.” He viewed the buy-

in provisions of paragraph 9.3 as a “safety net” if an

impermissible person obtained an assignment of a limited partner

interest from one of the girls. He considered the provisions of

paragraphs 9.1, 9.2, and 9.3, together, as important in

accomplishing his goal of keeping the partnership a closely held

partnership of family members: “If there are ways for the family

[the children] to wiggle out of that and bring other people in,

then it will prevent us from accomplishing our goals, so we

wanted a couple of levels here of restriction that would prevent

that from happening.” Kim testified that the purpose of

organizing the partnership was to establish a tool for Tom and

her “to be able to teach * * * [the] children about wealth and

the responsibility of that wealth.”

We believe that paragraphs 9.1 through 9.3 were designed

principally to discourage dissipation by the children of the
 - 37 -

wealth that Tom and Kim had transferred to them by way of the

gifts. The meaning of the term “bona fide business arrangement”

in section 2703(b)(1) is not self apparent. As discussed supra,

in Estate of Amlie v. Commissioner, T.C. Memo. 2006-76, we

interpreted the term “bona fide business arrangement” to

encompass value-fixing arrangements made by a conservator seeking

to exercise prudent management of his ward’s minority stock

investment in a bank consistent with his fiduciary obligations to

the ward and to provide for the expected liquidity needs of her

estate. Those are not the purposes of paragraphs 9.1 through

9.3. There was no closely held business here to protect, nor are

the reasons set forth in the Committee on Finance report as

justifying buy-sell agreements consistent with petitioners’ goals

of educating their children as to wealth management and

“disincentivizing” them from getting rid of Dell shares, spending

the wealth represented by the Dell shares, or feeling entitled to

the Dell shares.

3. Conclusion

We find that paragraphs 9.1 through 9.3 do not serve bona

fide business purposes. Those paragraphs do not constitute a

bona fide business arrangement within the meaning of section

2703(b)(1).

C. Device Test
The second requirement of section 2703(b) is that the

restriction not be a device to transfer the encumbered property

to members of the decedent’s family for less than full and
 - 38 -

adequate consideration in money or money’s worth (hereafter,

simply adequate consideration). Sec. 2703(b)(2). The

Secretary’s regulations interpreting section 2703 substitute the

term “the natural objects of the transferor’s bounty” for the

term “members of the decedent’s family”, apparently because he

interprets section 2703 to apply to both transfers at death and

inter vivos transfers. Sec. 25.2703-1(b)(1)(ii), Gift Tax Regs.9

Clearly, the gifts of the LP units were both (1) to natural

objects of petitioners’ bounty and (2) for less than adequate

consideration. They were not, however, a “device” to transfer

the LP units to the children for less than adequate

consideration. The question we must answer is whether paragraphs

9.1 through 9.3, which restrict the children’s rights to enjoy

the LP units, constitute such a device. We believe that they do.

Those paragraphs serve the purposes of Tom and Kim to discourage

the children from dissipating the wealth that Tom and Kim had

transferred to them by way of the gifts. They discourage

dissipation by depriving a child desirous of making an

impermissible transfer of the ability to realize the difference

in value between the fair market value of his LP units and the

units’ proportionate share of the partnership’s NAV. If a child

persists in making an impermissible transfer, paragraph 9.3

9
Petitioners argue: “Of course, there is no decedent in
this case, so § 2703(b)(2) appears to be satisfied on its face.”
They fail, however, to challenge the validity of sec. 25.2703-
1(b)(1)(ii), Gift Tax Regs., upon which respondent relies. We
assume that they concede the validity of the regulation in
applying the device test to transfers to “the natural objects of
the transferor’s bounty”.
 - 39 -

allows the general partners (currently Tom and Kim) to

redistribute that difference among the remaining partners. Thus,

if the provisions of paragraph 9.3 are triggered and the

partnership redeems the interest of an impermissible transferee

for less than the share of the partnership’s net asset value

proportionate to the impermissible transferee’s interest in the

partnership (which is likely, given the agreement of the parties’

valuation experts as to how the valuation discounts appropriate

to an LP unit are applied; see infra section IV.A. of this

report), the values of the remaining partners’ interests in the

partnership will increase on account of that redemption. See

infra note 17 and the accompanying paragraph. The partners

benefiting from the redemption could (indeed, almost certainly,

would) include one or more of the children, natural objects of

petitioners’ bounty.

Tom participated in the drafting of the partnership

agreement to ensure, in part, that “asset preservation” as he

understood that term (i.e., to discourage the children from

dissipating their wealth) was addressed. Tom impressed us with

his intelligence and understanding of the partnership agreement,

and we have no doubt that he understood the redistributive nature

of paragraph 9.3. and his and Kim’s authority as general partners

to redistribute wealth from a child pursuing an impermissible

transfer to his other children. We assume, and find, that he

intended paragraph 9.3 to operate in that manner, and this

intention leads us to conclude, and find, that paragraph 9.3 is a
 - 40 -

device to transfer LP units to the natural objects of

petitioners’ bounty for less than adequate consideration.

D. Comparable Terms

The third requirement of section 2703(b) is that the terms

of the restriction be comparable to similar arrangements entered

into by persons in an arm’s-length transaction. Comparability is

determined at the time the restriction is created. Sec. 25.2703-

1(b)(1)(iii), Gift Tax Regs. The parties rely on expert

testimony to show that the elements of section 2703(b)(3) have or

have not been satisfied.

Respondent called Daniel S. Kleinberger, professor of law at

William Mitchell College of Law, St. Paul, Minnesota. Professor

Kleinberger was accepted as an expert on arm’s-length limited

partnerships. In his direct testimony, he expressed the opinion

that the overall circumstances of the partnership arrangement

made it unlikely that a person in an arm’s-length arrangement

with the general partners would accept any of the “salient”

restrictions on sale or use contained in the partnership

agreement. He explained:

In virtually every material respect, the * * *
[partnership] agreement blocks for 50 years the limited
partners’ ability to sell or use their respective
limited partner interests. In an arm’s length
transaction, a reasonable investor faced with such a
prospect would ask, “What is so special about this
opportunity, what do I get out of this arrangement that
justified so restricting and enfeebling my rights?”
The answer, in an arm’s length context, is nothing.

On cross-examination, he agreed with counsel for petitioners

that transfer restrictions similar to those found in paragraphs
 - 41 -

9.1 through 9.3 are common in agreements entered into at arm’s

length. That, however, he concluded, was beside the point since

“The owners of a closely held business at arm’s length would

never get into this deal with the Holmans, period, so the issue

[transfer restrictions] wouldn’t come up.” In response to

petitioner’s counsel’s expression of doubt as to what he meant,

he answered:

What I mean is that when you look at the overall
context, when you look at the nature of the assets,
when you look at the expertise or non-expertise of the
general partner, when you look at the 50-year term,
when you look at the inability to get out, when you
look at the susceptibility of this single asset, * * *
the issue [transfer restrictions] wouldn’t arise,
because nobody at arm’s length would get into this
deal.”

