Brothers Misstated Value of Stock Transfers to Trusts, IRS Alleges

Chris Sorensen,
Petitioner
v.
Commissioner of Internal Revenue
Respondent

Pretrial Memorandum

06/24/22

Trial Calendar: Atlanta, Georgia
Date: July 18, 2022

PRETRIAL MEMORANDUM FOR RESPONDENT

NAMES OF CASES:
Robin Sorensen
Chris Sorensen
Chris Sorensen
Robin Sorensen

DOCKET NOs.
24797-18
24798-18
20284-19
20285-19

Judge David Gustafson

ATTORNEYS:

Petitioners:
Stephanie Loomis-Price
(713) 650-2750

Brianna E. Loughlin
(713) 650-2686

Abigail Earthman
(713) 650-2639

Respondent:
Blake J. Corry
(602) 636-9616

David W. Sorensen
(801) 799-6631

Miriam C. Dillard
(904) 661-3021

AMOUNTS IN DISPUTE

Year	Deficiency1	Penalty I.R.C. § 6662(h)2
2014 (RS3)	$8,951,316	$3,580,526
2014 (CS)	$8,952,276	$3,580,910
2015 (RS)	$4,614,988	$1,845,995
2015 (CS)	$4,616,907	$1,846,763

STATUS OF CASE

Probable Trial

CURRENT ESTIMATE OF TRIAL TIME

3-4 days

MOTIONS RESPONDENT EXPECTS TO MAKE

Motion in Limine to Exclude Any Evidence Related to Petitioners' Intent Regarding Their December 31, 2014 Gifts	Respondent will move to exclude any evidence, including testimony, of petitioners' intent with respect to their respective gift transfers of nonvoting shares of stock in Firehouse Restaurant Group, Inc. because this testimony is wholly irrelevant to the determination of the issues in these consolidated cases as the parties have already stipulated a gift occurred on December 31, 2014.
Motion in Limine to Exclude Alexander Rey's Expert Report dated March 21, 2022	Respondent will move to exclude Alexander Rey's Expert Report dated March 21, 2022 as it fails to satisfy Tax Court Rule 143(g), is biased, will not help the trier of fact determine the value of one nonvoting share of Firehouse Restaurant Group, Inc. stock, is not based on sufficient facts or data, and fails to reliably apply principles and methods to the facts of the case.
Motion in Limine to Exclude Curtis Kimball's Expert Rebuttal Report dated April 22, 2022	Respondent will move to exclude Curtis Kimball's Expert Rebuttal Report dated April 22, 2022 as it fails to satisfy Tax Court Rule 143(g), is biased, and will not help the trier of fact determine the value of one nonvoting share of Firehouse Restaurant Group, Inc. stock as of December 31, 2014 or March 31, 2015.

STATUS OF STIPULATION OF FACTS

The parties filed the First Stipulation of Facts and Second Stipulation of Facts on March 14, 2022 and June 24, 2022, respectively.

ISSUES

1. Whether petitioners are liable for additional gift tax on the transfers, through their respective living trusts, of 9,385 nonvoting shares of Firehouse Restaurant Group, Inc. (FRG) stock on December 31, 2014 to their respective family trusts, the Robin O. Sorensen Family Trust and the Chris R. Sorensen Family Trust (Irrevocable Family Trusts), for the benefit of their respective spouses and children.

2. Whether each petitioner, through their respective living trusts, transferred 5,365 nonvoting shares of FRG stock for insufficient consideration that resulted in a gift, under I.R.C. § 2512(b) and Treas. Reg. § 25.2512-8, on March 31, 2015.⁴

3. What is the value of the 9,385 nonvoting shares of FRG stock that were transferred on December 31, 2014, as described in issue statement 1?

4. What is the value of the 5,365 nonvoting shares of FRG stock that were transferred on March 31, 2015, as described in issue statement 2?

5. Whether a gross valuation misstatement penalty applies under I.R.C. § 6662(h) with respect to each petitioner's 2014 gift tax valuation misstatement.

6. Whether, in the alternative, a substantial gift tax valuation misstatement penalty applies under I.R.C. § 6662(a) and (g) with respect to each petitioner's 2014 gift tax valuation misstatement.

7. Whether, in the alternative, a penalty for negligence or disregard of rules or regulations applies to each petitioner's understatement under I.R.C. § 6662(a) and (c) with respect to each petitioner's 2014 gift tax return.

8. Whether a gross valuation misstatement penalty applies under I.R.C. § 6662(h) with respect to each petitioner's 2015 gift tax valuation misstatement.

9. Whether, in the alternative, a substantial gift tax valuation misstatement penalty applies under I.R.C. § 6662(a) and (g) with respect to each petitioner's 2015 gift tax valuation misstatement.

10. Whether, in the alternative, a penalty for negligence or disregard of rules or regulations applies to each petitioner's understatement under I.R.C. § 6662(a) and (c) with respect to each petitioner's 2015 gift tax return.

WITNESS(ES) RESPONDENT EXPECTS TO CALL

James L. Smith, Jr.	Mr. Smith, also known as Jamie Smith, is an accountant at Dixon Hughes Goodman, LLP (DHG), an accounting firm in Jacksonville, Florida. Mr. Smith will testify about information provided to him in preparing petitioners' gift tax returns for 2014 and 2015. Mr. Smith will also testify about information provided to him in preparing Firehouse Restaurant Group, Inc. (FRG) returns.
Robin Sorensen	Mr. Sorensen is one of the petitioners in these consolidated cases. Mr. Sorensen is a co-founder of FRG and was President of FRG during 2014 and 2015. Mr. Sorensen's anticipated testimony will regard business practices, ownership/shareholders, and valuations of FRG during the relevant years.
Chris Sorensen	Mr. Sorensen is one of the petitioners in these consolidated cases. Mr. Sorensen is a co-founder of FRG and was Vice-President of FRG during 2014 and 2015. Mr. Sorensen's anticipated testimony will regard business practices, ownership/shareholders, and valuations of FRG during the relevant years.
Jeff Anderson	Mr. Anderson prepared and submitted an expert report and rebuttal report under Tax Court Rule 143(g) on behalf of respondent. Mr. Anderson will testify regarding the value of one nonvoting share of FRG on December 31, 2014 and on March 31, 2015 including inter alia discounts for lack of marketability and lack of voting rights. Respondent will request that the Court recognize Mr. Anderson as an expert witness in the field of business valuation, with a specialty in businesses that hold intellectual property and franchise rights.
Tabitha Sorensen	Mrs. Sorensen is Robin Sorensen's spouse and has been the trustee of the Robin O. Sorensen Family Trust dated December 31, 2014, Robin Sorensen's Irrevocable Family Trust, since December 31, 2014. Mrs. Sorensen's anticipated testimony will regard the Robin O. Sorensen Family Trust receiving and owning nonvoting shares of FRG during the relevant years.
Kirsten Sorensen	Mrs. Sorensen is Chris Sorensen's spouse and has been the trustee of the Chris R. Sorensen Family Trust dated December 31, 2014, Chris Sorensen's Irrevocable Family Trust since December 31, 2014. Mrs. Sorensen's anticipated testimony will regard the Chris R. Sorensen Family Trust receiving and owning nonvoting shares of FRG during the relevant years.
Robert Trudeau	Mr. Trudeau drafted Robin Sorensen's and Chris Sorensen's respective Irrevocable Family Trust agreements and helped each petitioner transfer nonvoting shares in FRG to their respective Irrevocable Family Trusts in 2014 and 2015. Mr. Trudeau's anticipated testimony will regard petitioners' transfer of nonvoting shares to their respective Irrevocable Family Trusts on December 31, 2014 and March 31, 2015 and the ownership/shareholders of FRG during the relevant years.

Ken Kirschner	Mr. Kirschner was FRG's corporate attorney for the years at issue. Mr. Kirschner's anticipated testimony will regard the ownership/shareholders of FRG during the relevant years.
Stephen Joost	Mr. Joost was FRG's Treasurer from January 1, 2014 through December 31, 2015. Mr. Joost's anticipated testimony will regard FRG's ownership structure, FRG's shareholders during the years at issue, and valuations of FRG during the relevant years.
Mary Rawlins	Ms. Rawlins was the Vice President of Financial Services for an entity named Firehouse of America, LLC, which was a subsidiary of FRG in 2014 and 2015. Ms. Rawlins' anticipated testimony will regard FRG's ownership structure and FRG's shareholders during the years at issue.
Vincent Burchianti	Mr. Burchianti was FRG's Chief Financial Officer from January 1, 2014 through December 31, 2015. He also signed the agreement on FRG's behalf that resulted in DHG's “Summary Report on the Valuation of One Non-Voting Share in Firehouse Restaurant Group, Inc. as of December 31, 2014 Report Dated April 9, 2015” (DHG's Return Appraisal). Mr. Burchianti's anticipated testimony will regard FRG's financials, petitioners' transfer of shares, and his discussions with petitioners' proposed expert witnesses.
Martin Siegel	Mr. Siegel was an indirect shareholder of FRG during the relevant years and provided Robin Sorensen advice on the transfer of nonvoting shares in FRG during the years at issue. Mr. Siegel's anticipated testimony will regard Robin Sorensen's transfer of nonvoting shares of FRG to the Robin O. Sorensen Irrevocable Family Trusts on December 31, 2014 and March 31, 2015.
Alexander Rey	Mr. Rey was listed as one of four valuation analysts on DHG's Return Appraisal, which was the valuation report attached to Chris Sorensen's 2014 Form 709. Mr. Rey's anticipated testimony will regard his involvement in DHG's Return Appraisal.

Additionally, respondent reserves the right to call any witness listed in petitioners' pre-trial memorandum and/or cross examine each of petitioners' witnesses listed in its pre-trial memorandum. Respondent also reserves the right to call rebuttal and/or impeachment witnesses.

SUMMARY OF FACTS

Robin Sorensen and Chris Sorensen (petitioners) are brothers and founders of the restaurants known as Firehouse Subs. The brothers opened the first Firehouse Subs in Jacksonville, Florida in 1994. In 1995, petitioners created Firehouse Restaurant Group, Inc. (FRG) as a Florida corporation, which elected to be taxed as an S corporation under § 1362(a) of the Internal Revenue Code. FRG was headquartered in Jacksonville, Florida, and operated and franchised Firehouse Subs restaurants, which specialize in sub sandwiches. FRG also provided financing to franchisees through its subsidiaries.

By the end of 2011, there were over 500 Firehouse Subs in the United States, over 90% being franchises, that served about 700,000 customers per week, and grossed over $285,000,000 in system wide sales. By the end of 2014, Firehouse grossed over $550,000,000 in system wide sales and was projected to gross $667,000,000 in system wide sales for 2015.

As of December 31, 2014, FRG operated 27 restaurants and had 823 franchises across 43 states and Puerto Rico. FRG operated on a 52/53-week fiscal year and was managed by petitioners. As of December 31, 2014, Robin Sorensen served as President of FRG, and Chris Sorensen served as Vice-President and Secretary of FRG. FRG was financially successful, as shown by its healthy growth and increasing operating margins from fiscal year ended December 27, 2009 (revenue totaling $34,519,997 and operating margin of 21.44%) to fiscal year ended December 27, 2015 (revenue totaling $81,135,198 and operating margin of 27.83%).

