Bradley J. Bergquist and Angela Kendrick v. Commissioner

131 T.C. No. 2

UNITED STATES TAX COURT

BRADLEY J. BERGQUIST AND ANGELA KENDRICK, ET AL.,1 Petitioners
v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket Nos. 17530-06, 17535-06, Filed July 22, 2008.
17537-06, 17541-06,
17545-06, 17549-06.

As part of a consolidation of various separate
medical professional service corporations into a
single consolidated medical practice group controlled
and managed by the Oregon Health & Science
University, medical doctors donated their stock in
their medical professional service corporation to a
charity and for Federal income tax purposes claimed
charitable donations relating thereto of $401.79 per
share.

1

Cases of the following petitioners are consolidated
herewith: Robert E. and Patricia F. Shangraw, docket No.
17535-06; Stephen T. and Leslie Robinson, docket No. 17537-06;
William W. Manlove, III, and Lynn A. Fenton, docket No. 17541-
06; John L. and Catherine J. Gunn, docket No. 17545-06; and
Harry G.G. and Sonia L. Kingston, docket No. 17549-06.
 - 2 -

Held: On the date of donation the donated stock had
a fair market value of approximately $37 per share.

Held, further, on the facts of this case and in
spite of advice from attorneys, accountants, and
other advisers, the doctors are liable for the
applicable 40- or 20-percent accuracy-related
penalties.

Philip N. Jones and Peter J. Duffy, for petitioners.

Shirley M. Francis, for respondent.

SWIFT, Judge: Respondent determined deficiencies in

petitioners’ Federal income taxes and accuracy-related

penalties as follows:
Penalty
Petitioner Year Deficiency Sec. 6662
Kendrick 2001 $26,668 $10,667
2002 25,208 10,083
2003 6,662 2,640

Shangraw 2001 31,464 12,586
2002 23,400 9,360

Robinson 2001 25,703 10,281
2002 27,535 11,014
2003 6,289 2,516

Fenton 2001 19,603 7,841
2002 21,061 8,424
2003 14,174 5,670

Kingston 2001 61,024 24,410
2002 5,910 2,364

Gunn 2001 19,043 7,617
2002 4,710 942
2003 9,269 3,708
 - 3 -
The primary issue for decision in these consolidated cases

is the fair market value of stock in a medical professional

service corporation that was donated to a charitable

professional service corporation.

These cases were consolidated for purposes of trial,

briefing, and opinion. On the stock valuation issue, the

parties in 20 related but nonconsolidated cases also pending

before the Court have stipulated to be bound by the final

decisions rendered herein. The parties in the 20 related

nonconsolidated cases have stipulated to be bound by the final

decisions herein on the penalties only if our holding on the

penalties is the same for all consolidated petitioners.

Unless otherwise indicated, all section references are to

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

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

Procedure.

FINDINGS OF FACT

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

At the time the petitions were filed, petitioners resided

in Oregon.

Petitioners Angela Kendrick, Robert Shangraw, Stephen

Robinson, Lynn Fenton, and Harry Kingston are medical doctors,

each with a specialty in anesthesiology and each licensed to

practice medicine in Oregon. Petitioner John Gunn (Gunn) is a
 - 4 -
certified public accountant. Hereinafter, all references to

petitioners and/or to any of the above surnames are to the

specific petitioners named in this paragraph, not to their

respective spouses with whom they filed joint Federal income

tax returns for the years in issue. Also, generally references

to petitioners are to the petitioners who are medical doctors,

not to Gunn.

From 1994 to 2001 petitioners practiced medicine as

employees of and as stockholders in University

Anesthesiologists, P.C. (UA), a medical professional service

corporation specializing in anesthesiology.2 From 1994 to 2001

Gunn was the chief executive officer of and a stockholder in

UA.

Through UA, petitioners provided medical services to

patients of the Oregon Health & Science University Hospital

(OHSU), a public teaching and research hospital in Portland,

Oregon. UA was the exclusive provider of anesthesiology

medical services to all OHSU hospitals and clinics.

Petitioners also took on significant teaching duties as members

of OHSU’s teaching faculty in the OHSU medical school’s

Department of Anesthesiology.

Petitioners were employed by UA on month-to-month

contracts. UA employment contracts with petitioners did not

2
Fenton did not affiliate with UA until 1997.
 - 5 -
include noncompete or nonsolicitation clauses and provided for

immediate termination if an anesthesiologist was terminated

from his or her OHSU medical school faculty position.

