MANDELBAUM v. COMMISSIONER
69 T.C.M. 2852 (1995)
T.C. Memo. 1995-255
Bernard Mandelbaum, et al.1
v.
Commissioner.
Docket Nos. 20517-92, 20678-92, 20687-92, 20688-92, 20689-92, 12749-94, 12750-94, 12751-94, 12752-94, 12753-94, 12754-94, 12755-94, 12756-94, 12757-94, 12758-94, 12759-94, 12760-94, 12761-94, 12762-94, 12763-94.
United States Tax Court.
Filed June 12, 1995.
Henry M. Matri, David M. Kohane, and Thomas J. LaConte, Hackensack, N.J., for the petitioners. Clare W. Darcy, for the respondent.
TABLE OF CONTENTSFindings of Fact[Page]
1. The Mandelbaum Family ............................................... 2854
2. Big M ............................................................... 2854
a. Background ...................................................... 2854
b. Capital Structure ............................................... 2854
c. Type of Business ................................................ 2855
d. Management ...................................................... 2855
3. Freely Traded Values of Big M Stock ................................. 2855
4. Shareholders' Agreements ............................................ 2855
5. Big M's Financial History ........................................... 2856
6. Federal Gift Tax Returns ............................................ 2858
a. Overview ........................................................ 2858
b. Filing of Gift Tax Returns ...................................... 2861
c. Preparation of Gift Tax Returns ................................. 2861
d. Respondent's Audits of Gift Tax Returns ......................... 2862
7. The Notices of Deficiency and Amendments to Answers ................. 2862
Opinion
1. Marketability Discount .............................................. 2862
a. Overview ........................................................ 2862
b. Respondent's Determination and Her Expert ....................... 2864
c. Petitioner's Position and Their Expert .......................... 2865
d. Court's View on Experts ......................................... 2866
e. Count's Determination of Marketability Discount ................. 2867
2. Valuation Understatement Penalties .................................. 2869
a. Overview ........................................................ 2869
b. Sec. 6660 ....................................................... 2869
c. Sec. 6662(a) and (b) ............................................ 2870
Memorandum Findings of Fact and OpinionLARO, Judge:
The subject cases were consolidated for trial, briefing, and opinion. Bernard Mandelbaum (Bernard), Leon Mandelbaum (Leon), Beverly Mandelbaum (Beverly), Max Mandelbaum (Max), and Pearl Mandelbaum (Pearl) petitioned the Court to redetermine respondent's determinations with respect to their 1986 through 1990 taxable years.2 Respondent initially determined (and reflected in her notices of deficiency) the following deficiencies in Federal gift tax and additions to tax under section 6660:3 Additions to Tax
----------------
TaxpayerYearDeficiencySec. 6660
Bernard ......................................... 1987 $ 9,057 --
Leon ............................................ 1987 38,761 --
Max ............................................. 1987 37,772 --
Pearl ........................................... 1987 36,911 --
Beverly ......................................... 1987 38,761 --
Bernard ......................................... 1988 47,033 $ 9,406
Leon ............................................ 1988 49,410 9,882
Max ............................................. 1988 43,308 8,662
Pearl ........................................... 1988 43,308 8,662
Beverly ......................................... 1988 49,410 9,882
Bernard ......................................... 1989 25,833 7,750
Leon ............................................ 1989 39,235 11,771
Max ............................................. 1989 27,398 8,219
Pearl ........................................... 1989 27,398 8,219
Beverly ......................................... 1989 39,235 11,771
Bernard ......................................... 1990 472,370 94,474
Leon ............................................ 1990 752,715 150,543
Max ............................................. 1990 10,451 2,090
Pearl ........................................... 1990 486,023 97,205
Beverly ......................................... 1990 11,292 2,258
1. Cases of the following petitioners are consolidated herewith: Leon Mandelbaum, docket Nos. 20678-92, 12758-94, 12759-94, 12760-94; Beverly Mandelbaum, docket Nos. 20689-92, 12761-94, 12762-94, 12763-94; Bernard Mandelbaum, docket Nos. 12749-94, 12750-94, 12751-94; Max Mandelbaum, docket Nos. 20687-92; 12752-94, 12753-94, 12754-94; Pearl Mandelbaum, docket Nos. 20688-92, 12755-94; 12756-94, 12757-94.
2. Respondent audited petitioners' 1986 Federal gift tax returns and increased the amounts of their taxable gifts that were exempted from gift tax by application of the unified credit for that year. The increase, in turn, decreased the unified credits available to petitioners with respect to taxable gifts made in years after 1986. Petitioners' 1986 taxable year is before the Court solely to determine their unified credits.
3. otherwise indicated, section references are to the Internal Revenue Code in effect for the years in issue. Rule references are to the Tax Court Rules of Practice and Procedure.