2014 Transfer of FRG Stock

As of December 21, 2014, FRG had 9,000 voting shares issued and outstanding. The shareholders of FRG were as follows:

Shareholder	Shares	% Interest
Robin's Living Trust	3,200	35.56%
Chris's Living Trust	3,200	35.56%
Other Shareholders	2,600	28.88%
Total	9,000	100.00%

On December 28, 2014, FRG was recapitalized, dividing the shares into tranches of voting stock and nonvoting stock. After the recapitalization, the shareholders of FRG stock were as follows:

Shareholder	Voting	Nonvoting	Total	% Interest
Robin's Living Trust	3,200	28,800	32,000	35.56%
Chris's Living Trust	3,200	28,800	32,000	35.56%
Other Shareholders	2,600	23,400	26,000	28.88%
Total	9,000	81,000	90,000	100.00%

On December 31, 2014, the Robin Sorensen Living Trust, with Robin Sorensen acting as trustee, transferred 9,385 nonvoting shares of FRG stock to an irrevocable trust named the Robin O. Sorensen Family Trust dated December 31, 2014. Likewise, the Chris Sorensen Living Trust, with Chris Sorensen acting as trustee, transferred 9,385 nonvoting shares of FRG stock to an irrevocable trust named the Chris R. Sorensen Family Trust dated December 31, 2014.⁵ The parties have stipulated that the December 31, 2014 transfer was a gift. See First Stipulation of Facts (First SOF) ¶¶ 23-24. After the gifts, the shareholders of FRG stock were as follows:

Shareholder	Voting	Nonvoting	Total	% Interest
Robin's Living Trust	3,200	19,415	22,615	25.13%
Robin's Family Trust	0	9,385	9,385	10.43%
Chris's Living Trust	3,200	19,415	22,615	25.13%
Chris's Family Trust	0	9,385	9,385	10.43%
Other Shareholders	2,600	23,400	26,000	28.88%
Total	9,000	81,000	90,000	100.00%

This chart matches FRG's stock ledgers, which show each of petitioners' respective Irrevocable Family Trusts owning 9,385 nonvoting shares of FRG as of December 31, 2014.

Petitioners' respective Irrevocable Family Trust agreements state that, once property is transferred to the Irrevocable Family Trusts, the trustees have dominion and control over the property to manage, sell, pledge, dispose, “or otherwise deal with any trust assets of any kind . . . in such manner and on such terms without limit as the Trustee may deem advisable . . .” See First SOF ¶¶ 18-19, Exhibit 8-J, p. 15 and Exhibit 9-J, p. 16. The agreements also include a section specifically pertaining to “Closely-Held Businesses,” and state that the fiduciaries appointed within the Irrevocable Family Trusts have “every right with respect to stock in any closely-held corporation.” See First SOF ¶¶ 18-19, Exhibit 8-J, p. 24, Exhibit 9-J, p. 25. Such rights include, but are not limited to, the right to sell or transfer closely held corporate stock. See First SOF ¶¶ 18-19, Exhibit 8-J, p. 24, Exhibit 9-J, p. 25.

Petitioners' Reporting on Form 709 — 2014 Tax Year

On October 13, 2015, each petitioner filed a Form 709 — U.S. Gift (and Generation-Skipping Transfer) Tax Return for his respective 2014 tax year (2014 Gift Tax Return). On their respective 2014 Gift Tax Returns, with respect to the gift of nonvoting shares of FRG stock, each petitioner reported the following:

On December 31, 2014, the Donor transferred to the [respective Irrevocable Family Trust] dated December 31, 2014 (the “Family Trust”) EIN: [XX-XXXXXXX], created by [petitioner] as Settlor and [petitioner's wife] as Trustee, a number of non-voting shares of stock in Firehouse Restaurant Group, Inc. (“Firehouse”) that have a value as finally determined for federal gift tax purposes equal to $5,000,000 as of the date of the transfer. A copy of the Family Trust is attached and marked as Exhibit I. Based on the summary report on the valuation of one non-voting share in Firehouse Restaurant Group, Inc. as of December 31, 2014, attached and marked as Exhibit II (the “Valuation Report”), the value of one-nonvoting share of Firehouse stock as of the date of the gift was determined to be $532.79. Therefore based on the formula set forth above and the value as determined by the Valuation Report, the Donor transferred 9,385 non-voting shares in Firehouse stock with a value equal to $5,000,000, and the precise number of shares transferred cannot be finally determined until the value of such shares are finally determined for federal gift tax purposes. [Emphasis added.]

Chris Sorensen's 2014 Form 709 included the Chris R. Sorensen Family Trust agreement and a valuation report prepared by Dixon Hughes Goodman, LLP (DHG) entitled, “Summary Report on the Valuation of One Non-Voting Share in Firehouse Restaurant Group, Inc. as of December 31, 2014 Report Dated April 9, 2015” (DHG's Return Appraisal). Robin Sorensen's 2014 Form 709 included the Robin O. Sorensen Family Trust agreement but did not include DHG's Return Appraisal.

Further, both petitioners failed to adhere to the transfer clause stated in their respective 2014 Forms 709, the clause stating that each donor transferred nonvoting shares of FRG stock equal to $5,000,000 as of December 31, 2014. Multiplying 9,385 shares by $532.79, the value of one nonvoting share of FRG stock as stated in DHG's Return Appraisal, equals $5,000,234.15, which is greater than, and not equal to, $5,000,000. Petitioners' estate planning attorney, Robert Trudeau (Mr. Trudeau), advised petitioners' accountant at Dixon Hughes Goodman, LLP, James L. Smith, Jr. (Mr. Smith), and Robin Sorensen that the transfer of shares should be “the fractional number (i.e., 9,384.56 nonvoting shares, rather than 9,385 shares),” yet petitioners chose not to follow the advice.

Mr. Trudeau, at some point in time, drafted a separate document for each petitioner entitled “Irrevocable Stock Power,” which was signed by each petitioner. Each “Irrevocable Stock Power” stated that each petitioner transferred “a specific number of nonvoting shares in [FRG], a Florida corporation (the “Company”), that have a fair market value as finally determined for federal gift tax purposes equal to exactly $5,000,000.” Each Irrevocable Stock Power stated that “[t]he precise number of shares transferred in accordance with the preceding sentence shall be determined based on all relevant information as of the date of transfer in accordance with a valuation report that will be prepared by . . . [DHG].” Finally, each Irrevocable Stock Power stated that,

the determination of fair market value is subject to challenge by . . . [respondent]. While the parties intend to initially rely upon and be bound by the valuation report prepared by DHG, if the IRS challenges the valuation and a final determination of a different fair market value is made by the IRS or a court of law, the number of shares transferred from the transferor to the transferee shall be adjusted accordingly so that the transferred shares have a value exactly equal to $5,000,000, in the same manner as a federal estate tax formula marital deduction amount would be adjusted for a valuation redetermination by the IRS and/or a court of law. [Emphasis added.]

Neither the trustees for the transferee Irrevocable Family Trusts nor the corporation counter-signed the Irrevocable Stock Power.

Petitioners point to the Irrevocable Stock Powers as evidence that they did not transfer a fixed number of shares in FRG, but rather, transferred a fixed value of shares. Petitioners' respective Irrevocable Family Trusts, however, held 9,385 shares as of December 31, 2014 as reported on FRG's stock ledgers and FRG's U.S. Income Tax Return for an S Corporation, Form 1120S, for its tax year ending December 27, 2015 (FRG's 2015 Form 1120S).

2015 Transfer of FRG Stock

FRG filed FRG's 2015 Form 1120S with the Internal Revenue Service for FRG's tax year beginning December 29, 2014 and ending December 27, 2015. The copy of FRG's 2015 Form 1120S in the administrative file did not include a breakdown of when shares were transferred during the 2015 year. Petitioners' copy of FRG's 2015 Form 1120S, which the parties have stipulated to and is discussed below, did include a breakdown of when shares were transferred amongst shareholders or third parties during the 2015 year. See First SOF ¶ 33, Exhibit 17-J, pp. 27-29.

The copy of FRG's 2015 Form 1120S in respondent's administrative file, specifically the Schedule K-1s, show that the Robin O. Sorensen Family Trust and the Chris R. Sorensen Family Trust each owned 14.825% of FRG at the close of FRG's 2015 tax year. FRG had 90,000 issued and outstanding shares of stock at the close of FRG's 2015 tax year, which suggests that each of these entities owned 13,343 shares of FRG.⁶ Each petitioner's respective Irrevocable Family Trust was allocated income and other items on its Schedule K-1 consistent with owning 13,343 shares (or 14.825%) of FRG. As such, at the time the notices of deficiency were issued to petitioners for their 2014 and 2015 gift tax years, respondent was unsure how many shares of FRG stock petitioners transferred to their respective Irrevocable Family Trusts on December 31, 2014 as compared to transfers that occurred in 2015.

During discovery, petitioners provided documents they allege establishes that on March 31, 2015, each petitioner sold an additional 5,365 shares of FRG stock to their respective Irrevocable Family Trusts. The sales price for each tranche of 5,365 shares of FRG was $2,858,418. Thus, each petitioner's Living Trust received a note from their respective Irrevocable Family Trust in the principal amount of $2,858,418. Under the terms of the note, interest is due annually, with a balloon payment of principal due on March 30, 2024. Interest accrues at a rate of 1.47% per annum. Petitioners do not contend that the 2015 transfer was of a fixed dollar amount of FRG stock.

On October 20, 2016, each petitioner filed a Form 709 — U.S. Gift (and Generation-Skipping Transfer) Tax Return (2015 Gift Tax Return). Neither petitioner reported the 2015 transfer of 5,365 shares of FRG stock to the Irrevocable Family Trusts on their respective 2015 Gift Tax Return.

The parties have stipulated that each of petitioners' respective Irrevocable Family Trusts held 14,750 nonvoting shares of FRG stock in 2015. See First SOF ¶ 26. Petitioners also reported on FRG's 2015 Form 1120S that each petitioner's respective Irrevocable Family Trust owned 14,750 shares of FRG as of March 31, 2015. See First SOF ¶ 33, Exhibit 17-J, p. 28. Petitioners' copy of FRG's 2015 Form 1120S reports that each petitioner's Irrevocable Family Trust received 9,385 shares on December 31, 2014, and then received an additional 5,365 shares on March 31, 2015, which totals 14,750 shares. See First SOF ¶ 33, Exhibit 17-J, p. 28.

Petitioners' Treatment of the 2014 and 2015 Transfers of FRG Stock

Petitioners' 2014 Gift Tax Returns report a transfer of 9,385 nonvoting shares of FRG stock to each petitioner's respective Irrevocable Family Trust on December 31, 2014. On April 13, 2015, Robin Sorensen confirmed to Mary Rawlins, Vice President of Financial Services of Firehouse of America, LLC, that FRG's stock ledgers showing that each petitioner's Irrevocable Family Trust owned 9,385 nonvoting shares of FRG as of December 31, 2014, and 14,750 nonvoting shares of FRG as of March 31, 2015, were “correct.”