Before the donation of the stock that is in issue in these

cases, petitioners and Gunn each held 100 shares of UA’s voting

common stock which they purchased in 1994 at $1 per share.

In addition to UA, approximately 30 other medical practice

specialty groups (e.g., OBGYNs, cardiologists, radiologists,

and orthopedic surgeons) were affiliated with OHSU through

separate medical professional service corporations in a manner

similar to that of UA in which the medical doctors provided

specialty medical services to OHSU hospitals and clinics and

also took on teaching duties as members of the OHSU medical

school teaching faculty.

Consistent with the typical management of medical

professional service corporations, at the end of each year UA

generally paid bonuses, salaries, and prepaid expenses that

offset reported income. UA never declared or paid cash

dividends to its stockholders. UA’s only significant booked

asset was its accounts receivable.

In the late 1990s and after careful consideration and

discussion, because of perceived risks and management concerns

associated with the many separate medical practice specialty

groups that were providing (through their respective
 - 6 -
professional service corporations) medical services to OHSU

hospitals and clinics, OHSU’s executive management concluded

that the consolidation into a single medical practice group,

controlled and managed by a single professional service

corporation which in turn would be under OHSU’s direct

management and administration, would be required of all the

different medical practice specialty groups that wished to

continue to be affiliated with OHSU (hereinafter sometimes

referred to simply as the consolidation).

Under the consolidation, medical doctors practicing at

OHSU hospitals and clinics, including petitioners, were to

leave their separate medical practice specialty groups and

their medical professional service corporations and were to

become employees of a newly formed single consolidated medical

practice group operating and providing medical services through

a newly formed tax-exempt professional services corporation.

In the late 1990s the OHSU Business Operations Steering

Committee, of which Gunn was a member, was formed to assist in

the planning and implementation of the consolidation.

In 1998 OHSU management formed the OHSU Medical Group

(OHSUMG) as a section 501(c)(3) tax-exempt professional service

corporation to serve as the single consolidated medical group

into which all of the then-extant 30 different medical practice
 - 7 -
specialty groups whose doctors were affiliated with OHSU would

be consolidated.

An initial target date for consolidation into OHSUMG of

the medical practice specialty groups was set for January 1,

2001, but for reasons not clear in the record the target date

was rescheduled for July 1, 2001.

Initially it was intended that OHSUMG would offer to all

of the medical doctors to be employed by OHSUMG a governmental

pension plan, exempt from ERISA requirements, with flexibility

and various contribution and retirement options for the medical

doctors. In an effort to provide such a plan, OHSUMG

management requested a private letter ruling from respondent

under which OHSUMG would be treated as a governmental

instrumentality and the OHSUMG proposed pension plan would be

treated as an ERISA-exempt governmental plan within the meaning

of section 414(d).

OHSUMG management and attorneys were optimistic that

respondent would issue a favorable private letter ruling with

regard to the pension plan. As a contingency, however, in case

OHSUMG did not receive from respondent a favorable tax ruling,

OHSUMG management began developing an ERISA-compliant,

nongovernmental pension plan. Robinson, as a member of

OHSUMG’s pension committee, presented to the committee several

viable ERISA-compliant plans and took part in strategizing how
 - 8 -
to “sell” an ERISA-compliant plan to the doctors. Although

some doctors preferred a governmental plan, in general

petitioners and the other UA anesthesiologists appeared not to

have a preference and were concerned only that OHSUMG have some

form of a pension plan in place by the date of the

consolidation.

In early 1999 Gunn attended a conference sponsored by the

Medical Group Management Association. During a roundtable

discussion at the conference, Gunn learned that for Federal

income tax purposes some doctors throughout the country

apparently were claiming substantial charitable contribution

deductions relating to donations to academic-affiliated

institutions of stock in their medical professional service

corporations.

Upon returning from the conference and in view of the

planned consolidation, Gunn discussed with UA’s attorney, UA’s

accountant, and OHSUMG’s C.E.O. the possible tax benefits and

other ramifications if, as a step associated with the

consolidation, petitioners and the other UA anesthesiologists

were to donate their UA stock to OHSUMG and to claim charitable

contribution deductions with regard thereto.

On June 7, 1999, UA held a stockholders meeting at which

the potential tax benefits of donating UA stock to OHSUMG were
 - 9 -
described as offering a “huge [tax] windfall” of “150K” to each

UA stockholder.