Using a colorful expression, he summed up his view as follows:

[B]ased on my experience and based on
conversations with more than a dozen practitioners who
do this stuff, I couldn’t find anybody would do this
deal, who would let their client into a deal like this
as a limited partner without writing a very large CYA
memo, saying: “We advise against this.”

Petitioners called William D. Klein (Mr. Klein), a

shareholder in the Minnesota law firm of Gray, Plant, Mooty,

Mooty & Bennett, P.A. Mr. Klein has “practiced, written, and

lectured about” partnership taxation and law for more than 20

years. He has participated in the drafting of, or reviewed

drafts of, more than 300 limited partnership agreements. He was

accepted as an expert with respect to the comparability of the

provisions of the partnership agreement to provisions in other

partnership agreements entered into by parties at arm’s length.

He was asked by petitioners to express his opinion as to whether
 - 42 -

various provisions of the partnership agreement are “‘comparable

to similar arrangements entered into by persons in an arm’s

length transaction’”. With respect to paragraphs 9.1 and 9.2,

Mr. Klein is of the opinion that the paragraphs “are comparable

to provisions one most often finds in limited partnership

agreements among unrelated partners.” As to paragraph 9.3, he is

of the opinion that the paragraph “is not out of the mainstream

of what one typically finds in arm’s length limited partnership

agreements.”

Petitioners must show that paragraph 9.3 is “comparable to

similar arrangements entered into by persons in an arm’s length

transaction.” See sec. 2703(b)(3). The experts agree that

transfer restrictions comparable to those found in paragraphs 9.1

through 9.3 are common in agreements entered into at arm’s

length. That would seem to be all that petitioners need to show

to satisfy section 2703(b)(3). Nevertheless, respondent relies

on one of his expert’s, Professor Kleinberger’s, testimony “that

the overall circumstances of the * * * [partnership] arrangement

make it unlikely that arm’s length third parties would agree to

any one of its restrictions on sale or use.” Even were we to

find that paragraph 9.3 is comparable to similar arrangements

entered into by persons in arm’s-length transactions (thus

satisfying section 2703(b)(3)), we would still disregard it

because it fails to constitute a bona fide business arrangement,

as required by section 2703(b)(1), and is a prohibited device

within the meaning of section 2703(b)(2). Therefore, we need not
 - 43 -

(and do not) decide today whether respondent is correct in

applying the arm’s-length standard found in section 2703(b)(3) to

the transaction as a whole.

IV. Valuation

A. Introduction

We must determine the values of the gifts. Although the

gifts were of LP units, the parties agree that the starting point

for determining those values is the net asset value (NAV) of the

partnership. Since, on the dates of the gifts, the partnership

held only shares of Dell stock and had no liabilities, the

parties agree that the NAV on each of those dates equals the

value of the Dell shares then held. The parties also agree that,

in valuing the gifts of LP units, we are to look to the pro rata

portion of the NAV of the partnership allocable to the LP units

transferred but are to make negative adjustments to the values so

determined to reflect the lack of control and lack of

marketability inherent in the transferred interests. The parties

disagree on the magnitude of those discounts. They also disagree

on the effect of disregarding paragraph 9.3. We have set forth

as appendixes A through D hereto comparisons based on materials

prepared by respondent of the parties’ valuation positions for

each of the gifts. There appear to be no discrepancies between

the information in those appendixes and petitioners’ computations

of like amounts.
 - 44 -

B. Law

Pertinent to our determination of the values of the gifts is

section 25.2512-1, Gift Tax Regs., which provides that the value

of property for Federal gift tax purposes is “the price at which

such 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.”

The willing buyer and willing seller are hypothetical persons,

rather than specific individuals or entities, and their

characteristics are not necessarily the same as those of the

donor and the donee. See, e.g., Estate of Davis v. Commissioner,

110 T.C. 530, 535 (1998). The hypothetical willing buyer and the

hypothetical willing seller are presumed to be dedicated to

achieving the maximum economic advantage. E.g., id.

C. Expert Opinions

1. Introduction

The parties rely exclusively on expert testimony to

establish the appropriate discounts to be applied in determining

the fair market values of the gifts of LP units. Of course, we

are not bound by the opinion of any expert witness, and we may

accept or reject expert testimony in the exercise of our sound

judgment. Helvering v. Natl. Grocery Co., 304 U.S. 282, 295
(1938); Estate of Newhouse v. Commissioner, 94 T.C. 193, 217

(1990). Because valuation necessarily involves an approximation,

the figure at which we arrive need not be directly traceable to

specific testimony if it is within the range of values that may
 - 45 -

be properly derived from consideration of all the evidence.

E.g., Peracchio v. Commissioner, T.C. Memo. 2003-280.

2. Petitioners’ Expert

Petitioners called Troy D. Ingham (Mr. Ingham) as an expert

witness to testify concerning the values of the gifts. Mr.

Ingham is a vice president and director with Management Planning,

Inc., a business valuation firm. He has been performing

valuation services since 1996. He is a candidate for the

American Society of Appraisers. The Court accepted Mr. Ingham as

an expert on business valuation and limited partnership

valuation, and we received into evidence as his direct testimony

four reports he had participated in preparing. Three of those

reports express his opinions as to the fair market value of an LP

unit on November 8, 1999, January 4, 2000, and February 2, 2001,

respectively (the dates of the 1999, 2000, and 2001 gifts,

respectively). In each report, Mr. Ingham gives his opinion

alternatively regarding and disregarding the effect of paragraph

9.3. Mr. Ingham’s opinions are summarized in appendixes A

through D. Petitioners offered Mr. Ingham’s fourth report in

rebuttal to respondent’s valuation expert witness’s testimony,

and that report expresses Mr. Ingham’s opinion that some of

respondent’s valuation expert witness’s conclusions are flawed.

3. Respondent’s Expert

Respondent called Francis X. Burns (Mr. Burns) as an expert

witness to testify concerning the values of the gifts. Mr. Burns

is a vice president of CRA International, Inc., an international
 - 46 -

consulting firm that provides business valuation services. He is

an accredited senior appraiser in business valuation within the

American Society of Appraisers and a member of the Institute of

Business Appraisers. He has been performing valuation services

for more than 18 years, and he has testified as an expert in

several valuation cases. The Court accepted Mr. Burns as an

expert in the valuation of business entities and partnerships,

and we received into evidence as his direct testimony the report

he had prepared. In that report, he expresses his conclusions as

to the fair market values of the gifts, alternatively regarding

and disregarding the effect of paragraph 9.3. His opinions are

summarized in appendixes A through D.