Petitioners' unsigned copy of FRG's 2015 Form 1120S reports the Irrevocable Family Trusts as shareholders of FRG. Petitioners' copy includes a document entitled “Shareholders Changes in Interest” that shows the shareholders' interests in FRG during the year. Petitioners' respective Irrevocable Family Trusts are listed as holding 9,385 shares of FRG, a 10.4278% ownership interest, as of December 31, 2014. Petitioners' respective Living Trusts, which held a 35.5556% interest in FRG as of December 30, 2014 had its ownership interest in FRG reduced to 25.1278%. The difference between 35.5556% and 25.1278% is 10.4278%, an amount that corresponds to the interest that petitioners' respective Irrevocable Family Trusts received on December 31, 2014.

FRG's 2015 Form 1120S schedule entitled “Shareholders' Changes in Interest” also shows that each Irrevocable Family Trust's interest in FRG increased by 5,365 shares, to a total 14,750 shares, on March 31, 2015. On that same day, petitioners' respective Living Trust's ownership in FRG was reduced by 5,365 shares. Items of shareholder gain or loss were reported to each petitioner's respective Irrevocable Family Trust consistent with the number of days each shareholder held their shares during FRG's tax year ended December 27, 2015. This included cash distributions, of which each petitioner's Irrevocable Family Trust received $914,647.

FRG also filed its U.S. Income Tax Return for an S Corporation, Form 1120S, for tax years ended December 25, 2016 (“FRG's 2016 Form 1120S”), December 31, 2017 (“FRG's 2017 Form 1120S”), December 30, 2018 (“FRG's 2018 Form 1120S”), December 29, 2019 (“FRG's 2019 Form 1120S”), and December 27, 2020 (“FRG's 2020 Form 1120S”). Petitioners' respective Irrevocable Family Trusts owned 14,750 shares in FRG (9,385 (2014 transfer) plus 5,365 (2015 transfer)), a 16.389% ownership interest, from March 31, 2015 through December 9, 2021. Petitioners' respective Irrevocable Family Trusts received cash distributions, for FRG's 2016 through 2020 tax years, in the following amounts:

Robin O. Sorensen Family Trust

Year	Amount of Distributions
2016	$1,579,137.00
2017	$1,497,869.00
2018	$8,981,917.00
2019	$4,020,096.00
2020	$1,036,711.00

Chris R. Sorensen Family Trust

Year	Amount of Distributions
2016	$1,579,137.00
2017	$1,497,869.00
2018	$8,981,917.00
2019	$4,020,095.00
2020	$1,036,711.00

On November 15, 2021, Restaurant Brands International, Inc. announced that it was acquiring FRG for $1,000,000,000 in cash. On December 9, 2021, petitioners' respective Living Trusts and Irrevocable Family Trusts transferred all their shares in FRG. Today, neither petitioners' Living Trusts nor petitioners' Irrevocable Family Trusts own shares in FRG. Petitioners' Irrevocable Family Trusts each received $153,286,537.88 of the net acquisition proceeds on December 15, 2021, the date the acquisition of FRG closed.

Respondent's Notices of Deficiency

On September 19, 2018, respondent timely issued a notice of deficiency to each petitioner regarding his 2014 gift tax year (2014 SND). The 2014 SNDs determined that the per-share value of the FRG stock on December 31, 2014 is $1,923.56 per share. Based on the Schedule K-1s included with respondent's copy of FRG's 2015 Form 1120S respondent believed petitioners may have each transferred up to 13,343 shares of FRG stock in 2014. Thus, respondent determined that each petitioner made a gift on the transfer of 13,343 shares of FRG stock in the amount of $25,666,061 rather than the $5,000,000 reported on the returns. Respondent also determined that a gross valuation misstatement penalty applied under I.R.C. § 6662(h). In the alternative, respondent determined that a substantial gift valuation misstatement penalty applied under I.R.C. §§ 6662(a), (b)(5), and (g). Finally, respondent determined, also in the alternative, that a penalty under I.R.C. §§ 6662(a) and (c) applies to any underpayment for petitioner's 2014 gift tax year. Respondent complied with section 6751(b) in asserting the penalties for each of petitioners' 2014 gift tax liabilities.⁷

On October 17, 2019, respondent timely issued a notice of deficiency to each petitioner regarding his 2015 gift tax year (2015 SND). The 2015 SNDs determined that each petitioner made a gift of $7,613,450 to his respective Irrevocable Family Trust. This determination was based on the fact that 3,958 shares⁸ of the 13,343 shares that were determined transferred in the 2014 SND, may have been transferred in 2015. Respondent later learned through discovery that 5,365 shares were transferred by each petitioner on March 31, 2015. Respondent also determined that a gross valuation misstatement penalty applied under I.R.C. § 6662(h). In the alternative, respondent determined that a substantial gift valuation misstatement penalty applied under I.R.C. §§ 6662(a), (b)(5), and (g). Finally, respondent determined, also in the alternative, that a penalty under I.R.C. §§ 6662(a) and (c) applies to any underpayment for each petitioner's 2015 gift tax year. Respondent complied with I.R.C. § 6751(b) in asserting the penalties for each of petitioners' 2015 gift tax liabilities.⁹

Respondent's Amendment to Answers

On August 31, 2021, respondent's First Amendment to Answers were filed in each of petitioner's cases. In each case, respondent increased the deficiency and penalty amounts based on updated numbers for the fair market value of one nonvoting share of FRG as of December 31, 2014 and March 31, 2015 for tax years 2014 and 2015, respectively.¹⁰

The amounts that are now at issue for each petitioner are stated in the table on page 2 of this memorandum. The 2014 deficiency and penalty numbers, however, are based on each petitioner's transfer of 13,343 nonvoting shares of FRG stock as of December 31, 2014. The parties have now stipulated that each petitioner transferred 9,385 nonvoting shares of FRG stock as of December 31, 2014.¹¹ See First SOF ¶¶ 21-25.

Valuation of FRG

A. Mr. Anderson's Opening Expert Report

Respondent's proposed expert, Jeff Anderson (Mr. Anderson) of CONSOR® IP Experts, drafted an expert report in conformity with Tax Court Rule 143(g), entitled “Analysis of Firehouse Restaurant Group Stock Gift Valuation” dated March 14, 2022 (Mr. Anderson's Opening Report). Respondent lodged Mr. Anderson's Opening Report with the Court on March 21, 2022. On March 28, 2022, Mr. Anderson's Opening Report was filed with the Court. Mr. Anderson valued one nonvoting share of FRG at $2,076.86 (rounded) as of December 31, 2014. Mr. Anderson also valued one nonvoting share of FRG at $2,228.62 (rounded) as of March 31, 2015.

Like DHG's Return Appraisal, Mr. Anderson's Opening Report used the income approach and market approach, giving 50-50 weight to each approach, to reach a valuation conclusion. Mr. Anderson's Opening Report differs from DHG's Return Appraisal's income approach as follows: 1) Mr. Anderson did not reduce FRG's projected net cash flows by a theoretical corporate income tax because FRG pays no income taxes; and 2) Mr. Anderson's cost of capital was 13.14% as opposed to DHG's 26.00%. Mr. Anderson's Opening Report differs from DHG's Return Appraisal's market approach as follows: 1) Mr. Anderson stated that no true comparable exists, and thus used 23 companies as opposed to DHG's 7 companies; 2) Mr. Anderson did not apply a size adjustment factor to his comparable companies as opposed to the 60% size adjustment factor DHG applied to its comparable companies; and 3) Mr. Anderson used Revenues, Earnings Before Income Taxes, Depreciation, and Amortization (EBITDA), and Earnings Before Interest and Taxes (EBIT) as valuation multiples, as opposed to DHG's Return Appraisal's use of only Revenues and EBITDA.

Mr. Anderson listed all the documents he considered in Appendix B of Mr. Anderson's Opening Report. The documents include DHG's Return Appraisal and the Commissioner's report that was prepared during the examination of petitioners' 2014 gift tax year.

B. Mr. Anderson's Expert Rebuttal Report of DHG's Return Appraisal

On April 22, 2022, respondent's proposed expert, Mr. Anderson of CONSOR® IP Experts, drafted an expert rebuttal report in conformity with Tax Court Rule 143(g), entitled “Internal Revenue Service Rebuttal Report” dated April 22, 2022 (Mr. Anderson's Rebuttal Report). On April 26, 2022, Mr. Anderson's Rebuttal Report was filed with the Court. Mr. Anderson's Rebuttal Report reviewed and analyzed Mr. Rey's report lodged on March 21, 2022, which contained DHG's Return Appraisal as Attachment C. Mr. Anderson notes at footnote two of his report that: “Mr. Rey's expert opinion contains the March 31, 2015 share valuation while Attachment C contains the December 31, 2014 valuation and the methodology used for both valuation dates.”

Mr. Anderson's Rebuttal Report lists five primary reasons for the difference between his valuation conclusions and the valuation conclusions of DHG's Return Appraisal and Mr. Rey's report as follows: 1) Tax Affecting — DHG's Return Appraisal applied a theoretical corporate income tax, whereas Mr. Anderson's did not; 2) Discount Rates — DHG's Return Appraisal and Mr. Rey used discount rates of 26.00% and 25.7% as of December 31, 2014 and March 31, 2015, respectively, whereas Mr. Anderson used a discount rate of 13.14%; 3) Comparable Companies — DHG's Return Appraisal and Mr. Anderson used different criteria and methodologies to determine comparable companies; 4) Exclusion of EBIT Multiple — DHG's Return Appraisal did not consider EBIT multiples in its Market Approach, whereas Mr. Anderson considered EBIT multiples; and 5) Adjustment Factor — DHG's Return Appraisal used a size adjustment factor of 60% to lower its market approach value, whereas Mr. Anderson did not include a size adjustment factor.

Mr. Anderson's Rebuttal Report also goes into detail explaining the differences between Mr. Anderson's Opening Report and DHG's Return Appraisal. Mr. Anderson considers the positions taken by DHG's Return Appraisal and explains why the positions in DHG's Return Appraisal are unsupportable. Mr. Anderson further explains why the positions he took in Mr. Anderson's Opening Report are supported in the valuation community. Further, Mr. Anderson listed all the documents he considered in Appendix B of Mr. Anderson's Rebuttal Report.

C. As of the Dates of Valuation, FRG was financially successful and growing

The parties have stipulated to FRG's financial statements for its years ended December 27, 2009 through December 28, 2015. See First SOF ¶¶ 34-38, Exhibits 18-J through 22-J. The table below shows the revenue growth from FRG's 2009 fiscal year through its 2015 fiscal year:

Year End	12-27-2009	12-26-2010	12-25-2011	12-30-2012	12-29-2013	12-28-2014	12-27-2015
Total Revenues	$34,519,997.00	$37,108,437.00	$45,740,751.00	$55,553,437.00	$61,819,752.00	$72,924,781.00	$81,135,198.00
Growth	* * *	7.50%	23.26%	21.45%	11.28%	17.96%	11.26%

During this time, FRG's revenues grew at an average rate of 15.45%. FRG's revenues more than doubled from December 27, 2009 to December 28, 2014.