On February 27, 2001, the chairman of the OHSU Department

of Anesthesiology and the president of UA sent an e-mail

message to the UA stockholders which stated:

As the time to convert to OHSUMG comes closer, we
need to meet and thoroughly discuss implications of
our donation of * * * [UA stock] to OHSUMG. As you
are aware, we believe that there are some significant
tax advantages to doing this.

I would like to call a shareholders’ meeting for
Tuesday, March 6 at 4:30 pm. The object will be to
talk about the transition and the legal and tax
implications of this. At a later stage, should this
be necessary, I would be pleased to invite * * *
[UA’s attorney] and * * * [UA’s accountant] to be
present to answer any questions you may have.
[Emphasis deleted.]

In or around April 2001 an attorney for UA informed each

UA stockholder of the steps to be taken to make the donation to

OHSUMG of his or her UA stock and to claim a charitable

contribution deduction with regard thereto.

Under the plan outlined by the UA attorney, a new class of

nonvoting UA stock would be issued through the distribution of

a UA stock dividend. The attorney believed that this step was

necessary to comply with Oregon law under which a majority of

voting stock in a medical professional service corporation was

required to be held by licensed Oregon doctors. See Or. Rev.

Stat. sec. 58.375(1)(a) (2001).
 - 10 -
The attorney’s plan then called for UA stockholders to

donate their UA stock to OHSUMG in two stages. Before the

consolidation they would donate to OHSUMG their newly created

UA nonvoting stock and claim substantial charitable

contribution deductions relating thereto. After the

consolidation they would donate to OHSUMG their UA voting stock

and possibly claim additional charitable contribution

deductions relating thereto.

The UA attorney believed his plan would maximize the

amounts of charitable contribution deductions UA stockholders

could claim by allowing UA stockholders to donate most of their

UA stock while at the same time retaining control of UA to

avoid violating Oregon law.

Once the consolidation was completed, UA would have no

doctors and no patients, and UA would not operate and would

continue in existence for a period of time simply to collect

accounts receivable outstanding as of the date of the

consolidation. It was expected that after the consolidation

UA’s winding-down expenses would reduce UA’s taxable income to

zero.

On May 9, 2001, an OHSUMG attorney was contacted by

respondent’s representative and was informed that respondent

would not treat OHSUMG as a governmental instrumentality and

that the proposed OHSUMG pension plan would not be exempt from
 - 11 -
ERISA. To have more time to attempt to reverse respondent’s

position, OHSUMG management postponed the planned consolidation

until January 1, 2002.

On May 23, 2001, pursuant to the UA attorney’s plan of

donation, UA declared a stock dividend and issued to each of

the 28 UA stockholders 4 shares of nonvoting stock for each

share of UA voting stock held, so that after the stock dividend

each UA stockholder held 100 shares of voting stock and 400

shares of nonvoting stock.

On June 6, 2001, UA retained Houlihan Valuation Advisors

(Houlihan) to value the UA stock to be donated. In a letter to

Houlihan, the UA attorney described the planned consolidation

and wrote that OHSUMG would “be the employer of all of the

physicians, including the [UA] anesthesiologists, after the

reorganization is completed.”

In June 2001 Gunn retired as UA’s C.E.O. and was hired by

UA as a business consultant. Gunn was not replaced as UA’s

C.E.O., but on July 1, 2001, UA hired Lynda Johnson as chief

administrative officer (C.A.O.) largely to plan for the

consolidation.

On approximately September 8, 2001, upon OHSUMG’s request,

UA staff began preparing pro forma cashflow projections.

OHSUMG requested that the cashflow projections be prepared

under the assumption that at the end of 2001 all UA
 - 12 -
anesthesiologists would move to OHSUMG and that UA would no

longer operate.

On September 10, 2001, the UA accountant, the UA attorney,

and Robinson met to discuss the planned consolidation and the

planned donation of UA stock to OHSUMG. The final decision

made at the meeting was that the planned donation by the UA

stockholder of their UA stock would go forward on September 14,

2001.

On September 14, 2001, 24 of the 28 UA stockholders each

donated to OHSUMG 40 shares of their UA voting stock and all

400 shares of their UA nonvoting stock. On that same day each

of the remaining four UA stockholders, including Gunn, donated

to OHSUMG all 100 shares of their UA voting stock and all 400

shares of their UA nonvoting stock. At the time of the above

donation, each of the UA stockholders had a basis of 20 cents

per share in his or her UA stock.