D. Discussion

1. Net Asset Value of Partnership

The parties agree on the numbers of Dell shares the

partnership held on the dates of the gifts. They further agree

that the value of those shares establishes the NAV of the

partnership on each of those dates. They agree that the

partnership’s NAV was $2,812,763 (rounded) on the date of the

1999 gift. They disagree as to the partnership’s NAV on each of

the dates of the 2000 and 2001 gifts. Relying on Mr. Ingham’s

calculation of the closing values of a share of Dell stock on the

dates of those gifts, petitioners argue that the partnership’s

NAVs on those dates were $4,672,758 and $2,798,331, respectively.

Relying on Mr. Burns’s calculations of the averages of the high

and low prices of a share of Dell stock on those dates,
 - 47 -

respondent argues that the partnership’s NAVs on those dates were

$4,798,033 and $2,902,488, respectively. Section 25.2512-2, Gift

Tax Regs., deals with the valuation of stocks and bonds for

purposes of the gift tax. See sec. 25.2512-2(a), Gift Tax Regs.

In pertinent part, section 25.2512-2(b)(1), Gift Tax Regs.,

provides: “In general, if there is a market for stocks * * *, on

a stock exchange, in an over-the-counter market or otherwise, the

mean between the highest and lowest quoted selling prices on the

date of the gift is the fair market value per share”.

Petitioners argue that, because the gifts here being valued are

gifts of partnership interests that do not trade in a public

market, the regulation is inapplicable. Moreover, argue

petitioners, in determining his discount for lack of control, Mr.

Ingham relied on data showing that shares of publicly held

investment companies generally trade at a discount from NAV,

determined by comparing the price of the company to its end-of-

day NAV.

We cannot dismiss the regulation, as petitioners would have

us do. The starting point for valuing the gifts is determining

the NAV of the partnership, which is defined exclusively by the

value of shares of Dell stock, which Mr. Ingham opines are

“traded over-the-counter”. The rules for valuing marketable

shares of stock found in section 25.2512-2(b)(1), Gift Tax Regs.,

are not gift-specific rules whose application makes no sense if

it is only the value of the shares, indirectly, that is at issue,

and petitioners provide no authority for disregarding the rules.
 - 48 -

To the contrary, petitioners cite a case that supports a contrary

view: Estate of Cook v. Commissioner, T.C. Memo. 2001-170

(annuity tables appropriate to value installment payoff of

lottery ticket held by partnership notwithstanding marketability

discount that might apply to valuation of partnership interest),

affd. 349 F.3d 850 (5th Cir. 2003).

Petitioners’ argument with respect to Mr. Ingham’s

methodology for determining a lack of control discount is equally

unpersuasive. Data from the universe of trades of publicly held

investment companies may well show that shares of those companies

generally trade at a discount from NAV determined at the end of

the day, but petitioners have failed to show that any statistical

inference to be drawn from that data would be any different if an

average of the highs and lows of the component securities were

used to determine NAV.

We shall rely on Mr. Burns’s computations of $4,798,033 and

$2,902,488 as the partnership’s NAVs on the dates of the 2000 and

2001 gifts, respectively.

2. Minority Interest (Lack of Control) Discount

a. Introduction

Pursuant to the partnership agreement, a hypothetical buyer

of an LP unit would have limited control of his investment. For

instance, such a buyer (1) would have no say in the partnership’s

investment strategy, and (2) could not unilaterally recoup his

investment by forcing the partnership either to redeem his unit

or to undergo a complete liquidation. The parties agree that the
 - 49 -

hypothetical “willing buyer” of an LP unit would account for such

lack of control by demanding a reduced price; i.e., a price that

is less than the unit’s pro rata share of the partnership’s NAV.

b. Comparison to Closed-End Investment Funds
Both Messrs. Ingham and Burns apply minority interest

discounts in valuing the gifts by reference to the prices of

shares of publicly traded, closed-end investment funds, which

typically trade at a discount relative to their share of fund NAV

by definition.10 The idea is that since, by definition, such

shares enjoy a high degree of marketability, those discounts must

be attributable, at least to some extent, to a minority

shareholder’s lack of control over the investment fund. The

minority interest discounts applied by Messrs. Ingham and Burns

in valuing the gifts are as follows:

Table 10

Valuation expert 1999 gift 2000 gift 2001 gift

Mr. Ingham 14.4% 16.3% 10%
Mr. Burns 11.2 13.4 5

In determining those discounts, both experts rely on samples

of closed-end investment funds with investment portfolios

comprising predominantly domestic equity securities; viz, shares

10
We understand from the expert testimony of Messrs.
Ingham and Burns that, unlike a shareholder of an open-end fund
(and similar to a holder of a limited partner interest in the
partnership), a shareholder of a closed-end fund cannot obtain
the liquidation value of his investment (i.e., his pro rata share
of the fund’s net asset value (NAV)) at will by tendering his
shares to the fund for repurchase.
 - 50 -

of common stock. Each expert relies on three samples, one for

the date of each gift (the valuation dates). Mr. Ingham’s sample

sizes are 28, 28, and 27, and Mr. Burns’s are 28, 27, and 25.

For the first two valuation dates, 20 of the closed-end

investment funds in each of the four sets of samples are the

same. For the third date, 18 are the same. Mr. Burns relies

solely on general equity funds, which contain a diversified

portfolio of stocks across industries. Mr. Ingham includes in

his samples seven specialized equity funds with investments in

the healthcare, petroleum and resources, and banking industries.

Mr. Ingham computes (and relies on) only the median discount for

each of his samples. Mr. Burns computes not only the median

discount for each of his samples but also the mean and

interquartile mean discounts for each.11 The following table

shows the results of each expert’s computations.

11
The following description of the terms “mean”, “median”,
and “interquartile mean” is drawn from Kaye & Freedman,
“Reference Guide on Statistics”, in Reference Manual on
Scientific Evidence, 83, 113–115 (Federal Judicial Center, 2d ed.
2000). “Mean” and “median” are common descriptive statistics
used to describe the central tendency (i.e., the middle or
“expected” value) of a set of numerical data. The mean
(commonly, “average”) is found by adding up all the numbers and
dividing by how many there are. By comparison, the median is
defined so that half the numbers are bigger than the median, and
half are smaller. The mean takes account of all the data – it
involves the total of all the numbers. Particularly with small
data sets, however, a few unusually large or small observations
may have too much influence on the mean. The median is resistant
to such outliers. See the definition of the term “outlier” infra
note 12. The interquartile mean is the mean of the 50 percent of
the data points falling between the 25th and 75th percentiles.
Like the median, it is resistant to outliers. Also, to remove
the influence of outliers on the mean, it may be recomputed
disregarding outliers.
 - 51 -

Table 11

Valuation expert’s
computation 1999 gift 2000 gift 2001 gift

Mr. Ingham: Median 13.1% 14.8% 9.1%
Mr. Burns: Mean 10.8 11.7 3.4
Mr. Burns: Median 12.1 14.8 3.8
Mr. Burns:
Interquartile
mean 11.2 13.4 5.0