FRG's operating income also followed this positive trend as follows:

Year End	12-27-2009	12-26-2010	12-25-2011	12-30-2012	12-29-2013	12-28-2014	12-27-2015
Operating Income	$7,399,672.00	$7,645,059.00	$10,913,144.00	$13,380,826.00	$16,543,387.00	$18,964,805.00	$22,583,764.00
Growth	* * *	3.32%	42.75%	22.61%	23.64%	14.64%	19.08%
Operating Margin	21.44%	20.60%	23.86%	24.09%	26.76%	26.01%	27.83%

Also, from December 27, 2009 to December 28, 2014, FRG's operating income more than doubled, and FRG's operating income almost tripled from December 27, 2009 to December 27, 2015. This growth in operating income was made possible by FRG's revenue growth and improved operating margin.

FRG made distributions during its tax years prior to petitioners' gifts on December 31, 2014, as follows:

FRG Tax Years	Total Distributions
12-27-2009	$4,409,632.00
12-26-2010	$5,505,142.00
12-25-2011	$7,743,041.00
12-30-2012	$13,338,823.00
12-29-2013	$13,495,394.00
12-28-2014	$50,936,113.00
Total	$95,428,145.00

FRG made a large distribution during its tax year ended December 28, 2014 for two primary reasons: 1) petitioners wished to benefit from building a profitable company before transferring shares to their respective Irrevocable Family Trusts; and 2) Robin Sorensen wished to reduce the value of FRG before making the December 31, 2014 gift transfer.

At the time that each petitioner transferred 9,385 nonvoting shares to his Irrevocable Family Trust on December 31, 2014, 9,385 shares equaled 10.4278% of the outstanding shares of FRG. Thus, during the six-year period before the gift occurred, a shareholder holding a 10.4278% ownership interest in FRG would have received distributions as follows:

FRG Tax Years	Allocation to 10.4278% of shares
12-27-2009	$459,826.63
12-26-2010	$574,063.97
12-25-2011	$807,427.11
12-30-2012	$1,390,942.82
12-29-2013	$1,407,269.70
12-28-2014	$5,311,504.67
Total	$9,951,034.90

As shown in the table above, a shareholder holding a 10.4278% interest in FRG would have received $9,951,034.90 in aggregate distributions. That amount is almost twice DHG's Return Appraisal's valuation for those same 9,385 nonvoting shares, which DHG valued at $5,000,234.15.

The six-year period following the gift made by each petitioner on December 31, 2014, including the distributions for its tax year ended December 28, 2014, shows that the above-described distributions were not unusual:

FRG Tax Years	Total Distributions
12-27-2015	$5,605,013.00
12-25-2016	$9,635,413.00
12-31-2017	$9,139,543.00
12-30-2018	$54,804,918.00
12-29-2019	$24,529,397.00
12-27-2020	$6,325,697.00
Total	$110,039,981.00

This includes a large distribution during FRG's tax year ended December 30, 2018, in the amount of $54,804,918, similar to the large distribution during FRG's tax year ended December 28, 2014. Further, during this period, a shareholder holding a 10.4278% ownership interest in FRG would have received distributions as follows:

FRG Tax Years	Allocation to 10.4278% of shares
12-27-2015	$584,478.30
12-25-2016	$1,004,759.46
12-31-2017	$953,051.23
12-30-2018	$5,714,935.06
12-29-2019	$2,557,871.01
12-27-2020	$659,629.63
Total	$11,474,724.69

As shown in the table above, a shareholder holding a 10.4278% interest would have received $11,474,724.69 in aggregate distributions during the six-year period after the December 31, 2014 gift. This amount is more than double DHG's Return Appraisal's valuation of 9,385 nonvoting shares, which DHG valued at $5,000,234.15.

A shareholder holding a 10.4278% interest in FRG during the twelve-year period starting with FRG's tax year ended December 27, 2009 through FRG's tax year ended December 27, 2020, would have received $21,425,759.58 in aggregate distributions. That amount is four times more than DHG's Return Appraisal for an equivalent interest in FRG.

During the twelve-year period starting with FRG's tax year ended December 27, 2009 through FRG's tax year ended December 27, 2020, FRG made distributions totaling $205,468,126 while continuing to grow and subsequently sold for a net amount of approximately $935,307,689 in December 2021.

Overall, DHG's Return Appraisal valued FRG at $67,300,000 as of December 31, 2014, whereas Mr. Anderson's Opening Report valued FRG at $257,941,854. Mr. Rey valued FRG at $70,400,000 as of March 31, 2015, whereas Mr. Anderson's Opening Report valued FRG at $276,790,345 as of March 31, 2015.

BRIEF SYNOPSIS OF LEGAL AUTHORITIES:

Issue 1 — Each Petitioner Gifted 9,385 Nonvoting Shares to His Irrevocable Family Trust on December 31, 2014

A. Each Petitioner Relinquished Dominion and Control over 9,385 Nonvoting Shares of FRG on December 31, 2014

Petitioners argue, based on their interpretation of the instrument of transfer, that the “precise number of shares transferred cannot be finally determined until the value of such shares [is] finally determined for federal gift tax purposes.” As noted above, each “Irrevocable Stock Power” provided for the transfer of

a specific number of nonvoting shares in [FRG], . . . that have a fair market value as finally determined for federal gift tax purposes equal to exactly $5,000,000. . . . While the parties intend to initially rely upon and be bound by the valuation report prepared by DHG, if the IRS challenges the valuation and a final determination of a different fair market value is made by the IRS or a court of law, the number of shares transferred from the transferor to the transferee shall be adjusted accordingly so that the transferred shares have a value exactly equal to $5,000,000. [Emphasis added.]

While each petitioner signed an “Irrevocable Stock Power,” the trustees of the Irrevocable Family Trusts did not countersign them.

I.R.C § 2501(a)(1) imposes a tax, for each calendar year, on the transfer of property by gift. In enacting the gift tax, “Congress intended to use the term 'gifts' in its broadest and most comprehensive sense.” Commissioner v. Wemyss, 324 U.S. 303, 306 (1945). It sought “to reach every kind and type of transfer by gift.” Robinette v. Helvering, 318 U.S. 184, 187 (1943). The tax applies “whether the transfer is in trust or otherwise, whether the gift is direct or indirect, and whether the property is real or personal, tangible or intangible.” I.R.C. § 2511(a).

The gift tax is an excise on the donor's act of making a transfer of property and, accordingly, is the primary and personal liability of the donor. Robinette, 318 U.S. at 186; Treas. Reg. § 25.2511-2(a); see also I.R.C. § 2502(c). Nonetheless, “[t]he application of the tax is based on the objective facts of the transfer and the circumstances under which it is made, rather than on the subjective motives of the donor.” Treas. Reg. § 25.2511-1(g)(1). [Emphasis added.] Therefore, the donor's subjective beliefs and state of mind are irrelevant. Wemyss, 324 U.S. at 306. Further, “[a]s to any property, or part thereof or interest therein, of which the donor has so parted with dominion and control as to leave in him no power to change its disposition, whether for his own benefit or for the benefit of another, the gift is complete.” Treas. Reg. § 25.2511-2(b); accord Burnet v. Guggenheim, 288 U.S. 280, 286 (1933) (finding, “a gift is not consummate until put beyond recall”); Carrington v. Commissioner, 476 F.2d 704, 708 (5th Cir. 1973) (stating a gift was “complete” when the donor “did not retain any vestige of control”). Thus, a donor's retention of an interest that is dependent upon the occurrence of an event beyond the donor's control will not cause the transfer to be incomplete. Robinette, 318 U.S. at 187; Smith v. Shaughnessy, 318 U.S. 176, 181 (1943).

The parties agree that each petitioner transferred 9,385 nonvoting shares in FRG to his respective Irrevocable Family Trust on December 31, 2014. See First SOF ¶¶ 23-25. As the gift tax is not based on petitioners' subjective intent at the time of the property transfer, petitioners are liable for the gift tax. See Wemyss, 324 U.S. at 306; Robinette, 318 U.S. at 186. The objective facts demonstrating that petitioners relinquished dominion and control of the 9,385 nonvoting shares in FRG on December 31, 2014, without any power to change the disposition of the shares, control the determination of when the gift was complete. See Treas. Reg. § 25.2511-1(g); Treas. Reg. § 25.2511-2(b).

The following objective facts demonstrate petitioners' relinquishment of dominion and control: 1) FRG reported that petitioners' respective Irrevocable Family Trusts each owned 9,385 shares of FRG as of December 31, 2014 (See First SOF ¶ 33, Exhibit 17-J, p. 28); 2) each Irrevocable Family Trust received pro rata distributions in excess of $11,400,000 from December 31, 2014 through December 27, 2020 from FRG; 3) there was no agreement between petitioners and their respective Irrevocable Family Trusts that petitioners could demand the return of any of the nonvoting shares in the future; and 4) each Irrevocable Family Trust, not petitioners or petitioners' respective Living Trusts, transferred 9,385 nonvoting shares in FRG, on December 9, 2021, to facilitate the acquisition of FRG by Restaurant Brands International, Inc. Given these objective facts, Robin Sorensen, through his Living Trust, relinquished dominion and control over 9,385 nonvoting shares of FRG to the Robin O. Sorensen Family Trust, an irrevocable trust, on December 31, 2014, and Chris Sorensen, through his Living Trust, relinquished dominion and control over 9,385 shares of FRG to the Chris R. Sorensen Family Trust, an irrevocable trust, on December 31, 2014.

1. Petitioners' Respective Irrevocable Family Trusts were Listed as the Owners of 9,385 Shares of FRG on FRG's Tax Returns.

Positions taken in tax returns may be treated as admissions. See Waring v. Commissioner, 412 F.2d 800, 801 (3d Cir. 1969); Fonteneaux v. Commissioner, 539 Fed.App'x 442, 444 (5th Cir. 2013); see also Lare v. Commissioner, 62 T.C. 739, 750 (1974). Initially, respondent notes that each petitioner reported on his 2014 Form 709 — U.S. Gift (and Generation-Skipping Transfer) Tax Return, Schedule A Part 3 Continuation sheet the transfer of “9,385 non-voting shares in Firehouse stock.” See First SOF ¶ 3, Exhibit 1-J, pp. 5-6. On Schedule B-1 of petitioners' copy of FRG's 2015 Form 1120S, petitioners' respective Irrevocable Family Trusts are listed as shareholders of FRG. See First SOF ¶ 33, Exhibit 17-J, p. 8.

FRG's 2015 Form 1120S also included pages identified as “Shareholders Changes in Interest.” See First SOF ¶ 33, Exhibit 17-J, p. 27. The second page of the “Shareholders Changes in Interest” document listed the Irrevocable Family Trusts as shareholders of FRG. See First SOF ¶ 33, Exhibit 17-J, p. 28. At the start of FRG's 2015 tax year,¹² December 29, 2014, the Irrevocable Family Trusts are listed as holding zero (0) shares in FRG. On December 31, 2014, however, the Irrevocable Family Trusts are shown to own 9,385 shares, reflecting the ownership of 10.4278% of FRG. See First SOF ¶ 33, Exhibit 17-J, p. 28. Then, on March 31, 2015, the Irrevocable Family Trusts increased their respective ownership in FRG to 14,750 shares, reflecting the ownership of 16.3889% of FRG. See First SOF ¶ 33, Exhibit 17-J, p. 28.