OHSUMG’s executive management accepted the donation of UA

stock as a professional courtesy to the UA stockholders. At

the time of donation, OHSUMG’s management did not expect to

derive any economic benefit from the donated UA stock. OHSUMG

management did not expect to receive and in fact did not

receive from UA any dividends or distributions.

On October 5, 2001, Houlihan appraised the donated UA

voting and nonvoting stock as of August 31, 2001, at $401.79
 - 13 -
per share, or a total donation of $200,895 for Gunn and a total

donation of $176,787 for each of the other petitioners.

On October 23, 2001 because respondent had not yet issued

the requested private letter ruling, the OHSUMG board agreed to

implement an ERISA-compliant plan under section 403(b) to

become effective on January 1, 2002.

In October 2001, the medical practice groups for the

OHSUMG Departments of Ophthalmology, Orthopedics, Integrated

Primary Care Organization, and Pediatric Surgery consolidated

into OHSUMG, and the doctors from those practice groups became

employees of OHSUMG.3

On November 11, 2001, Kingston, Robinson, and Gunn met

with UA’s attorney and accountant to discuss whether the UA

anesthesiologists should donate to OHSUMG their remaining UA

stock. At the meeting it was decided that the planned second

donation of UA stock would not be beneficial because there

likely would not be enough value in the UA shares to justify

the expenses involved with claiming a charitable contribution

deduction--namely, a second appraisal fee. Accordingly, the

planned second donation of the remaining UA voting stock never

occurred.

3

The record does not indicate why certain medical groups
joined OHSUMG before the scheduled consolidation date of Jan.
1, 2002.
 - 14 -
On January 1, 2002, the remaining medical speciality

practice groups affiliated with OHSU and their doctors,

including UA’s anesthesiologists, consolidated into OHSUMG, and

the doctors became employees of OHSUMG. After the

consolidation, UA no longer operated as a provider of

anesthesiology services but continued in existence only to

collect its accounts receivable.4 After the consolidation,

any proceeds UA received as a result of collecting accounts

receivable were, after payment of expenses, distributed to the

UA anesthesiologists in the form of bonus and severance pay.

Of the many doctors from the different specialty practice

groups that consolidated into OHSUMG, the UA anesthesiologists

were the only ones who donated to OHSUMG stock or any other

interest in their preconsolidation professional service

corporation.

By letter dated January 8, 2002, OHSUMG’s president

notified Kingston that on its books OHSUMG would enter a value

of zero for donated UA stock that it received, and he

explained:

Based on advice from our legal and accounting
advisors, we are placing the total value of all of
the donated shares at $0 on our books. This net
valuation is in recognition of the consensus pro-forma
cash flow projections developed by * * * [UA] for CY2002
and reviewed by OHSUMG staff. These financials indicate

4

It is not clear from the record whether or when UA was in
fact liquidated.
 - 15 -
that, as the affairs of UA are wound up over the next
year, total projected cash disbursements will approximate
total projected cash receipts, thus leaving no
unencumbered residual value for the benefit of OHSUMG.

In preparation for a UA January 29, 2002, stockholders

meeting, the January 8, 2002, letter from the OHSUMG president

was distributed to the UA stockholders, along with a copy of

the Houlihan appraisal. Before the meeting each UA stockholder

was given by UA a Form 8283, Noncash Charitable Contributions,

that reflected Houlihan’s appraised fair market value of the

donated UA stock. In advance of the meeting each UA

stockholder was advised by UA’s attorney and accountant not to

bring to the meeting his or her own tax adviser.

At the January 29, 2002, UA stockholders meeting the UA

stockholders discussed how they should report and claim on

their 2001 Federal income tax returns charitable contribution

deductions with respect to the donation of their UA stock. At

the meeting, in response to concerns from several UA

stockholders who suggested that they were considering claiming

tax deductions lower than the amounts reported on the Forms

8283 they had been given, UA’s attorney and accountant advised

the UA stockholders not to attract respondent’s attention by

deviating from the amounts reported on the Forms 8283 and not

to discuss the donations with respondent if contacted.

At the January 29, 2002, stockholders meeting UA’s

attorney and accountant further advised the UA stockholders not
 - 16 -
to show to their own tax advisers the minutes from the UA

stockholders meetings or the January 8, 2002, letter from

OHSUMG’s president. The trial evidence suggests that

petitioners complied with this advice and further that

petitioners apparently, with respect to the donations, did not

consult with any attorney or accountant who was truly

independent and not involved with the planned donation of UA

stock.