Mr. Ingham considers adjustments to his median discount figures

to reflect what he describes as quantitative factors (i.e.,

aggregate size of the partnership’s NAV, relative volatility of

the partnership’s portfolio, measures of return and yield) but

determines that those factors had an insignificant influence. He

considers qualitative factors (i.e., the lack of diversification

of the partnership’s portfolio, the depth and quality of the

partnership’s management, the partnership’s income tax status),

and he determines that, “[b]ased on all relevant factors,

including the fact that * * * [the partnership’s] portfolio is

neither well diversified nor professionally managed on a daily

basis”, an investor or willing buyer of an LP unit would require

a discount 10 percent greater than the median discount he had

determined. Table 10 reflects his final determination that the

appropriate minority interest discounts are 110 percent of the

median discounts he determined. Mr. Burns relies on the

interquartile mean discount. Although he considers a downward

adjustment to reflect the large size of the limited partner

interest held by Janelle as trustee (and the influence that would
 - 52 -

give her over the general partners), he rejects any adjustment

“as a point of conservatism”.

We must determine (1) the composition of the appropriate

samples of closed-end investment funds (i.e., whether Mr. Ingham

appropriately includes specialized funds); (2) the appropriate

descriptive statistic to measure the central tendency of the

samples; and (3) whether Mr. Ingham’s adjustments to his sample

medians are justified.

c. Discussion

On cross-examination, Mr. Ingham agreed with counsel for

respondent that the seven specialized equity funds that he had

included in his samples of closed-end equity funds resembled the

partnership only in that they were specialized in their

investments. Indeed, that was his reason for including them,

although he agreed that he could find no correlation between

quantitative factors particular to the funds in his samples and

the discounts at which those funds traded. He further agreed

that he had included no explanation in his report as to why he

had included the specialized funds in his samples. We have

examined the data Mr. Ingham presented with respect to discounts

from NAV for the seven specialized funds for the first valuation

date (November 8, 1999) and have determined that the discounts

for that subset of his sample range from a minimum of 9.8 percent

to a maximum of 24.9 percent, with mean and median discounts of

17.1 and 17.8 percent, respectively, as compared to the range of

discounts for the full sample, 1 to 24.9 percent, with mean and
 - 53 -

median discounts of 12 and 13 percent, respectively. Both

experts agree that general equity funds are sufficiently

comparable to the partnership so that useful information as to an

appropriate minority discount can be drawn from a sample of those

funds. They disagree as to whether useful information can be

obtained by considering funds specializing in industries

different from Dell’s computer business. Mr. Burns believes that

it cannot. Given that disagreement and the significant

differences we found in comparing the range, mean, and median of

the subset and the sample, we are content to rely on the area of

the experts’ agreement; i.e., that a sample of general equity

funds is reliable for purposes of determining an appropriate

minority discount. We shall construct samples for each valuation

date from the intersection of the experts’ data sets for that

date (i.e., the 20 funds selected for both the first and second

valuation dates and the 18 funds selected for the third valuation

date).

Mr. Ingham dealt with his concern for outliers12 by relying

on the median of each sample. He is of the opinion that the

median does not put any weight on outliers as the mean would. In

response to the Court’s question as to whether he relied on the

median because outliers caused a significant difference between

the means and the medians in his samples, he answered that he did

12
Outlier: “An observation that is far removed from the
bulk of the data. Outliers may indicate faulty measurements and
they may exert undue influence on summary statistics, such as the
mean * * *.” Kaye & Freedman, supra at 168.
 - 54 -

not know since he had not computed the mean. Mr. Burns computed

the mean, the median, and the interquartile mean for each of his

samples. His approach to the problem of outliers appears to have

been more thoughtful than Mr. Ingham’s, and we shall follow his

lead and deal with the problem of outliers by relying on the

interquartile mean of each sample we construct.

We shall also follow Mr. Burns’s lead and make no

adjustments to the averages so obtained. Simply put, Mr. Ingham

has failed to convince us that lack of portfolio diversity and

professional management justify an increased adjustment on

account of lack of control of 10 percent (or, indeed, any

adjustment at all). In his report, Mr. Ingham concedes: “the

Partnership’s relatively simple investment portfolio negates

[lack of professional management]”. Nor can we see how lack of

diversity could exacerbate lack of control since the partnership

was, on the valuation dates, transparently, the vehicle for

holding shares of stock of a single, well-known corporation. Mr.

Ingham’s 10-percent adjustment, based on “all relevant factors”,

is without sufficient analytical support to convince us that any

adjustment should be made to the sample averages we obtain. See

Casey v. Commissioner, 38 T.C. 357, 381 (1962) (“An expert’s

opinion is entitled to substantial weight only if it is supported

by the facts.”).
 - 55 -

d. Conclusion

We determine minority interest discounts to be applied in

valuing the gifts as follows:

Table 12

1999 gift 2000 gift 2001 gift
11.32% 14.34% 4.63%

3. Marketability Discount

a. Introduction
The parties agree that, to reflect the lack of a ready

market for LP units (or, more pertinently, assignee interests in

the partnership), an additional discount (after applying the

minority interest discounts) should be applied to the

partnership’s NAV to determine the fair market values of the

gifts. Such a discount is commonly referred to as marketability

discount. The experts differ sharply on two points: (1) The

existence of a market for LP units, and (2) the weight that

should be given various qualitative factors.

b. Mr. Ingham’s Opinion
To determine an appropriate marketability discount, Mr.

Ingham looks at his and others’ studies of restricted stock

transactions, which compare the private-market price of

restricted shares of public companies (i.e., shares that, because

they have not been registered with the Securities and Exchange

Commission (SEC), generally cannot be sold in the public market
 - 56 -

for a 2-year period)13 with their coeval public market price.

Mr. Ingham combines data from the restricted stock approach with

his analysis of the “investment quality” of the LP units to

support a marketability discount of 35 percent.

c. Mr. Burns’s Opinion
Mr. Burns’s approach requires more explanation. He also

considers various studies of marketability discounts with respect

to restricted stock sales. He looks at studies of the mean

discount (in two cases, the median discount) on sales of

restricted stock during three periods: (1) before 1990; (2) from

1990 to 1997; and (3) during 1997 and 1998. In 1972, the SEC

adopted rule 144, 17 C.F.R. sec. 230.144 (1972), imposing a 2-

year holding period on the resale of restricted stock. In 1990,

the SEC adopted rule 144A, 17 C.F.R. sec. 230.144A (1990),

allowing institutional buyers to buy and sell restricted stock.