4. Petitioners alleged in their petitions that respondent mailed her notices of deficiency to them after the statutory period of limitations for assessment and collection of gift tax. Respondent's pleadings contain denials of this allegation, and set forth affirmative facts to support her denials. Because petitioners did not raise this issue at trial or in their briefs, we hold that their silence amounts to a concession of this issue. Burbage v. Commissioner [Dec. 41,097], 82 T.C. 546, 547 n. 2 (1984), affd. [85-2 USTC ¶ 9733] 774 F.2d 644 (4th Cir. 1985). We note, however, that the record indicates that respondent issued the subject notices of deficiency to petitioners before the expiration of the period of limitations. 5. Accordingly, each branch of the family had two voting shares.
6. Mandee Shops does business in certain States under the name "Karin Morgan".
7. The parties have stipulated these freely traded values. These values take into account any minority interest discount that is applicable.
8. Siegel is also a certified public accountant.
9. Or, in other words, two persons from each branch of the Mandelbaum family.
10. Or, in other words, two persons from each branch of the Mandelbaum family.
11. The three trusts — the Bernard Mandelbaum Retained Interest Trust, the Leon Mandelbaum Retained Interest Trust, and the Pearl Mandelbaum Retained Interest Trust — were each established on Feb. 1, 1990, and were irrevocable. Under their terms, each grantor could receive all of the income from the transferred property for a set period of time (e.g., 10 years), and the remainder interest would pass to his or her children equally.
12. We note that the percentages of the shareholders' holdings contain rounding errors of .01.
13. Contrary to her determination with respect to Leon, Pearl, Beverly, and Bernard, respondent determined the value of Max's gift on Dec. 30, 1990, by reference to a per-share value of $3,777. The record does not support a different value for Max, as opposed to the other four petitioners, and we assume that respondent's reference to the higher per-share value in Max's notice of deficiency was an error.
14. Respondent asserted in her amendments that the per-share value on the 1987 valuation date was $4,784.
15. For example, expert testimony is not useful to the Court when the expert is merely an advocate for the position argued by the party. Laureys v. Commissioner [Dec. 45,446], 92 T.C. 101, 129 (1989). 16. Petitioners allege in their brief that respondent has the burden of proof with respect to the additions to their 1989 and 1990 gift taxes under sec. 6662(a) and (g). Petitioners contend that respondent bears this burden because she stated in her notices of deficiency that she determined the additions under sec. 6660, and restated in her answers that the determinations were made under sec. 6662(a) and (g). We disagree with petitioners that respondent bears the burden of proof on this issue. Although we agree with petitioners that respondent must prove any new matter pleaded in her answers, Rule 142(a), we do not agree with them that respondent's correction of her reference to former sec. 6662(a) and (g) is a new matter. Given the fact that respondent's notices clearly state that she determined valuation understatement penalties for 1989 and 1990, the mere fact that she mistakenly referred to the predecessor section (which mistake she quickly corrected in her answers) does not raise a new matter or otherwise shift the burden of proof. Estate of Jayne v. Commissioner [Dec. 32,497], 61 T.C. 744, 748-749 (1974); McSpadden v. Commissioner [Dec. 28,998], 50 T.C. 478, 492-493 (1968). 17. Restricted stock is stock acquired from an issuer in a transaction exempt from the registration requirements of the Federal securities law. Transfers of restricted stock are generally restricted within the first 2 years after issuance.
18. See generally Pratt, Valuing a Business 238-247 (2d ed. 1989), for a discussion of studies on restricted stock transactions.
19. For this purpose, a nonreporting company is not required to file certain documents, such as quarterly disclosure reports, although it has stock which is publicly traded over the counter.
20. According to Grabowski, the Shareholders' Agreements "severely restrict" the marketability of Big M shares because the agreements contain a waiting period (with a right of first refusal) with respect to all sales of Big M stock to prospective buyers who are outside of the Mandelbaum family, and contain numerous provisions that minimize the possibility that such a buyer could ever vote on corporate matters or serve on the Board. Grabowski also concluded that an investor in Big M stock would demand a higher rate of return on his or her investment, as compared to an investment in a freely traded comparable company, because of the transferability restrictions embodied in the Shareholders' Agreements.
21. See generally Pratt, supra, for a discussion of studies on IPO's.
22. As mentioned infra at 49, the period of time for which an investor must hold stock may affect the value of that stock.
23. We are also troubled by the fact that Grabowski failed to give these interviewees relevant information about the subject stock. See Commissioner v. Estate of Stewart [46-1 USTC ¶ 10,248], 153 F.2d 17 (3d Cir. 1946) (willing buyer and seller presumed to know all essential facts), affg. a Memorandum Opinion of the Court. Although Grabowski gave each of the interviewees selective information on the subject shares, Grabowski did not give the interviewees vital information that is extremely probative on the shares' value. This omitted information includes the names of Big M and its retail stores. 24. Because the parties used Big M's yearend statements to determine its freely traded values on these valuation dates, we do the same with respect to the marketability discount.
25. Accordingly, we do not pass on the other arguments made by petitioners with respect to the 1987 and 1988 additions to tax.