On their respective 2001 Federal income tax returns, using

the Houlihan appraised per-share value therefor of $401.79 for

both the voting and the nonvoting shares, 26 of the 28 UA

stockholders claimed charitable contribution deductions with

respect to the donation of their UA stock. The remaining two

UA stockholders claimed no charitable contribution deduction

with respect to the donation of UA stock.

Before taking into account charitable contribution

limitations, petitioners generally claimed charitable

contribution deductions of $176,788 on their 2001 Federal

income tax returns with respect to their UA stock donations.

Gunn claimed a charitable contribution deduction of $200,895 on

his 2001 joint Federal income tax return relating to his UA

stock donation. Because of the charitable contribution

limitation, a number of petitioners carried over the claimed

contribution deductions to subsequent years.
 - 17 -
On audit of the returns of each of petitioners and the

other UA stockholders, respondent, determining that on

September 14, 2001, the UA stock had no value, disallowed in

their entirety the claimed charitable contribution deductions

relating to the donation of UA stock.

Before trial and on the basis of an expert appraisal,

respondent agreed that the UA stock had a value of $37 per

voting share and $35 per nonvoting share and that charitable

contribution deductions were allowable to petitioners to that

extent.

OPINION

Section 170(a)(1) allows a deduction for charitable

contributions made during a year. The amount of a charitable

contribution of property is equal to the fair market value

(FMV) of the contributed property, defined as the price at

which, on the date of contribution, “the property would change

hands between a willing buyer and a willing seller, neither

being under any compulsion to buy or sell and both having

reasonable knowledge of relevant facts.” Sec. 1.170A-1(c)(2),

Income Tax Regs.

In general, for Federal tax purposes property is valued as

of the valuation date “on the basis of market conditions and

facts available on that date without regard to hindsight.”

Estate of Gilford v. Commissioner, 88 T.C. 38, 52 (1987)
 - 18 -
(emphasis deleted); see Ithaca Trust Co. v. United States, 279

U.S. 151, 155 (1929).

Subsequent events “are not considered to fix fair market

value, except to the extent that they were reasonably

foreseeable at the date of valuation.” Trust Servs. of Am.,

Inc. v. United States, 885 F.2d 561, 569 (9th Cir. 1989)

(citing Estate of Gilford v. Commissioner, supra at 52). Thus,

courts may consider relevant subsequent events if they are

reasonably foreseeable “because they would be foreseeable by a

willing buyer and a willing seller, and they therefore would

affect the valuation of the property”. Estate of Gimbel v.

Commissioner, T.C. Memo. 2006-270.

In deciding valuation issues, trial courts often receive

into evidence and consider the opinions of expert witnesses.

Helvering v. Natl. Grocery Co., 304 U.S. 282, 295 (1938).

Courts may accept the opinion of one expert over the opinion of

another expert, Buffalo Tool & Die Manufacturing Co. v.

Commissioner, 74 T.C. 441, 452 (1980), and courts may be

selective in determining which portion of an expert’s opinion

to accept, Parker v. Commissioner, 86 T.C. 547, 562 (1986).
 - 19 -
The dramatic difference between petitioners’ experts’5 and

respondent’s expert’s appraised values for the UA stock stems

largely from the experts’ respective conclusions as to the

proper valuation premise--whether to value UA as a going

concern.

Petitioners’ experts valued UA as of September 14, 2001,

as a going concern because they viewed the scheduled January 1,

2002, consolidation of UA into OHSUMG as uncertain.6

After careful consideration of the trial testimony and

other evidence (including letters, e-mails, minutes of

meetings, financial statements, and handwritten notes), we

conclude that as of September 14, 2001, UA should not be valued

as a going concern. The donation of UA stock was driven by the

imminent consolidation of UA (along with the other medical

groups) into OHSUMG. On the evidence, it is beyond any

reasonable question that petitioners would not have donated

their UA stock to OHSUMG had there existed any realistic

5

At trial, in addition to the Houlihan expert petitioners
presented expert testimony and an expert report from another
expert witness who valued the UA stock at $326 per voting share
and $323 per nonvoting share.
6

In their expert reports neither of petitioners’ experts
explain how or why they selected a going concern premise of
value, and they conveniently and incredibly make no mention of
the scheduled Jan. 1, 2002, consolidation.
 - 20 -
possibility that the consolidation would not occur by yearend

2001 or soon thereafter.