In 1997, the SEC amended rule 144, 17 C.F.R. sec. 230.144 (1997),

reducing the required holding period to 1 year. For the first

period (pre-1990), which Mr. Burns characterizes as “lack[ing] *

* * a resale market”, the average of the discounts for the

studies he considered is 34 percent. For the second period (1990

to 1997), the similar average is 22 percent, and, for the third

period (1997 and 1998), it is 13 percent. He concludes:

Based on the evolution of restricted stock discounts,
there appear to be at least two factors that influence
investors: 1) the limited access to a liquid market

13
See 17 C.F.R. sec. 230.144(d) (1972). The required
holding period was shortened to 1 year in 1997. See 62 Fed. Reg.
9242 (Feb. 28, 1997).
 - 57 -

and 2) the required holding period before the
restricted stock can be freely traded. These factors
suggest an explanation as to why average marketability
discounts have decreased since the implementation of
Rule 144A and the Amendment to Rule 144A [sic., Rule
144]. Rule 144A allowed for institutional trading of
restricted stocks. The difference between average
marketability discounts before and after Rule 144A
would appear to reflect the discount investors required
for having virtually no secondary market. In contrast,
the difference between average discounts found prior to
and after 1997 is a logical result of the reduction in
holding period from two years to one year.

Mr. Burns recognizes that the partnership is very different

from the operating companies that are the subject of the

restricted stock studies he examined. Nevertheless, he thinks

that the changes in restricted stock discounts over time

evidenced by those studies are instructive with respect to the

pricing decisions of investors holding securities that cannot

readily be resold. He starts with the premise that, before SEC

rule 144A, holders of restricted stock had virtually no access to

any secondary (resale) market and, therefore, demanded a discount

(34 percent being the average of the studies he examined) to

account for that lack of market access. The promulgation of SEC

rule 144A, he argues, opened a resale market (albeit a limited

one), and the average discount of the studies he examined for the

period from 1990 to 1997 is, at 22 percent, 12 percentage points

lower than the average discount he observed for the prior period,

before the promulgation of rule 144A. He concludes that the

difference is due to the availability of a resale market after

1990. Put another way, Mr. Burns believes that 12 percent is

indicative of the charge that the buyer imposed on the seller of
 - 58 -

restricted stock before 1990 to account for the buyer’s lack of

access to a ready resale market. Mr. Burns concludes that the

remaining 22 percentage points of the average pre-1990 discount

of 34 percent are attributable to holding period restrictions and

factors unrelated to marketability. He explains the effect of

holding period restrictions as follows: “Legally mandated

holding periods can be particularly onerous for investors when

the restricted shares are subject to extreme price volatility, as

is the case with many financially distressed companies.” He

concludes:

For investment holding companies such as the
Partnership –- those not hindered by legal holding
periods, nor subject to the operating and financial
risks of typical restricted shares -– the measure of
discount based on restricted stock research suggests a
lack of marketability adjustment closer to 12 percent.

That, he explains “is the incremental level of discounts that

investors demanded before 1990, when the trading market became

more liquid.”

Mr. Burns next turns his attention to the circumstances of

the partnership. He believes that there are factors particular

to the partnership that must be considered in determining an

appropriate marketability discount. Mr. Burns lists the

following factors: the failure to make distributions, a

nondiversified portfolio, the restrictions on transferring LP

units, the dissolution provisions of the partnership agreement,

and the liquidity of Dell shares. He considers the last two

factors as increasing marketability. He believes that the

provisions of the partnership agreement providing for the
 - 59 -

voluntary dissolution of the partnership (and distribution of its

assets on a pro rata basis to its partners) would benefit a

limited partner wishing to sell her interest. He believes that a

voluntary dissolution of the partnership would be of little

detriment to the remaining partners, who could reconstitute the

partnership less the withdrawing partner (who might agree to pay

the costs attendant to dissolution and reconstitution), and the

dissolution would significantly benefit the withdrawing partner,

who would save the large discount to her proportional share of

the partnership’s NAV attendant to any assignment of her

interest. He notes that, on each valuation date, the

partnership’s portfolio consisted of only highly liquid,

marketable securities; viz, Dell shares: “These assets have an

easily discernible value and can be sold quickly and easily.”14

Mr. Burns concludes that a reasonable negotiation between a buyer

and seller over the price of a limited partner interest in the

partnership would result in a price concession for lack of

marketability in the range of 10 to 15 percent. He starts with

the notion that traditional studies of unregistered shares of

public companies suggest a price concession of 12 percent due to

the lack of a ready market. Because of his belief that, unlike

restricted stock, a limited partner interest in the partnership

is not burdened by prescribed holding period limitations on

14
He adds: “The Partnership owns a substantial block of
Dell stock. However, these shares represented less than 0.28% of
Dell’s trading volume on the dates of valuation, which suggests
that the Partnership’s shares could be readily absorbed by the
market.”
 - 60 -

resale, nor does it carry the business or financial risk

associated with the typical issuer of private placement shares,

he adds little for those factors. He settles on a marketability

discount of 12.5 percent.

d. Discussion

(1) Introduction

The experts agree on the usefulness of restricted stock

studies in determining appropriate marketability discount for the

gifts. They further agree that (1) no secondary market exists

for LP units; (2) an LP unit cannot be marketed to the public or

sold on a public exchange; and (3) an LP unit can be sold only in

a private transaction. They disagree principally on the

likelihood of a private market among the partners for LP units.

(2) Mr. Ingham’s Opinion

Mr. Ingham’s approach is relatively straightforward. He

believes that “restricted shares [of publicly held companies]

sell at a price below their publicly traded (unrestricted)

counterparts because of the lack of access to a ready market due

to SEC Rule 144.” He has sampled private transactions in the

common stocks of actively traded companies. His sample shows

median and mean discounts of 24.8 and 27.4 percent, respectively,

“for equities with access to public stock market liquidity in

about two years.” He believes that “these private placement

transactions * * * are an appropriate starting point from which

to measure the diminution in valuing arising from lack of

marketability.” He adds: “The * * * [marketability] discounts
 - 61 -

demanded by potential investors in privately held business

interests with potentially very long holding periods should be

much larger [than for restricted shares with access to a ready

market in 2 years].” In particular, with respect to the

partnership, he concludes that (1) the willing buyer of a limited

partner interest “has no real prospects of being able to sell the

interest in the public market at the full, freely traded value at

any time,” and (2) “there is virtually no ready market for * * *

[interests in the partnership]”. He appears to dismiss

altogether the possibility of a private sale of LP units:

Further, there is no market for a limited
partnership unit in * * * [the partnership]. There
have never been any purchases or sales of * * *
[partnership] limited partnership units. Sales of
partnership units are restricted by the Agreement. A
buyer has no assurance, as well, of being admitted as a
substitute partner, as such admission requires the
consent of all the partners.

He concludes: “Considering all relevant factors, * * * [I]

believe that the discount for lack of marketability should be at

least 35%.” (Emphasis added.) He settles for a 35-percent

discount for lack of marketability in determining the value of an

LP unit.