On the first page of the document labeled “Shareholders Changes in Interest” petitioners' Living Trusts are shown as owners of FRG, and the Living Trusts' percentage of ownership drops from 35.5556% to 25.1278%, on December 31, 2014. This decrease matches the increase in percentage of ownership/interest the Irrevocable Family Trusts gained on December 31, 2014. See First SOF ¶ 33, Exhibit 17-J, p. 27. These admissions on FRG's 2015 Form 1120S show that petitioners, through their respective Living Trusts, relinquished dominion and control over 9,385 shares of FRG to their respective Irrevocable Family Trusts on December 31, 2014. See Waring, 412 F.2d at 801; Fonteneaux, 539 Fed.App'x at 444; see also Lare, 62 T.C. at 750.

FRG's 2015 Form 1120S is an admission that each petitioner, through his respective Living Trust, relinquished dominion and control over 9,385 shares in FRG to his respective Irrevocable Family Trust on December 31, 2014.¹³ See also First SOF ¶¶ 25 and 39, Exhibit 23-J. Therefore, each petitioner is liable for gift tax to the extent that the value of 9,385 nonvoting shares of FRG exceeds his available annual exclusions and lifetime exemption equivalents. See I.R.C. §§ 2501(a); 2503(b); and 2505(a).

2. Each Irrevocable Family Trust Enjoyed the Benefits of Owning 9,385 Shares of FRG by Receiving over $11,400,000 in Distributions.

The Irrevocable Family Trusts were shareholders of FRG from December 31, 2014 until December 9, 2021. As shareholders of FRG, an S Corporation for federal income tax purposes, the Irrevocable Family Trusts determine their tax liability by considering their “pro rata share” of FRG's items of income, loss, deduction, or credit on an annual basis regardless of whether the S corporation makes distributions. I.R.C. § 1366(a). In the present case, FRG allocated such income and loss to the Irrevocable Family Trusts based on their ownership of 14,750 shares of FRG stock from March 31, 2015 until December 2021. See I.R.C. §§ 1366(a) and 1377(a).¹⁴ Further, as shareholders of FRG, the Irrevocable Family Trusts received distributions from FRG during FRG's 2015 through 2020 tax years in the following amounts:

Robin O. Sorensen Family Trust

Year	Amount of Distributions
2015	$914,647.00
2016	$1,579,137.00
2017	$1,497,869.00
2018	$8,981,917.00
2019	$4,020,096.00
2020	$1,036,711.00
Total	$18,030,377.00

Chris R. Sorensen Family Trust

Year	Amount of Distributions
2015	$914,647.00
2016	$1,579,137.00
2017	$1,497,871.00
2018	$8,981,917.00
2019	$4,020,095.00
2020	$1,036,711.00
Total	$18,030,378.00

All outstanding shares of stock in an S corporation must confer identical rights to distributions and liquidation proceeds. I.R.C. § 1361(b)(1)(D); Treas. Reg. §1.1361-1(l)(1). As mentioned above, FRG's 2015 Form 1120S reported that each Irrevocable Family Trust owned 14,750 shares as of March 31, 2015. Thus, considering only the 9,385 shares each Irrevocable Family Trust owned as of December 31, 2014, the distributions attributable to those shares would have been as follows:

Robin O. Sorensen Family Trust

Year	Amount of Distributions
2015	$581,963.53
2016	$1,004,759.37
2017	$953,050.89
2018	$5,714,934.99
2019	$2,557,871.25
2020	$659,629.34
Total	$11,472,209.37

Chris R. Sorensen Family Trust

Year	Amount of Distributions
2015	$581,963.53
2016	$1,004,759.37
2017	$953,052.16
2018	$5,714,934.99
2019	$2,557,870.62
2020	$659,629.34
Total	$11,472,210.00

The distributions went to the Irrevocable Family Trusts; not to petitioners or petitioners' Living Trusts. Petitioners surrendered the right to receive these distributions when they transferred their shares in FRG to their respective Irrevocable Family Trusts. The Irrevocable Family Trusts have enjoyed the benefits of being in dominion and control of the shares since December 31, 2014. All these facts show that each petitioner relinquished dominion and control over 9,385 nonvoting shares in FRG to his respective Irrevocable Family Trust as of December 31, 2014. Therefore, each petitioner's gift is taxable to the extent that the value of the 9,385 nonvoting shares of FRG exceeds his available annual exclusions and lifetime exemption equivalents. See I.R.C. §§ 2501(a); 2503(b); and 2505(a).

3. No Documents Between Petitioners and Their Respective Irrevocable Family Trusts Make the Gift of FRG Stock Contingent on a Redetermination of Value.

Petitioners' respective Irrevocable Family Trust agreements are substantially similar, apart from the named settlors (petitioners), trustees (petitioners' respective wives), and beneficiaries (petitioners' respective wives and children). The trust agreements state, under Article II:

I hereby irrevocably assign and transfer to the Trustee all of my right, title, and incidents of ownership in certain property, the receipt of which is hereby acknowledged by the Trustee. Such property shall be held upon the terms and conditions and with the powers and limitations set forth in this instrument.

The Irrevocable Family Trust agreements are clear that the trusts are irrevocable under Florida state law, and that any property transferred to them is held by them as established in the Irrevocable Family Trust agreements. See First SOF ¶¶ 18-19, Exhibit 8-J, pp. 5 and 24, Exhibit 9-J, pp. 6 and 29. Once property is transferred to them, the trustees have dominion and control over the property to manage, sell, pledge, dispose, “or otherwise deal with any trust assets of any kind . . . in such manner and on such terms without limit as the Trustee may deem advisable . . .” See First SOF ¶¶ 18-19, Exhibit 8-J, p. 15, Exhibit 9-J, p. 16.

The Irrevocable Family Trust agreements also have a section specifically pertaining to “Closely-Held Businesses,” and state that the fiduciaries have “every right with respect to stock in any closely-held corporation.” See First SOF ¶¶ 18-19, Exhibit 8-J, p. 24, Exhibit 9-J, p. 25. Such rights include, but are not limited to, the right to sell or transfer closely held corporate stock. See First SOF ¶¶ 18-19, Exhibit 8-J, p. 24, Exhibit 9-J, p. 25. Ultimately, the Irrevocable Family Trusts did in fact transfer their respective 9,385 shares to a third party on December 9, 2021 and no longer hold any shares in FRG.¹⁵

Once each petitioner, through his respective Living Trust, transferred 9,385 nonvoting shares in FRG stock to his respective Irrevocable Family Trust, he parted with dominion and control over the shares. Petitioners' relinquishment of dominion and control over the shares is shown by the Irrevocable Family Trusts' agreements providing each trustee with the ability to manage the FRG shares as the trustee deemed advisable, which included the ability to sell, transfer, or dispose of the shares.

Petitioners argue that even though they each transferred 9,385 non-voting shares in Firehouse stock in 2014, the “precise number of shares transferred cannot be finally determined until the value of such shares [is] finally determined for federal gift tax purposes.” As stated in the Irrevocable Stock Powers,

the determination of fair market value is subject to challenge by . . . [respondent]. While the parties intend to initially rely upon and be bound by the valuation report prepared by DHG, if the IRS challenges the valuation and a final determination of a different fair market value is made by the IRS or a court of law, the number of shares transferred from the transferor to the transferee shall be adjusted accordingly so that the transferred shares have a value exactly equal to $5,000,000, in the same manner as a federal estate tax formula marital deduction amount would be adjusted for a valuation redetermination by the IRS and/or a court of law.”

Assuming that this clause is binding on the parties to the 2014 gift, an assumption that is very much in contention, and assuming further that the parties do in fact honor their “shall be adjusted accordingly” clause in light of the value determined by the Court, the adjustment will not change the fact that on December 31, 2014, each petitioner, through his Living Trust, made a competed gift of 9,385 nonvoting shares of FRG stock when he relinquished dominion and control over the shares.

Consider that if a farmer agrees to transfer his son several cows worth $1,000 as finally determined for federal gift tax purposes, and the farmer's appraiser determines that five cows equal that value, then the transfer is for five cows. The son is now the owner of five cows. Years pass. The son breeds the cows and opens a barbeque stand. If a later gift tax examination finds that each cow was actually worth more, and that two extra cows had been included in the transfer, nothing in the agreement would allow the farmer to take the two cows back. They were sold as barbeque. The parties might be held to their agreement — a transfer of the number of cows as finally determined to equal $1,000 coupled with the possibility of the farmer getting something (barbeque?) in the event of a redetermination of value. But whatever it is, it won't be the cows transferred. And it might be nothing; the farmer may not pursue his claim, and if he does, he is now just a general creditor who must stand in line with all the other unsecured creditors of the barbecue operation.

The farmer's use of a transfer clause that contemplates subsequent events does not change the fact that the transfer of the five cows was complete on the execution of the documents. This is the case even though the number of cows was indefinite until the initial appraisal was completed. Robinette, 318 U.S. at 187 (gift was complete despite “indefiniteness of the eventual recipient”); Nelson v. Commissioner, 17 F.4th 556, 561 (5th Cir. 2021) (same); Estate of Sommers v. Commissioner, T.C. Memo. 2013-8, at *45-46 (filling in the blanks upon receipt of the appraisal was a “ministerial act” implementing the parties' original agreement); Treas. Reg. § 25.2511-2(b) (gift is complete upon cessation of dominion and control). The transfer was of five cows, regardless of whether the transfer is structured as a gift or a sale.

Under the farmer's transfer document, however, a redetermination of the value of a cow might give rise to a right of recovery against the son. But a right that is dependent upon the occurrence of an event beyond the donor's control, such as a later redetermination of value by federal authorities or the courts, does not alter the fact that the transfer is complete for gift tax purposes upon the execution of the documents. Smith, 318 U.S. at 181; Robinette, 318 U.S. at 187; Ward v. Commissioner, 87 T.C. 78, 111 (1986); Estate of Kolb v. Commissioner, 5 T.C. 588, 593 (1945); Mack v. Commissioner, 39 B.T.A. 220, 229 (1939); See also Wandry v. Commissioner, 2012-46 I.R.B. 543, 2012 WL 5473819 (November 13, 2012). The possibility that the farmer might get something back does not change the fact that he transferred five cows upon the execution of the documents, regardless of whether the transfer is structured as a gift or a sale.

And the possibility that petitioners might get something back because of this proceeding does not change the fact that on December 31, 2014, petitioners gave up dominion and control over the FRG stock. Therefore, petitioners' gifts are taxable to the extent that the value of 9,385 nonvoting shares of FRG exceeds petitioners' available annual exclusions and lifetime exemption equivalents. See I.R.C. §§ 2501(a); 2503(b); and 2505(a).

4. Petitioners' Respective Irrevocable Family Trusts Transferred the Nonvoting Shares in FRG in December 2021.

As mentioned above, on December 31, 2014, the trustees of the Irrevocable Family Trusts had the right to manage the 9,385 nonvoting shares in FRG that petitioners, through their respective Living Trusts, relinquished dominion and control over. This included the rights of the trustees to sell, transfer, and/or dispose of the shares as the trustees deemed fit. And that is exactly what the trustees did on December 9, 2021 to facilitate Restaurant Brand International, Inc.'s acquisition, through a subsidiary that is a Delaware limited liability company, of FRG; the trustees transferred their shares in FRG, including the 9,385 nonvoting shares received on December 31, 2014, in exchange for $153,286,537.88. Further, petitioners admit that the Irrevocable Family Trusts no longer own any of the transferred shares. Again, the objective facts show that each Irrevocable Family Trust, and not petitioners or petitioners' respective Living Trusts, had dominion and control of 9,385 nonvoting shares of FRG stock immediately after petitioners' gifts on December 31, 2014. Therefore, petitioners' gifts are taxable to the extent that the value of 9,385 nonvoting shares of FRG stock exceeds petitioners' available annual exclusions and lifetime exemption equivalents. See I.R.C. §§ 2501(a); 2503(b); and 2505(a).