Petitioners inflate the importance of the problems and

delay relating to the OHSUMG pension plan and argue without

credible evidence that OHSUMG’s ability to provide a

governmental plan was a necessary condition for the

consolidation. OHSUMG’s ability to offer a governmental plan

clearly was not a major requirement for the planned

consolidation but simply a potential benefit of it. The fact

that the consolidation occurred without a governmental plan

belies petitioners’ argument. Further, with the exception of

self-serving testimony by petitioners at trial, there is no

evidence in the record that UA management and petitioners were

concerned in the least with the possibility that OHSUMG might

not offer a governmental retirement plan. The credible

evidence indicates that, in this regard, their only real

concern was that by the consolidation OHSUMG have some form of

pension plan in place.

In addition, the evidence establishes that as of the

September 14, 2001, UA stock donation date, it was well known

to all concerned individuals that it was highly likely that UA

and UA anesthesiologists would take part in the scheduled

January 1, 2002, consolidation. The evidence does not indicate

that UA management or petitioners at any time expressed to
 - 21 -
anyone that petitioners and other UA anesthesiologists had any

reservations about the planned consolidation or might decline

to participate in the consolidation. Two key UA stockholders

held OHSU or OHSUMG board or committee positions and took part

in planning and implementing the consolidation--Gunn and

Robinson. Gunn retired as UA’s C.E.O. just months before the

scheduled consolidation and was replaced with a C.A.O. who

worked almost exclusively on the consolidation.

Petitioners refer to brief statements extracted from two

e-mails and from a handwritten note to support their argument

that the January 1, 2002 consolidation was uncertain.

Petitioners, however, place inordinate weight on this evidence.

When viewed and considered in context, the statements do not

support petitioners’ argument that as of September 14, 2001,

there was uncertainty as to whether the consolidation would

occur.

While the January 1, 2002, consolidation date may not have

been set in stone, by September 2001 there was tremendous

commitment by UA, by OHSU, and by OHSUMG management to ensure

that by January of 2002 the consolidation would occur. On the

facts before us, a reasonably informed and willing buyer or

seller certainly would have known about and would have taken

into account the fact that as of September 14, 2001, there was
 - 22 -
an extremely high likelihood that by early 2002 UA would no

longer be an operating entity.7

For the above reasons, in their valuations of UA stock,

petitioners’ experts erred in treating UA as a going concern.

Because petitioners’ experts’ valuations are based entirely on

an incorrect valuation premise, we choose not to rely upon

their reports in determining the FMV of the donated UA stock.

Petitioners argue alternatively that even if it were known

on September 14, 2001, that on January 1, 2002, UA would no

longer be operating, the donated UA stock would at least have a

value of approximately $114 per share. We decline to rely on

7

Petitioners argue that regardless of the certainty of the
planned consolidation, as of Sept. 14, 2001, a hypothetical
willing buyer should be treated as not knowing what everyone
else in fact knew of and anticipated (i.e., the planned and
imminent consolidation), and a hypothetical willing buyer would
make an offer to buy UA stock only on the condition that UA
anesthesiologists sign long-term employment contracts and
noncompete agreements with UA. While the willing buyer and the
willing seller are hypothetical persons who are “presumed to be
dedicated to achieving the maximum economic advantage”, Estate
of Newhouse v. Commissioner, 94 T.C. 193, 218 (1990) (citing
Estate of Curry v. United States, 706 F.2d 1424, 1429 (7th Cir.
1983)), petitioners’ experts fail to take into account that the
economic “advantage must be achieved in the context of market
conditions”, see id., and that for valuation purposes the
“positing of transactions which are unlikely” is frowned upon,
Estate of Curry v. United States, supra at 1429. After UA’s
incorporation, UA employment agreements were month-to-month and
did not contain noncompete agreements. Given the clear
movement and momentum to consolidate and the UA history of no
long-term employment agreements, we find it most improbable and
highly unlikely that the UA anesthesiologists would have been
willing to enter into any such contracts, and any hypothetical
buyer must be deemed to know of that fact during the course of
his or her hypothetical negotiations to buy UA.
 - 23 -
petitioners’ alternative valuation of the UA stock because it

did not appear in any of the expert reports and was not

adequately explained in petitioners’ briefs.

Respondent’s expert valued UA as an assemblage of assets

because, in his opinion, it was known or knowable on

September 14, 2001, that on January 1, 2002, UA very likely

would no longer be operating.

Having concluded that UA should be treated as not

operating beyond January 1, 2002, respondent’s expert dismissed

the income approach and the market approach to valuation

because those approaches generally presume ongoing business

operations, and respondent’s expert concluded that the asset-

based approach would be the most accurate valuation method.