Respondent observes about Mr. Ingham’s analysis: If Mr.

Ingham’s assumptions about the absence of a market for LP units

are accepted, “then the conclusion is unavoidable that the value

of limited partnership interests in the * * * [partnership] is

virtually zero, or that they cannot be valued at all.”

Respondent criticizes Mr. Ingham for being arbitrary in stopping

at 35 percent when his analysis would seem to lead to the
 - 62 -

conclusion that, since he believes that an LP unit cannot be

sold, the appropriate discount for lack of marketability should

be 100 percent. Respondent has a point. Mr. Ingham’s analysis

is predicated on the assumption that he can extrapolate the

marketability discount appropriate to an LP unit from the typical

discount found by him with respect to a sample of sales of

restricted stock barred from resale in a ready market for 2

years. The obstacle he must overcome is his belief that there is

not now, nor will there ever be, a ready market (indeed, any

market) for LP units. If we are to assume (as he would have us

do) that the size of the marketability discount is a function of

the length of time that a holder of an interest in a business is

barred access to a ready market, then Mr. Ingham has not

persuaded us that his stopping point, 35 percent, is anything but

a guess. He does not build from his observed sample median and

mean discounts of 24.8 and 27.4 percent, respectively, to his 35

percent conclusion by quantitative means. He considers the

“investment quality” of the LP units, concluding that the lack of

public information about the partnership is a detriment that is

mitigated “somewhat” by the transparency of the partnership

(since its only assets are shares of Dell stock). He takes into

account that there is no market for LP units, and an investor

wishing to acquire Dell shares could do so outside of the

partnership without encountering the various restrictions

attaching to a partnership interest. Without any further

analysis, he concludes, as stated supra: “Considering all
 - 63 -

relevant factors, * * * the discount for lack of marketability

should be at least 35 percent.”15 Given his assumptions that (1)

there is virtually no ready market for LP units, and (2) the size

of any marketability discount is a function of the length of time

that a holder of an interest in a business is barred access to a

ready market, it would seem that he could only draw the

conclusion that an LP interest is simply not salable, which is

not the conclusion that he draws. We do not reject per se Mr.

Ingham’s reliance on restricted stock studies. We simply lack

confidence in the result he reaches given the assumptions he

makes. We need not rely on the unsupported opinion of an expert

witness. See Casey v. Commissioner, 38 T.C. at 381.

(3) Mr. Burns’s Opinion

Mr. Burns looks at the marketability discount as comprising

principally two components: a market access (liquidity)

component and a holding period component. We assume that

petitioner’s expert, Mr. Ingham, accepts that division since, in

his rebuttal report, he states: “[Mr. Burns] concluded,

correctly, that private placement discounts have declined because

of relaxations for institutional trading and reductions in

15
A clue to his settling on 35 percent may be contained in
a reference in his direct testimony to a group of 13 restricted
stock studies, which he describes as having a range of observed
discounts from 13 to 45 percent and “an observed clustering of
discounts between 30% and 35%.” We have computed the group’s
mean and median discounts to be 29.36 and 31.9 percent,
respectively. The data set is skewed to the left (with more
extreme measurements among the lower percentages), which
indicates that the median is the preferred measure of central
tendency. Mr. Ingham does not explain what further significance
he attaches to his clustering observation.
 - 64 -

required holding periods under Rule 144.” (Emphasis added.) Mr.

Burns pegs at 12 percent the difference in private placement

discounts between a period in which holders of restricted stock

had no access to a ready market and could only dispose of their

restricted stock in private transactions and a period in which

certain holders of restricted stock were allowed limited access

to a ready market.16 He concludes: “[That] difference * * *

would appear to reflect the discount investors required for

having virtually no secondary market.” That difference suggests

to Mr. Burns the market access component of the marketability

discount appropriate to an LP unit; i.e., the price concession

that a buyer of an LP unit would demand to reflect that the unit

could only be liquidated in a private transaction.

Mr. Burns recognizes that factors particular to the

partnership (such as the restrictions on transferring LP units)

might elicit an additional discount, and, on the basis of those

factors and the discounts suggested by his empirical research

studies, he settles on a marketability discount of 12.5 percent.

He makes little, if any, adjustment on account of holding period

restrictions. He notes that the partners can agree to dissolve

the partnership; and, although he did not determine the

likelihood of a dissolution, he testified that, so long as the

16
In his rebuttal testimony, Mr. Ingham criticizes Mr.
Burns for referring in a portion of his testimony to a reduction
in “average marketability discounts” rather than a reduction in
private placement discounts. It is clear to us that Mr. Burns is
referring to the average of his summary of marketability discount
studies based on restricted stock sales. We see no ambiguity or
error.
 - 65 -

partnership continued to hold only shares of Dell stock (which he

characterizes as having “an easily discernible value”), “[he

could not] envision an economic reason why * * * [the

partnership] would not be willing to let somebody be bought out,

because * * * [the remaining partners would] be holding the same

proportion of assets, the same type of assets, after * * * [the

buyout].” Indeed, given the significant minority interest and

marketability discounts from an LP unit’s proportional share of

the partnership’s NAV that each expert would apply in valuing the

gifts, it would appear to be in the economic interest of both any

limited partner not under the economic necessity to do so but

wishing to make an impermissible assignment of LP units and the

remaining partners to strike a deal at some price between the

discounted value of the units and the dollar value of the units’

proportional share of the partnership’s NAV. The wishing-to-

assign partner would get more than she would get in the

admittedly “thin” market for private transactions, and the dollar

value of each remaining partner’s share of the partnership’s NAV

would increase.17 So long as the partnership’s assets remain

17
Thus, for instance, assume that a hypothetical limited
partnership organized under an agreement identical to the
partnership’s has one general and four limited partners, all
sharing equally in profits and losses, an NAV of $100, and,
because of minority interest and marketability discounts, no
impermissible assignment of a limited partner interest could be
made for a price greater than 60 percent of the interest’s share
of NAV. If a limited partner with bargaining power and wishing
to dispose of her 20-percent interest and the limited partnership
were to settle on a redemption price of $14 for her interest, she
would receive $2 more than she could receive on an impermissible
assignment, the limited partnership’s remaining NAV would be $86,
(continued...)
 - 66 -

highly liquid (as they were on each of the valuation dates), the

remaining partners would appear to bear little or no economic

risk in agreeing to a redemption or similar transaction to

accommodate a wishing-to-assign partner.