5. The “Irrevocable Stock Power” language attempting to “adjust” the number of nonvoting shares of FRG that were transferred by Petitioners on December 31, 2014 is a condition subsequent and violates Public Policy.

In Commissioner v. Procter, 142 F.2d 824 (4th Cir. 1944), the Fourth Circuit rejected a clause that adjusts part of a gift to “automatically be deemed not to be included in the conveyance in trust hereunder and shall remain the sole property of [the taxpayer]” because the adjustment is triggered only by a “final judgment or order of a competent federal court of last resort that any part of the transfer . . . is subject to gift tax.” Id. at 827.

Petitioners' Irrevocable Stock Powers state that “[t]he precise number of shares transferred in accordance with the preceding sentence shall be determined based on all relevant information as of the date of transfer in accordance with a valuation report that will be prepared by Dixon Hughes Goodman, LLP ('DHG'), Jacksonville, Florida, an independent third-party professional organization that is experienced in such matters. . . .” DHG's Return Appraisal, which was attached to Chris Sorensen's 2014 gift tax return, concludes that the per share value of FRG stock is $532.79 as of December 31, 2014. Petitioners then failed to follow their transfer clause since each petitioner reported on his respective 2014 gift tax returns that he transferred 9,385 shares of FRG stock ($5,000,234.15 according to DHG's Return Appraisal) on December 31, 2014, which does not equal $5,000,000.

In Procter, the Fourth Circuit found a gift adjustment clause similar to the one at issue in this case to be void as contrary to public policy. Id. at 827; see also Rev. Rul. 86-41, 1986-1 C.B. 300; Rev. Rul. 65-144, 1965-1 C.B. 442. In Procter, the taxpayer made a present gift on the condition that, if a court of last resort found the gift was subject to gift tax, the part of the gift that was subject to the gift tax would be void. Procter, 142 F.2d at 827. The clause at issue in the Irrevocable Stock Power¹⁶ functions in the same manner as the clause in Procter. If the savings clause at issue in this case is interpreted in the manner that petitioners advance, then any part of the gift subject to gift tax is void. The Fourth Circuit found that the clause in Procter was contrary to public policy because the clause discouraged the collection of gift tax since any attempt to enforce the gift tax would defeat the gift. Id. The Fourth Circuit also found that the effect of the clause “would be to obstruct the administration of justice by requiring the courts to pass upon a moot case.” Id. The Fourth Circuit found that the effect of the clause would neutralize any final judgment of a court; that is, the condition in the clause would not become operative until there was a judgment that the donor was liable for the gift tax, but after the judgment had been rendered, the condition could not become operative because the matter involved was concluded and rendered moot by the judgment. Id. at 827-28. See also TOT Property Holdings, LLC v. Commissioner, 1 F.4th 1354, 1365 (11th Cir. 2021); Belk v. Commissioner, 774 F.3d 221, 229 (4th Cir. 2014); Estate of Christiansen v. Commissioner, 130 T.C. 1, 13-14 (2008), aff'd on other issues, 586 F.3d 1061 (8th Cir. 2009); Ward v. Commissioner, 87 T.C. at 109-16.

Giving effect to petitioners' “shall be adjusted accordingly” clause presents the same issue as in Procter: it precludes respondent from enforcing the gift tax or engaging in any efforts to collect the gift tax. Moreover, it also precludes respondent from enforcing the valuation misstatement penalties.

Further, the Eleventh Circuit, the circuit to which appellate venue lies in the subject case¹⁷, supports respondent's interpretation of the legal result pertaining to petitioners' “shall be adjusted accordingly” clause. In TOT Property Holdings, LLC v. Commissioner, 1 F. 4th 1354 (11th Cir. 2021), the Commissioner disallowed a conservation-easement deduction due to the taxpayer's failure to meet applicable regulation requirements. Id. at 1357. The Eleventh Circuit concluded that language in the deed conveying the conservation easement conflicted with applicable regulation requirements, and the deed language purporting to bring the easement into compliance with the relevant regulations “if different” was an unenforceable savings clause. Id. at 1357, 1365-68.

The Eleventh Circuit relied on the Fourth Circuit's decision in Procter, including the discussion in Procter about the public policy concerns precluding enforcement of a clause retroactively voiding part of a transfer subject to the gift tax. Id. at 1365-68. Although the deed language in TOT Property was “not conditioned on any adverse action by the IRS or a court,” that was a “clear necessity” for the clause to apply. Id. at 1367. As such, the clause presented “the same sort of catch-22 situation that leads to the 'trifling with the judicial process,' that case law has held to be unenforceable.” Id. at 1368 (citing Procter, 142 F.2d at 827).

This is not to be confused with the cases in which the donor transferred a fixed number of units in a closely-held entity subject to the condition that the units be reallocated among the donees based upon unit values as finally determined for transfer tax purposes. See Estate of Petter v. Commissioner, 653 F.3d 1012, 1015-16 (9th Cir. 2011); Estate of Christiansen v. Commissioner, 586 F.3d 1061, 1062 (8th Cir. 2009); Succession of McCord v. Commissioner, 461 F.3d 614, 619 (5th Cir.2006); Hendrix v. Commissioner, T.C. Memo. 2011-133, at *19-22. In these cases, there was no question that the donor had given up dominion and control over a fixed number of units and no possibility that any of those units could return to the donor. As the Fifth Circuit explained,

While the formula-clause cases might give the appearance of reopening a transaction in just such a fashion, that is not the case. A gift is considered complete, and thus subject to the gift tax, when “the donor has so parted with dominion and control as to leave in him no power to change its disposition, whether for his own benefit or the benefit of another.” 26 C.F.R. § 25.2511-2(b) (2021). For tax purposes, the “value . . . at the date of the gift shall be considered the amount of the gift.” 26 U.S.C § 2512(a). With a formula clause, the transaction is still closed even if a reallocation occurs. That reallocation simply works to ensure that a specified recipient “receive[s] those units [he or she was] already entitled to receive.” Est. of Petter, 653 F.3d at 1019. Similarly, the value of the gift existed and could be determined at the time of the transfer. “The number of . . . units” transferred [to a specified recipient] is “capable of mathematical determination from the outset, once the fair market value [is] known.” Id. The reallocation clauses thus allow for the proper number of units to be transferred based on the final, correct determination of valuation. Est. of Petter, 653 F.3d at 1019.

Nelson v. Commissioner, 17 F.4th at 561.

Therefore, petitioner's “shall be adjusted accordingly” clause, which adjusts the transferred shares between the donor and the donee, as opposed to among the donees, should be disregarded, and the Court should find that each petitioner transferred 9,385 nonvoting shares of FRG to his respective Family Trust on December 31, 2014.

The facts of this case are clear — each petitioner transferred 9,385 shares of FRG on December 31, 2014. Petitioners cannot claim that two mutually exclusive facts are true at the same time — that they transferred 9,385 shares of FRG on December 31, 2014 and that they did not transfer 9,385 shares of FRG on December 31, 2014. That is “the same sort of catch-22 situation that leads to the 'trifling with the judicial process,' that case law has held to be unenforceable.” TOT Property Holdings, LLC v. Commissioner, 1 F.4th at 1368 (citing Procter, 142 F.2d at 827). Thus, each petitioner made a gift of 9,385 shares of FRG on December 31, 2014.

B. The Wandry Opinion Improperly Focused on the Donor's Subjective Intent in Contradiction of the Applicable Statutes and Regulations

This Court, in Wandry v. Commissioner, T.C. Memo. 2012-88, a case that was submitted under T.C. Rule. 122, found that a defined value clause controlled the amount of the gift. In Wandry, the donors transferred “a sufficient number of my Units as a Member of Norseman Capital, LLC, a Colorado limited liability company, so that the fair market value of such Units for federal gift tax purposes shall be [stated dollar amounts].” Wandry, T.C. Memo. 2012-88 at *4-5. The transfer documents in Wandry stated that:

If, after the number of gifted Units is determined based on such valuation, the IRS challenges such valuation and a final determination of a different value is made by the IRS or a court of law, the number of gifted Units shall be adjusted accordingly so that the value of the number of Units gifted to each person equals the amount [stated in the transfer documents].

Id.

The Court, citing Estate of Petter, T.C. Memo. 2009-280, differentiated between a “savings clause” and a “formula clause.” Id. at *20-21. The Court stated a “savings clause” is void because it creates a donor that tries to “take property back,” whereas a “formula clause” is valid because it transfers in the first instance a “fixed set of rights with uncertain value,” and the difference between the two “depends on an understanding of just what the donor is trying to give away.” Id. The Court pointed to the transfer document language to find that the taxpayers' intent was to transfer “a predefined Norseman percentage interest expressed through a formula” to each donee, and the transfer document does not allow taxpayers to “take property back” but correct the allocations. Id. at *25.

Respondent issued an Action on Decision regarding Wandry. 2012-46 I.R.B. 543, 2012 WL 5473819 (November 13, 2012). As explained in the Action on Decision, respondent disagrees with the result in Wandry because the application of the gift tax is based on the objective facts and circumstances of when the donor relinquishes dominion and control over the gifted property, as detailed in Section II. above, and not upon the subjective donative intent of the donor. The evidence in Wandry showed that the donors parted with dominion and control over the gifted Norseman Capital, LLC units, although the number of units was unclear from the record (as pointed out by the Court). The transfer documents in Wandry created a condition subsequent to the donees' ownership of the gifted Norseman Capital, LLC units by subjecting the gift to reallocation if “a final determination of a different value is made by the IRS or a court of law.” However, a condition subsequent cannot change the fact the gift was complete as of the date the donors gave up control of the Norseman Capital, LLC units to the donee. See Smith, 318 U.S. at 181; Robinette, 318 U.S. at 187; Estate of Kolb, 5 T.C. at 593; Mack, 39 B.T.A. at 229.

The Wandry opinion also failed to acknowledge that adjusting or “reallocating” the donors' and donees' capital accounts in Norseman Capital, LLC affects each partner's economics in the partnership since capital accounts under Treas. Reg. § 1.704-1 (I.R.C. § 704(b) book capital accounts) are used to track a partner's economic share of the underlying partnership assets. Thus, a reduction to a partner's capital account is a reduction to the partner's economic share of the partnership's assets, it is not simply an adjustment to the partnership's internal accounting, as the Wandry decision alludes.

The Wandry opinion also discusses the donor and donees' competing interests, but, unlike a situation where a donor is gifting property to a third-party, there are no real competing interests where the donor is gifting property to a spouse and/or children for estate planning purposes. In Estate of Petter and other cases where a donor gifts property to charities, the directors of charitable foundations have fiduciary duties to their organizations to ensure appraised values of gifts are acceptable, and for a donor to receive a charitable contribution deduction the charities acknowledge the appraised value of the gift before the IRS by signing Form 8283. Contrast that situation with Wandry, in which donors are gifting property to family members and there are no competing interests. Donors are incentivized to transfer as much as possible to remove the assets from the transfer tax base and the donees would like to receive as much as possible. See Tiffany B. Carmona, Tye J. Klooster, Wandry v. Commissioner, the Secret Sauce Estate Planners Have Been Waiting for?, Probate & Property, November/December 2012, at 10, 14. Thus, the Wandry opinion's rationale that the donor and donees had competing interests at the time the gift was completed, similar to donors who gift property to charities, is inherently flawed.