The asset-based approach is a method of business valuation

whereby the appraiser estimates the value of the business on

the basis of the business’s equity.

To estimate total UA equity, respondent’s expert first

estimated the FMV of UA’s assets and liabilities individually.

As is typical under the asset-based approach, respondent’s

expert examined UA’s balance sheet to determine the book value

of the assets and liabilities. To estimate the FMV of the

assets and liabilities, respondent’s expert then made
 - 24 -
adjustments8 to several of the book values of the assets and

liabilities and concluded that as of July 31, 2001,9 UA had

total assets valued at $3,658,887 and total liabilities valued

at $2,200,500, for a total equity value of $1,458,387.

To account for the noncontrolling, nonmarketable nature of

UA stock, respondent’s expert then applied a 35-percent lack of

control discount and a 45-percent lack of marketability

discount to the $1,458,387 UA equity value, resulting in a

discounted equity FMV of $521,373.

Respondent’s expert derived the 35-percent lack of control

discount from a study of mergers and acquisitions of publicly

traded companies in the health care industry which compared the

difference in an entity’s share price just before an announced

acquisition to the price paid per share by the acquiring

business. The study demonstrated that in 1999 and 2000 share

prices of stock in health care companies before a merger traded

at an average discount of approximately 35 percent relative to

8

In particular, respondent’s expert decreased net accounts
receivable to account for expected collection costs, created an
accrued sick leave entry to account for an estimated accrued
sick leave liability as of the valuation date, and accounted
for estimated Federal and State income taxes that would be paid
on receivables expected to be collected.
9

Because UA financial statements were dated July 31, 2001,
respondent’s expert used a valuation date of July 31, 2001, not
Sept. 14, 2001. We perceive no practical difference between
the two dates and treat respondent’s expert’s report as
applicable to the date of the donation--Sept. 14, 2001.
 - 25 -
their postacquisition share prices--a discount respondent’s

expert attributes to lack of control.

Respondent’s expert derived his 45-percent lack of

marketability discount from a study of restricted stock health

care companies and from a study of initial public offerings

(IPOs). The restricted stock study compared prices of freely

traded stock in public companies with those of restricted but

otherwise similar stock. The study demonstrated that from 1983

to 2000 restricted stock of health care companies traded at a

mean and median discount of approximately 39 percent relative

to their unrestricted counterparts--a discount respondent’s

expert attributed to lack of marketability. The IPO study

compared the private-market price of stock sold before a

company went public with the public-market price obtained for

the stock shortly after the IPO. The study demonstrated that

from 1975 to 1997 pre-IPO stock traded at mean and median

discounts of approximately 44 and 46 percent, respectively,

relative to the post-IPO stock prices--a discount respondent’s

expert attributed to lack of marketability.

Respondent’s expert then divided the discounted UA equity

value of $521,373 by 14,000 (the number of UA stock shares

outstanding) to arrive at a per-share value of $37 for voting

UA stock. On the basis of several studies, respondent’s expert

then applied an additional 5-percent discount to account for
 - 26 -
the lack of voting rights of the nonvoting UA stock, resulting

in a value of $35 per share for the nonvoting UA stock.

Petitioners have not pointed to, nor do we find,

significant flaws in respondent’s expert’s analysis or in the

studies he relied upon that would suggest his report is

unreliable, and we adopt respondent’s expert’s discounts and

conclusions of value. On the basis of respondent’s expert’s

appraisal, respondent’s concession as to the value of the UA

stock, and respondent’s concession as to petitioners’

entitlement to charitable contribution deductions relating

thereto, we conclude that on September 14, 2001, the UA voting

and nonvoting stock had a per-share value of $37 and $35,

respectively. Petitioners are entitled to charitable

contribution deductions only in the amounts now allowed by

respondent.10

Under section 6662(h) a taxpayer may be liable for a 40-

percent accuracy-related penalty on the portion of an

underpayment of tax attributable to a gross valuation

misstatement. Section 6662(h)(2)(A) provides that there is a

gross valuation misstatement if the value of property as

claimed on a tax return is 400 percent or more of the amount

10

For a recent Tax Court opinion involving a donation and
the valuation of a medical professional service corporation’s
goodwill to a tax-exempt entity and the Court’s disallowance of
claimed charitable contribution deductions relating thereto,
see Derby v. Commissioner, T.C. Memo. 2008-45.
 - 27 -
determined to be the correct value. However, no valuation

misstatement penalty is imposed unless the portion of the

underpayment attributable to the valuation misstatement exceeds

$5,000. See sec. 6662(e)(2).