A transaction of the type described would (if petitioners’

proposed discounts are to be credited) increase the wealth of the

family members post hoc. While such a transaction is perhaps

inconsistent with the stated purpose of the partnership to

“preserve Family assets”, the provision in the partnership

agreement allowing for the consensual dissolution of the

partnership convinces us that preservation of family assets is

not an unyielding purpose. We think that Mr. Burns was correct

to take into account the prospect of such a dissolution of the

partnership as a significant factor in the private market for LP

units, and we think that the economic self-interest of the

partnership (more precisely, any remaining partners) must be

considered in determining any marketability discount. We agree

with Mr. Burns that the holding period component of the

marketability discount is of little, if any, influence here.18

17
(...continued)
and each of the four remaining partners’ share of that NAV would
increase by $1.50, from $20 to $21.50. Of course, we cannot say
where between $12 and $20 the redemption price would settle, but,
putting transaction costs aside, it would be in the economic
interest of both the withdrawing partner and the remaining
partners to have it settle somewhere in between.
18
We are mindful of one of respondent’s expert’s,
Professor Kleinberger’s, testimony that “nobody at arm’s length
would get into this deal” (meaning the partnership), and the
implication to be drawn from that testimony that it would be hard
to market an interest in the partnership. Professor Kleinberger,
(continued...)
 - 67 -

(4) Conclusion

Mr. Burns has persuaded us that a hypothetical purchaser of

an LP unit would demand and get a price concession to reflect the

market access component of the marketability discount but would

get little if any price concession to reflect the holding period

component of that discount. On the record before us, and

considering the expert testimony presented, we cannot determine

any better estimate of an appropriate marketability discount than

Mr. Burns’s estimate, 12.5 percent, and we find accordingly.

(5) Paragraph 9.3

Since we have determined to disregard paragraph 9.3 in

determining the values of the gifts, we need not address the

parties’ differences with respect to its effects on those

values.19

18
(...continued)
however, was not called as an expert on valuation; he did not
offer any opinion as to the value of an existing LP unit, and,
although we are unpersuaded by one of petitioners’ expert’s, Mr.
Ingham’s, opinion as to an appropriate marketability discount, he
stopped at 35 percent.
19
We note in passing that when asked to determine the fair
market values of the gifts disregarding the impact of paragraph
9.3, the parties’ experts took different approaches. Mr. Burns
simply disregarded the additional discount on account of
paragraph 9.3 that he had applied sequentially after applying the
minority interest and marketability discounts that he thought
appropriate. See infra appendixes A–D. Mr. Ingham added an
amount to what he had determined to be the freely traded value of
an LP unit (i.e., the unit’s proportional share of the
partnership’s NAV) minus his calculation of the appropriate
minority interest discount. See infra appendixes A–D, final
portion: “Mr. Ingham’s computation –- effect of par. 9.3”. We
fail to see the logic of Mr. Ingham’s approach, since he did not
take into account paragraph 9.3 in determining the freely traded
value of an LP unit. He is adding back an amount to show his
disregard of a provision (par. 9.3) that he had not taken into
(continued...)
 - 68 -

V. Conclusion

On the premises stated, we calculate the fair market values

of the gifts as follows:

Table 13

Date of gift

11/8/1999 11/8/1999 1/4/2000 2/2/2001
f/b/o I. in trust in trust in trust

Net asset value $2,812,763 $2,812,763 $4,798,033 $2,902,488
Gift interest 14.265% 70.054% 3.285% 5.431%
Pro rata portion
of net asset
value 401,241 1,970,453 157,615 157,634
Discount for lack
of control
(11.32, 11.32,
14.34, and
4.63%
respectively) (45,420) (223,055) (22,602) (7,298)
355,820 1,747,398 135,013 150,336
Discount for lack
of marketability
(12.5%) (44,478) (218,425) (16,877) (18,792)
Fair market value 311,343 1,528,973 118,137 131,544

We find accordingly, except that, on the basis of

respondent’s position on brief that the amount of the 2001 gift

is $131,033, we find that the total amount of that gift is that

amount.

Decision will be entered

under Rule 155.

19
(...continued)
account. If, for instance, the minority interest discount is set
to zero, Mr. Ingham’s approach would increase the freely traded
value of an LP unit to an amount greater than its proportional
share of the partnership’s NAV, a result that we do not think he
would support.
 - 69 -
APPENDIX A

Comparison of Valuation Experts’ Computations
Gift of 1,426.5334 Limited Partnership Units f/b/o I.-Nov. 8, 1999

Units outstanding 10,000
Units transferred 1,426.5334
Percentage of outstanding units transferred 14.265%
Petitioners’ expert Respondent’s expert
Mr. Ingham Mr. Burns
Net asset value (NAV): Total Per unit Total Per unit
100% $2,812,763 281.28 2,812,763 281.28
NAV proportional
to gift $401,241 281.28 401,241 281.28
Computations of fair market value (FMV)--restrictions contained in
paragraph 9.3 of partnership agreement (par. 9.3) taken into account
Minority discount:
Mr. Ingham--14.4% (57,779) (40.50) -- --
Mr. Burns--11.2% -- -- (44,939) (31.50)
Freely traded value 343,462 240.77 356,302 249.77
Marketability discount:
Mr. Ingham--35% (120,212) (84.27) -- --
Mr. Burns--12.5% -- -- (44,538) (31.22)
Subtotal $223,250 156.50 311,764 218.55
Par. 9.3 discount:
Mr. Ingham--not
separately stated -- -- -- --
Mr. Burns--16.1% -- -- (50,506) (35.41)
FMV--par. 9.3 taken
into account: $223,250 156.50 261,258 183.15
Total discounts $177,990 124.77 139,982 98.13
Total discounts as
percentage of NAV 44.4% 44.4% 34.9% 34.9%

Computations of FMV--par. 9.3 disregarded

FMV above--par. 9.3
taken into account: $223,250 156.50 261,258 183.15
Mr. Ingham--add premium 5,581 3.91 -- --
Mr. Burns--add back
16.1% discount -- -- 50,506 35.41
FMV--par. 9.3 disregarded: $228,832 160.41 311,764 218.55
Total discounts $172,409 120.86 89,477 62.72
Total discounts as
percentage of NAV 43.0% 43.0% 22.3% 22.3%
Mr. Ingham’s computation--effect of par. 9.3
Total Per unit

Freely traded value $343,462 240.77
Add 2.5% premium 8,587 6.02
Adjusted freely
traded value 352,049 246.79
Subtract 35%
marketability discount 123,217 86.38
FMV–-par. 9.3 disregarded 228,832 160.41
FMV–-par. 9.3 taken
into account 223,250 156.50
Net increase in FMV–-
par. 9.3 disregarded 5,581 3.91
 - 70 -
APPENDIX B
Comparison of Valuation Experts’ Computations
Gift of 7,005.367 Limited Partnership Units f/b/o the children-Nov. 8, 1999