The focus upon the donor's subjective intent also subverts Congressional intent regarding the valuation misstatement penalties in gift tax matters. For example, if a donor is allowed to control the dollar amount of property it transfers to a donee, then this Court is not deciding the amount of gift tax on the property transferred but rather is only determining the property that should be returned to the donor. In such a scenario, there can never be a valuation misstatement penalty because the donor's intent to avoid gift tax, rather than the value of the property transferred, controls the donor's gift tax liability, and thus avoids any valuation misstatement penalties. The Supreme Court in Helvering v. Mitchell, 303 U.S. 391, 401 (1938), explained that penalties are “a safeguard for the protection of the revenue and to reimburse the Government for the heavy burden of investigation.” More important, respondent relies “on the risk of civil and criminal penalties — and a large measure of good faith — to maintain public compliance with the tax code.” See Harrison v. Internal Revenue Serv., No. 20-CV-828 (CRC), 2021 WL 930266, at *1 (D.D.C. Mar. 11, 2021) (citing United States v. Bisceglia, 420 U.S. 141, 145 (1975)). Permitting taxpayers' subjective intent to set a predetermined value on the transfer of gifted property precludes respondent from imposing such valuation misstatement penalties and takes away the safeguard to maintain public compliance with the tax code. Therefore, focusing on the donor's subjective intent, rather than focusing on the cessation of dominion and control over the property transferred, gives donors an incentive to undervalue the gifted property with no risk of additional gift tax or penalties.

The Wandry opinion improperly focused on the donors' intent rather than the donors' relinquishment of dominion and control over gifted property, as required by the statutes and regulations thereunder. Therefore, to the extent necessary to resolve this issue, this Court should find Wandry was wrongly decided, and petitioners owe additional gift tax to the extent that the value of 9,385 nonvoting shares of FRG exceeds petitioners' annual exclusions and lifetime exemption equivalents. See I.R.C. §§ 2501(a); 2503(b); and 2505(a).

C. The Facts in This Case are Distinguishable from the Facts in Wandry

One glaring distinction between this case and Wandry is respondent's ability, in this case, to identify the specific property that petitioners gifted and the shift in the benefits (for example, distributions) and burdens with respect to that specific property. In Wandry, the opinion does not describe the specific number of units in the limited liability company transferred by the donors. In this case, respondent can show that the Irrevocable Family Trusts each own a set number of shares of FRG stock as of December 31, 2014. Indeed, the parties agree that petitioners gifted shares to their respective Irrevocable Family Trusts as of December 31, 2014, and the shareholders of FRG were as follows:

Shareholder	Voting	Nonvoting	Total	% Interest
Robin Sorensen's Living Trust	3,200	19,415	22,615	25.13%
Robin Sorensen's Irrevocable Family Trust	0	9,385	9,385	10.43%
Chris Sorensen's Living Trust	3,200	19,415	22,615	25.13%
Chris Sorensen's Irrevocable Family Trust	0	9,385	9,385	10.43%
Other Shareholders	2,600	23,400	26,000	28.88%
Total	9,000	81,000	90,000	100.00%

See First SOF ¶ 23-25; see also First SOF ¶ 39, Exhibit 23-J.

FRG reported, on its 2015 Form 1120S, that each Irrevocable Family Trust owned 9,385 shares, a 10.4278% interest, in FRG as of December 31, 2015. See First SOF ¶ 33, Exhibit 17-J, p. 28. Also, FRG issued Schedule K-1s (Form 1120S) to each Irrevocable Family Trust reporting that trust's share of FRG's current year income, deduction, credits, distributions, and other items of the S corporation based on the trusts' ownership of 9,385 shares of stock. Further, each Irrevocable Family Trust retained the 9,385 shares until it transferred the shares on December 9, 2021. Therefore, unlike in Wandry, where the units transferred were uncertain, the parties agree, and the documents prove, that each petitioner transferred 9,385 nonvoting shares in FRG to his respective Irrevocable Family Trust on December 31, 2014.

Unlike the donors in Wandry, petitioners failed to follow their own transfer clauses. The descriptions of the gifts within petitioners' respective 2014 Gift Tax Returns state that each transferred nonvoting shares equal to $5,000,000 and further stated one nonvoting share was valued at $532.79. Yet, each petitioner transferred 9,385 nonvoting shares in FRG to his respective Family Trust. The result of multiplying 9,385 nonvoting shares in FRG by $532.79 is $5,000,234.15, which is greater than, not equal to $5,000,000. Accordingly, these facts align more with Knight v. Commissioner, 115 T.C. 506, 515-16 (2000), than with Wandry.

In Knight, the donors argued that their defined value clause limited their gift to $300,000, but at trial the donors contended the gifts were worth less than $300,000. This Court found that the donors' inconsistent positions opened the door to respondent's argument that the gifts were worth more than $300,000. Similar to the donors in Knight, petitioners here are taking an inconsistent position in arguing that their gift should be equal to $5,000,000 while reporting on their gift tax returns a transfer of shares in excess of $5,000,000. By failing to comply with the plain language of their own transfer clause, petitioners have waived reliance on their transfer clause and opened the door for the Court to consider whether each petitioner's gifts on December 31, 2014 were worth more than $5,000,000.

Finally, the donors in the Wandry were gifting interests in an entity taxed as a partnership for federal income tax purposes. In the Wandry opinion, the Court discusses respondent's ability to challenge “the accuracy of partnership capital accounts, resulting in reallocations that affect previous years” and reasons that “it can be said that a capital account is always 'tentative' until final adjudication or the passing of the appropriate period of limitations” as a reason that the capital accounts did not control the nature of donors' gifts. Wandry, T.C. Memo. 2012-88 at *15. This reasoning allowed the Court to reach the conclusion that the reallocation in Wandry does not result in the donors taking property back.

Partnerships have broad flexibility to determine the economic rights of partners under the partnership agreement that are not available to S corporations. In order to be taxed as an S corporation, each ownership interest (i.e., each share of stock) in an S corporation must confer identical rights to distributions and liquidation proceeds. I.R.C. § 1361(b)(1)(D); Treas. Reg. § 1.1361-1(l)(1). FRG is an S corporation, thus, the only way to reallocate economic rights among the shareholders is through the retransfer of a share of stock. Therefore, unlike in Wandry where the Court reasoned that a capital account reallocation did not amount to the donors receiving property back from the donees, if the Court follows Wandry, petitioners will have to receive the nonvoting shares back, as well as any distributions and sales proceeds that the Irrevocable Family Trusts received because of their ownership since December 31, 2014.

D. Petitioners and the Irrevocable Family Trusts are Unable to “Adjust” the Number of Gifted FRG Shares; Thus, the Number of Shares Gifted is Final

Cases that approve the use of defined value clauses, as “formula clauses,” in the gift tax realm reason that the donor is gifting a fixed set of rights, although the value of said rights passing to any given donee is unknown. See Estate of Petter, 653 F.3d at 1015-16; Estate of Christiansen, 586 F.3d at 1062; Succession of McCord, 461 F.3d at 619; Hendrix, T.C. Memo. 2011-133, at *19-22. The reallocation of the transferred property among the donees based on a redetermination of the value of the transferred property does not result in the donor taking back property but rather, ensures that each donee receives the property that the donee was always entitled to receive. This logic, however, is severely flawed when applied to the facts of this case.

Petitioners argue that if the value of 9,385 nonvoting shares in FRG as of December 31, 2014 exceeds $5,000,000 (which petitioners themselves exceeded with their initial transfer), then they do not owe additional gift tax because the shares “shall be adjusted accordingly” between the donor and the donee. No adjustment of the shares can occur in this case, however, since neither petitioners nor their respective Irrevocable Family Trusts now own shares in FRG.

Even if petitioners' respective Living Trusts and Irrevocable Family Trusts still held the nonvoting shares of FRG, this Court, being a court of limited jurisdiction, could not enforce any “adjustment” after finality of the case. A “shall be adjusted accordingly” adjustment would substantially affect the rights of the Irrevocable Family Trusts given the wide disparity in the value of the FRG shares at issue in this case, as well as the substantial distributions that the Irrevocable Family Trusts have received from December 31, 2014 through December 2021. The trustees of the Irrevocable Family Trusts bear a fiduciary duty to the beneficiaries of the Irrevocable Family Trusts, and not to petitioners. The trustees are not a party to this case. Moreover, there is no evidence that the trustees ever agreed to be party to such an adjustment, or even that petitioners intend to pursue such an adjustment in a state law proceeding.

The realities of a transaction must control the tax implications. Petitioners are asking this Court to ignore a transaction that occurred eight years ago and find that petitioners' tax wishes control the tax implications of petitioners' gifts. The transaction at hand, however, shows that each petitioner gifted 9,385 nonvoting shares in FRG stock to his respective Irrevocable Family Trust by relinquishing dominion and control over the shares on December 31, 2014. Therefore, petitioners' gifts are taxable to the extent that the value of 9,385 nonvoting shares of FRG exceeds each petitioner's annual exclusions and lifetime exemption equivalents. See I.R.C. §§ 2501(a); 2503(b); and 2505(a).

E. The Parties Stipulated that Each Petitioner Gifted 9,385 Nonvoting Shares of FRG Stock on December 31, 2014

Finally, Wandry is inapplicable in this case because the parties stipulated, in the First Stipulation of Facts filed on March 14, 2022, that each petitioner gifted 9,385 nonvoting shares of FRG Stock to his Irrevocable Family Trust. See First SOF ¶¶ 21-25.

Issue 2 — Petitioners transferred 5,365 shares of FRG for insufficient consideration on March 31, 2015

Respondent determined in the notices of deficiency for tax year 2015 that each petitioner transferred by gift 3,958 shares of FRG to his respective Irrevocable Family Trust. Petitioners have since admitted that each transferred 5,365 shares of FRG by sale that occurred on March 31, 2015 at the same per-share price of $532.79 of the December 31, 2014 appraisal prepared for petitioners' 2014 Forms 709. Respondent has filed an Amendment to Answer to modify his position with respect to petitioners' 2015 gift tax years. The parties agree that each petitioner, through his respective Living Trust, transferred 5,365 nonvoting shares of FRG to his respective Irrevocable Family Trust on March 31, 2015. The parties disagree that the consideration provided by petitioners' respective Irrevocable Family Trusts was adequate. Respondent will show that the Irrevocable Family Trusts provided insufficient consideration for the 5,365 nonvoting shares of FRG as of March 31, 2015; thus, these transfers are a part-sale and a part-gift.