The increased penalty under section 6662(h) will not apply

to any portion of an underpayment if the taxpayer establishes

that there was reasonable cause for such portion and that the

taxpayer acted in good faith. See sec. 6664(c)(1). However,

the exception under section 6664(c)(1) can apply to a section

170 deduction only if (1) the claimed value of the property was

based on a “qualified appraisal” made by a “qualified

appraiser”, and (2) the taxpayer made a good-faith

investigation of the value of the contributed property. See

sec. 6664(c)(2).

Respondent argues that petitioners did not act in good

faith and did not make a good-faith investigation of the value

of the donated UA stock.

We agree with respondent. From the beginning, the plan to

donate UA stock on the brink of the January 1, 2002,

consolidation was presented to UA stockholders as a way to reap

a potential “150K” windfall. Petitioners are well educated and

surely were cognizant of the imprudence of valuing the UA stock

at such a high value given the likelihood that by 2002 UA would

no longer be an operating entity.
 - 28 -
Petitioners were aware of the January 8, 2002, letter from

OHSUMG’s president stating that OHSUMG had decided to book the

donated stock at zero; and while the value of property in the

hands of the donee is generally not determinative of FMV, see

Estate of Robinson v. Commissioner, 69 T.C. 222, 225 (1977),

petitioners should have at least questioned the difference in

reporting by OHSUMG and by themselves. Furthermore, the fact

that petitioners were advised not to bring their own tax

advisers to the January 29, 2002, UA stockholders meeting and

were directed to withhold information from their own tax

advisers should have put petitioners on notice as to the

inaccuracy of the claimed donations.

Petitioners argue that they relied in good faith on the

Houlihan appraisal and on advice from UA’s attorney and

accountant. However, to establish good faith, petitioners

cannot blindly rely on advice from advisers, nor on an

appraisal. Kellahan v. Commissioner, T.C. Memo. 1999-210;

Estate of Goldman v. Commissioner, T.C. Memo. 1996-29. We note

that under section 1.6664-4(c)(1)(ii), Income Tax Regs., a

taxpayer will not be considered to have reasonably relied in

good faith on advice from an adviser if the advice is based on

an “unreasonable” assumption the “taxpayer knows, or has reason

to know, is unlikely to be true”. This would appear to be
 - 29 -
particularly applicable where no adviser is sought out who is

truly independent of the planned transaction.

We conclude that petitioners did not make a good faith

investigation as to the value of their donated UA stock and did

not act in good faith, and we conclude that the reasonable

cause exception in section 6664(c)(1) does not apply.

The value of the donated UA stock that was claimed on

petitioners’ Federal income tax returns ($401.79 per share for

voting and nonvoting stock) exceeds 400 percent of the value

determined to be correct ($37 and $35 per-share for voting and

nonvoting stock, respectively). However, whether the portion

of the underpayment attributable to the valuation misstatement

exceeds $5,000, and thus whether the 40-percent penalty under

section 6662(h) applies, will depend on the magnitude of the

underpayment of tax as calculated for each petitioner under

Rule 155.

We hold that each petitioner is liable for the 40-percent

accuracy-related penalty of section 6662(h) if, for the years

in issue, the Rule 155 calculation determines that each

petitioner’s underpayment exceeds $5,000.

Under section 6662(a) and (b)(1), a taxpayer may be liable

for a 20-percent accuracy-related penalty on the portion of an

understatement of tax attributable to negligence or to

disregard of rules or regulations. Negligence is strongly
 - 30 -
indicated where a taxpayer “fails to make a reasonable attempt

to ascertain the correctness of a deduction, credit or

exclusion on a return which would seem to a reasonable and

prudent person to be ‘too good to be true’ under the

circumstances”. Sec. 1.6662-3(b)(1)(ii), Income Tax Regs.

In view of the evidence before us, we conclude that

petitioners were negligent and that petitioners’ underpayments

were attributable to their negligence. We hold that to the

extent petitioners are not liable for the 40-percent penalty

under section 6662(h) (because their underpayments do not

exceed $5,000 under the Rule 155 calculation), petitioners are

liable for the 20-percent penalty under section 6662(b)(1).

These cases are decided on the preponderance of the

evidence and are unaffected by section 7491. See Estate of

Bongard v. Commissioner, 124 T.C. 95, 111 (2005).

To reflect the foregoing,

Decisions will be entered

under Rule 155.