Units outstanding 10,000
Units transferred 7,005.367
Percentage of outstanding units transferred 70.054%
Petitioners’ expert Respondent’s expert
Mr. Ingham Mr. Burns
Net asset value (NAV): Total Per unit Total Per unit
100% $2,812,763 281.28 2,812,763 281.28
NAV proportional
to gift $1,970,453 281.28 1,970,453 281.28
Computations of fair market value (FMV)--restrictions contained in
paragraph 9.3 of partnership agreement (par. 9.3) taken into account
Minority discount:
Mr. Ingham--14.4% (283,745) (40.50) -- --
Mr. Burns--11.2% -- -- (220,691) (31.50)
Freely traded value 1,686,708 240.77 1,749,762 249.77
Marketability discount:
Mr. Ingham--35% (590,348) (84.27) -- --
Mr. Burns--12.5% -- -- (218,720) (31.22)
Subtotal $1,096,360 156.50 1,531,042 218.55
Par. 9.3 discount:
Mr. Ingham--not
separately stated -- -- -- --
Mr. Burns--16.1% -- -- (248,029) (35.41)
FMV–-par. 9.3 taken
into account: $1,096,360 156.50 1,283,013 183.15
Total discounts $874,093 124.77 687,440 98.13
Total discounts as
percentage of NAV 44.4% 44.4% 34.9% 34.9%

Computations of FMV--par. 9.3 disregarded

FMV above--par. 9.3
taken into account: $1,096,360 156.50 1,283,013 183.15
Mr. Ingham--add premium 27,409 3.91 -- --
Mr. Burns--add back
16.1% discount -- -- 248,029 35.41
FMV--par. 9.3 disregarded: $1,123,769 160.41 1,531,042 218.55
Total discounts $846,684 120.86 439,411 62.72
Total discounts as
percentage of NAV 43.0% 43.0% 22.3% 22.3%
Mr. Ingham’s computation--effect of par. 9.3
Total Per unit

Freely traded value $1,686,708 240.77
Add 2.5% premium 42,168 6.02
Adjusted freely traded
value 1,728,875 246.79
Subtract 35%
marketability
discount 605,106 86.38
FMV--par. 9.3
disregarded 1,123,769 160.41
FMV--par. 9.3 taken
into account 1,096,360 156.50
Net increase in FMV--
par. 9.3 disregarded 27,409 3.91
 - 71 -
APPENDIX C
Comparison of Valuation Experts’ Computations
Gift of 469.704 Limited Partnership Units f/b/o the children-Jan. 4, 2000
Units outstanding 14,296.71
Units transferred 469.704
Percentage of outstanding units transferred 3.285%
Petitioners’ expert Respondent’s expert
Mr. Ingham Mr. Burns

Net asset value (NAV): Total Per unit Total Per unit
100% $4,672,758 326.84 4,798,033 335.60
NAV proportional
to gift $153,500 326.84 157,615 335.60
Computations of fair market value (FMV)--restrictions contained in
paragraph 9.3 of partnership agreement (par. 9.3) taken into account
Minority discount:
Mr. Ingham--16.3% (25,021) (53.28) -- --
Mr. Burns--13.4% -- -- (21,120) (44.97)
Freely traded value 128,480 273.57 136,495 290.63
Marketability discount:
Mr. Ingham--35% (44,968) (95.75) -- --
Mr. Burns--12.5% -- -- (17,062) (36.33)
Subtotal $83,512 177.82 119,433 254.30
Par. 9.3 discount:
Mr. Ingham--not
separately stated -- -- -- --
Mr. Burns--16.1% -- -- (19,229) (40.94)
FMV--para. 9.3 taken
into account: $83,512 177.82 100,204 213.36
Total discounts $69,988 149.02 57,411 122.24
Total discounts as
percentage of NAV 45.6% 45.6% 36.4% 36.4%

Computations of FMV--par. 9.3 disregarded

FMV above--par. 9.3
taken into account: $83,512 177.82 100,204 213.36
Mr. Ingham--add premium 2,088 4.45 -- --
Mr. Burns--add back
16.1% discount -- -- 19,229 40.94
FMV--par. 9.3 disregarded: $85,600 182.26 119,433 254.30
Total discounts $67,901 144.58 38,182 81.30
Total discounts as
percentage of NAV 44.2% 44.2% 24.2% 24.2%
Mr. Ingham’s computation--effect of par. 9.3
Total Per unit
Freely traded value $128,480 273.57
Add 2.5% premium 3,212 6.84
Adjusted freely traded
value 131,692 280.41
Subtract 35%
marketability discount 46,092 98.14
FMV--par. 9.3 disregarded 85,600 182.26
FMV--par. 9.3 taken
into account 83,512 177.82
Net increase in FMV--
par. 9.3 disregarded 2,088 4.45
 - 72 -
APPENDIX D
Comparison of Valuation Experts’ Computations
Gift of 860.7708 Limited Partnership Units f/b/o the Children-Feb. 2, 2001
Units outstanding 15,849.07
Units transferred 860.7708
Percentage of outstanding units transferred 5.431%
Petitioners’ expert Respondent’s expert
Mr. Ingham Mr. Burns

Net asset value (NAV): Total Per unit Total Per unit
100% $2,798,331 176.56 2,902,488 183.13
NAV proportional
to gift $151,977 176.56 157,634 183.13
Computations of fair market value (FMV)--restrictions contained in
paragraph 9.3 of partnership agreement (par. 9.3) taken into account
Minority discount:
Mr. Ingham--10.0% (15,198) (17.66) -- --
Mr. Burns--5.0% -- -- (7,882) (9.16)
Freely traded value 136,779 158.91 149,752 173.98
Marketability discount:
Mr. Ingham--35% (47,873) (55.62) -- --
Mr. Burns--12.5% -- -- (18,719) (21.75)
Subtotal $88,906 103.29 131,033 152.23
Par. 9.3 discount:
Mr. Ingham--not
separately stated -- -- -- --
Mr. Burns--17.7% -- -- (23,193) (26.94)
FMV--par. 9.3 taken
into account: $88,906 103.29 107,840 125.28
Total discounts $63,070 73.27 49,793 57.85
Total discounts as
percentage of NAV 41.5% 41.5% 31.6% 31.6%

Computations of FMV--par. 9.3 disregarded

FMV above--par. 9.3
taken into account: $88,906 103.29 107,840 125.28
Mr. Ingham--add premium 2,223 2.58 -- --
Mr. Burns--add back
16.1% discount -- -- 23,193 26.94
FMV--par. 9.3 disregarded: $91,129 105.87 131,033 152.23
Total discounts $60,848 70.69 26,601 30.90
Total discounts as
percentage of NAV 40.0% 40.0% 16.9% 16.9%
Mr. Ingham’s computation--effect of par. 9.3
Total Per unit
Freely traded value $136,779 158.91
Add 2.5% premium 3,419 3.97
Adjusted freely traded
value 140,199 162.88
Subtract 35%
marketability discount 49,070 57.01
FMV--par. 9.3 disregarded 91,129 105.87
FMV--par. 9.3 taken
into account 88,906 103.29
Net increase in FMV--
par. 9.3 disregarded 2,223 2.58