The Court of Appeals for the Ninth Circuit has indicated, on at least three occasions, that the presumption of correctness that attaches to a notice of deficiency is forfeited where the Commissioner adopts a litigating position different from the valuation stated in a deficiency notice. See Estate of Mitchell v. Commissioner, 250 F.3d 696, 701-702 (9th Cir. 2001), aff'g in part, vacating in part and remanding 103 T.C. 520 (1994) and T.C. Memo. 1997-461; Estate of Simplot v. Commissioner, 249 F.3d 1191, 1193-1194 (9th Cir. 2001), rev'g and remanding 112 T.C. 130 (1999); Morrissey v. Commissioner, 243 F.3d 1145, 1148-1149 (9th Cir. 2001), rev'g and remanding Estate of Kaufman v. Commissioner, T.C. Memo. 1999-119. Respondent's litigating position as to the fair market value of the real property underlying the deficiency in the one-day taxable year differs from the value stated in the deficiency notice.
Petitioners argue that Estate of Simplot v. Commissioner, 249 F.3d 1191, 1193 (9th Cir. 2001), rev'g and remanding 112 T.C. 130 (1999), and Estate of Mitchell v. Commissioner, 250 F.3d 696, 702 (9th Cir. 2001), aff'g in part, vacating and remanding in part T.C. Memo. 1997-461, prove their point. We agree in part.
We must also be mindful that these hypothetical buyers and sellers are, after all, purely hypothetical, meaning we mustn't "construct[] particular possible purchasers" based upon "imaginary scenarios" about who they might be or how they might act. Estate of Simplot v. Commissioner, 249 F.3d 1191, 1195 (9th Cir. 2001), rev'g and remanding 112 T.C. 130 (1999); see also Morrissey v. Commissioner, 243 F.3d 1145, 1148 (9th Cir. 2001), rev'g Kaufman v. Commissioner, 77 T.C.M. (CCH) 1179 (1999); Cave Buttes, L.L.C. v. Commissioner, 147 T.C. 338, 357-58 (2016).
And in previous cases involving these types of control we have recognized that a discount would not apply. See Estate of Winkler v. Commissioner, T.C. Memo. 1989-231 (rejecting a discount where a minority block of stock had "swing vote characteristics"); see also Estate of Simplot v. Commissioner, 249 F.3d 1191, 1195-1196 (9th Cir. 2001) (rejecting our decision to apply a control premium to a controlling block of nonvoting stock because "[n]o 'seat at the table' was assured by this minority interest" that would result in an economic advantage for which a premium would be necessary), rev'g and remanding 112 T.C. 130 (1999); Estate of Bright, 658 F.2d at 1002-1008 (rejecting the Government's attempt to use family attribution principles to apply a control premium to a controlling block of stock for estate valuation purposes). These types of control are not present here and thus cannot affect WEC's interests in CSI, PSI, and NorAm.
The willing buyer and seller are hypothetical persons, not any specific or named person. Estate of Simplot v. Commissioner, 249 F.3d 1191, 1195 (9th Cir. 2001), rev'g and remanding 112 T.C. 130 (1999); Morrissey v. Commissioner, 243 F.3d 1145, 1148 (9th Cir. 2001), rev'g T.C. Memo. 1999-119; Estate of Kahn v. Commissioner, 125 T.C. 227, 231 (2005). When determining the fair market value of unlisted stocks for which no recent sales or bids have been made, several factors should be considered, including: the company's net worth, its earning power and dividend-paying capacity, its good will, the economic outlook in the industry, its management and its position in the industry, the degree of control of the business represented in the block of stock to be valued, and the value of stock in similar, publicly traded companies.
Petitioners rely on a series of cases from the U.S. Court of Appeals for the Ninth Circuit holding that the Commissioner's adoption of a litigation position that substantially deviates from the position in the notice of deficiency results in a forfeiture of any presumption of correctness in the notice and places the burden of proof as to factual matters on the Commissioner. See Estate of Mitchell v. Commissioner, 250 F.3d 696 (9th Cir. 2001), aff'g in part, vacating in part and remanding T.C. Memo. 1997-461; Estate of Simplot v. Commissioner, 249 F.3d 1191 (9th Cir. 2001), rev'g and remanding 112 T.C. 130 (1999); Morrissey v. Commissioner, 243 F.3d 1145 (9th Cir. 2001), rev'g and remanding Estate of Kaufman v. Commissioner, T.C. Memo. 1999-119. The parties have stipulated that appeal in this case would lie to the U.S. Court of Appeals for the Tenth Circuit, and therefore we are not bound by caselaw from the U.S. Court of Appeals for the Ninth Circuit.
We look at hypothetical willing buyers and sellers, and do not construct "particular possible purchasers." Estate of Simplot v. Commissioner, 249 F.3d 1191, 1195 (9th Cir. 2001), rev'g and remanding 112 T.C. 130 (1999); see also Morrissey v. Commissioner, 243 F.3d 1145, 1148 (9th Cir. 2001), rev'g Kaufman v. Commissioner, T.C. Memo. 1999-119. Fair market value is a question of fact to be determined from all relevant evidence on the record.
Petitioner was presumably relying on a line of cases from the Court of Appeals for the Ninth Circuit, where an appeal in this case would normally lie, holding that the Commissioner's adoption of a litigation position that substantially deviates from the position in the notice of deficiency results in a forfeiture of any presumption of correctness in the notice and places the burden of proof on the Commissioner. See Estate of Mitchell v. Commissioner, 250 F.3d 696 (9th Cir. 2001), aff'g in part, vacating in part and remanding T.C. Memo. 1997461; Estate of Simplot v. Commissioner, 249 F.3d 1191 (9th Cir. 2001), rev'g and remanding 112 T.C. 130 (1999); Morrissey v. Commissioner, 243 F.3d 1145 (9th Cir. 2001), rev'g and remanding Estate of Kaufman v. Commissioner, T.C. Memo. 1999119.On brief, however, petitioner does not address such an argument or cite any of the foregoing cases.
The Court of Appeals for the Ninth Circuit, to which an appeal in this case would normally lie, has addressed the issue of burden of proof in estate tax valuation cases in a series of three decisions. Estate of Mitchell v. Commissioner, 250 F.3d 696 (9th Cir. 2001), affg. in part, vacating in part and remanding 103 T.C. 520 (1994) and T.C. Memo. 1997-461; Estate of Simplot v. Commissioner, 249 F.3d 1191 (9th Cir. 2001), revg. and remanding 112 T.C. 130 (1999); Morrissey v. Commissioner, 243 F.3d 1145 (9th Cir. 2001), revg. and remanding Estate of Kaufman v. Commissioner, T.C. Memo. 1999-119. In each of these cases the Commissioner determined an estate tax deficiency based upon an increase in the fair market value, over that claimed on the tax return, of shares in a closely held corporation.
Generally, the most important factor is the extent to which the taxpayer exercised ordinary business care and prudence in attempting to assess his or her proper tax liability. See Estate of Simplot v. Commissioner [Dec. 53,296], 112 T.C. 130, 183 (1999) (citing Mandelbaum v. Commissioner [Dec. 50,687(M)], T.C. Memo. 1995-255), revd. on another issue [2001-1 USTC ΒΆ 60,405] 249 F.3d 1191 (9th Cir. 2001); sec. 1.6664-4(b), Income Tax Regs. Under section 6662(g), respondent apparently takes the position that the determination whether the percentage threshold for a substantial or gross valuation understatement has been reached is made on a property-by-property basis.