I.R.C. § 2512(b) provides that “[w]here property is transferred for less than an adequate and full consideration in money or money's worth, then the amount by which the value of the property exceeded the value of the consideration shall be deemed a gift.” “The Supreme Court interpreted section 2512 as dispensing with the test of 'donative intent' in favor of a 'much more workable external test' that 'where property is transferred for less than an adequate and full consideration' then the excess, 'shall, for [the purposes of gift tax] be deemed a gift.' ” Frazee v. Commissioner, 98 T.C. 554, 561 (1992) (citing Wemyss, 324 U.S. at 306-07). Treas. Reg. § 25.2512-8 provides that if the value of the property transferred exceeds the consideration received, then a gift has occurred. Treas. Reg. § 25.2512-8 also provides that transfers in the ordinary course of business are not subject to gift tax. “Transactions within a family group are subject to special scrutiny, and the presumption is that a transfer between family members is a gift.” Harwood v. Commissioner, 82 T.C. 239, 258 (1984), aff'd without pub. op. 786 F.2d 1174 (9th Cir. 1986)(citation omitted).

The March 31, 2015, transfer was between family members and was not made in the ordinary course of business. Petitioners have not taken the position that the transaction was in the ordinary course of business, but even if petitioners take this position, the facts belie this assertion. First, the parties used a three-month old appraisal to calculate the transfer price of a rapidly growing business. Second, the consideration was paid through a note with a below-market interest rate and a balloon payment of all principal due in nine years.

Respondent's expert, Jeff Anderson, determined that one nonvoting share of FRG stock was valued at $2,228.62 (rounded) as of March 31, 2015. Petitioner provided consideration based on a per share value of $532.79 and a purchase price of $2,858,418. The difference between this amount ($2,858,418) and the amount determined by respondent's expert ($11,956,566) is a taxable gift in the amount of $9,098,148.

Issue 3 — The Fair Market Value of One Nonvoting Share of FRG as of December 31, 2014 is $2,076.86 (rounded)

This Court has noted that special rules apply when valuing the stock of a closely held corporation. Estate of Noble v. Commissioner, T.C. Memo. 2005-2, at *12 (citing Estate of Scanlan v. Commissioner, T.C. Memo. 1996-331, aff'd without pub. op. 116 F.3d 1476 (5th Cir. 1997)). Where closely held stock cannot be valued from arm's-length sales, the value of the closely held stock is then “best determined by analyzing the value of publicly traded stock in comparable corporations engaged in the same or a similar line of business, as well as by taking into account all other relevant factors bearing on value that would be considered by an informed buyer and an informed seller.” Estate of Noble, T.C. Memo. 2005-2, at *13-14 (internal citations omitted). This methodology is widely accepted, as reflected by the valuation community's embrace of Rev. Rul. 59-60, 1959-1 C.B. 237, which similarly states in section 3.03 that “in many instances, the . . . best measure may be found in the prices at which the stocks of companies engaged in the same or a similar line of business are selling in a free and open market.”

Mr. Anderson's Opening Report determined that the value of one nonvoting share of FRG as of December 31, 2014 equals $2,076.86 (rounded). Mr. Anderson's Opening Report explains he used the income approach and market approach methodologies, giving each a 50/50 weight, to reach his conclusion of value.

Mr. Anderson's Opening Report also details why “tax affecting” an S corporation is inappropriate to determine the entity's value, and thoroughly explains his use of the Free Cash Flow to Equity approach, including his use of FRG's financials and how he determined an appropriate discount rate to conclude the value of FRG as of December 31, 2014. In Mr. Anderson's market approach, he clearly explains that “no perfect comparable company exists,” but he isolated “23 companies that fit” the criteria of a suitable comparable company. Using these comparable companies, he applied the “comparable companies' valuation metrics to” FRG to determine FRG's value as of December 31, 2014. The metrics Mr. Anderson used were Revenue, EBITDA, and EBIT. Mr. Anderson did not apply a size discount to the market approach since the data, if anything, supported a size premium, rather than a size discount, for smaller companies in the restaurant industry. Although not noted in Mr. Anderson's Opening Report, this can be clearly shown by Shake Shack's market multiples, a company with less than 100 stores, compared to Wendy's market multiples, a company with more than 6,000 stores.

Mr. Anderson's report determined that the value of 9,385 nonvoting shares of FRG as of December 31, 2014 equaled $19,491,348. Mr. Anderson's conclusion is supported by accepted methodologies in the valuation community and the facts of this case.

A. Tax Affecting an S Corporation Results in Undervaluing an Entity and is Not Supported by Case Law or the Valuation Community

Rev. Rul. 59-60, 1959-1 C. B. 237, is widely accepted within the field of business valuation as the bedrock for the analysis of valuation problems involving closely held business entities. Pass-through entities (PTEs) existed at the time Rev. Rul. 59-60 was published, and it is believed that a substantial majority of the closely held business interests now subject to Rev. Rul. 59-60 are PTEs. Section 3.01 of Rev. Rul. 59-60, Approach to Valuation, provides, in part:

A determination of fair market value, being a question of fact will depend upon the circumstances in each case. No formula can be devised that will be generally applicable to the multitude of different valuation issues arising in estate and gift tax cases. . . . A sound valuation will be based upon all the relevant facts, but the elements of common sense, informed judgment and reasonableness must enter into the process of weighing those facts and determining their aggregate significance.

In a series of opinions, the Tax Court has addressed tax affecting in the context of valuing non-controlling interests in PTEs. In each case the Court's concern was the lack of an empirical basis for the tax affecting, that tax affecting remains purely theoretical with no backing from real world transactions. In each case, the Court concluded on the record before it that in applying the DCF method to the projected earnings stream of the PTE, the proper entity level tax rate was its actual tax rate, zero percent. See Estate of Jackson v. Commissioner, T.C. Memo 2021-48 (name & likeness, song catalog, limited liability company) Estate of Gallagher v. Commissioner, T.C. Memo. 2011-148, modified by T.C. Memo 2011-244 (limited liability company); Estate of Giustina v. Commissioner, T.C. Memo. 2011-141, aff'd on this issue, 586 Fed. App'x 417 (9th Cir. 2014)(limited partnership); Dallas v. Commissioner, T.C. Memo. 2006-212 (S corporation); Estate of Adams v. Commissioner, T.C. Memo. 2002-80 (S corporation); Estate of Heck v. Commissioner, T.C. Memo. 2002-34 (S corporation); Wall v. Commissioner, T.C. Memo. 2001-75 (S corporation); Gross v. Commissioner, T.C. Memo. 1999-254, aff'd, 272 F.3d 333 (6th Cir. 2001), cert. denied, 537 U.S. 827 (2002) (S corporation).

In Gross, the taxpayer argued, as do petitioners here, that tax affecting was necessary to account for the tax burden imposed on the owners of S corporations. The Court declined to accept that reasoning, explaining:

He [Dr. Bajaj, the Commissioner's expert] made no explicit adjustment for any shareholder level taxes, although, undoubtedly, he knew such taxes would be due. Dr. Bajaj did not, however, ignore shareholder level taxes. He simply disregarded them both in projecting G & J's available cash and in determining the appropriate discount rate. The present value of any future (deferred) cash-flow is a function of three variables: (1) the amount of the cash-flow, (2) the discount rate, and (3) the period of deferral. The discount rate reflects the return, over time, to the investor on the amount invested (commonly expressed as a rate of interest). If, in determining the present value of any future payment, the discount rate is assumed to be an after-shareholder-tax rate of return, then the cash-flow should be reduced (“tax affected”) to an after-shareholder-tax amount. If, on the other hand, a preshareholder-tax discount rate is applied, no adjustment for taxes should be made to the cash-flow. [Emphasis added, footnotes omitted.]

Gross, T.C. Memo. 1999-254, at *28-29. Stated another way, the application of a pre-tax discount rate to after-tax cash flow is a fundamental misapplication of present value analysis. See also Wall, T.C. Memo. 2001-75; Estate of Heck, T.C. Memo. 2002-34; Estate of Adams, T.C. Memo. 2002-80; Dallas, T.C. Memo. 2006-212.

In Estate of Gallagher, the gross estate included a 15 percent interest in an electing S corporation engaged in the newspaper business. The court rejected the taxpayer's 39% reduction in estimated cash flow to account for shareholder level income taxes, as well a positive adjustment (an S corporation premium) to account for the benefits of an S election. The tax savings that result from the corporation's S election are “properly reflected through the imposition of a zero-percent corporate tax rate in valuing S corporations under the DCF method.”

In Estate of Giustina, the gross estate included a 41 percent limited partner interest in a partnership holding timberland. The court rejected the taxpayer's 25 percent reduction in estimated cash flow to account for partner level income taxes, noting that this reduction was fundamentally inconsistent with the use of a pretax discount rate to determine the present value of the projected cash flows.

Here, the income from FRG is not taxable at the entity level, rather the income is taxable to the shareholders of FRG. Applying a hypothetical corporate income tax rate to FRG's projected earnings stream results in an after-tax investor level cash flow. As the Court noted in Gross, the mismatch of a pre-tax investor level discount rate with an after-tax investor level cash flow is a fundamental misapplication of present value analysis. See Gross v. Commissioner, supra, n. 12, (demonstrating that when present value analysis is consistently applied, i.e., pre-tax discount rates are applied to pre-tax cash flows, or after-tax discount rates are applied to after-tax cash flows, the values reached in each scenario will be the same). Tax affecting FRG's income stream would result in a pre-tax investor level discount rate being applied to after-tax investor level cash flows, which would result in a substantial undervaluation of the FRG shares at issue in these consolidated cases.

The theoretical tax affecting proposed by academics also misapprehends the definition of fair market value, which contemplates both a buyer and a seller. Like the hypothetical buyer, the hypothetical seller is also fully informed and economically motivated. The hypothetical seller is seeking the highest possible price, while the buyer is seeking to “maximize his advantage.” Estate of Curry v. United States , 706 F.2d 1424, 1428 (7th Cir. 1983). Rev. Rul. 59-60, supra, envisions the give and take of the real-world marketplace as the ultimate arbiter of value. Tax affecting focuses almost exclusively on the concerns of the buyer while ignoring the concerns of the seller. This is contrary to the real-world practicalities of the marketplace and explains why tax affecting has no real-world transactional applicability. Sellers do not routinely leave 35-40 percent of value on the table. Therefore, tax affecting FRG's earnings results in a discounted cash flow value that fails to satisfy the definition of fair market value under the applicable gift tax regulations and Rev. Rul. 59-60.

B. The Facts of This Case Support the Valuation Conclusion Reached in Mr. Anderson's Opening Report

In Estate of Noble, T.C. Memo. 2005-2, Judge Laro included a preliminary statement on the importance of introducing facts that support an expert's ultimate conclusions of value. Judge Laro, quoting his opinion in Haffner's Serv. Stations, Inc. v. Commissioner, T.C. Memo. 2002-38, at *28-29, aff'd 326 F.3d 1 (1st Cir. 2003) stated:

Much of the purported data that * * * [the expert] relied upon in reaching his conclusion also never made its way into evidence. Although an expert need not rely upon admissible evidence in forming his or her opinion, Fed.R.Evid. 703, we must rely upon admitted evidence in forming our opinion and, in so doing, may not necessarily agree with an expert whose opinion is not supported by a sufficient factual record. The mere fact that the Court admits an expert's opinion into evidence does not mean that the underlying facts upon which the expert relied are also admitted into evidence. Anchor Co. v. Commissioner, 42 F.2d 99 (4th Cir.1930); Rogers v. Commissioner, 31 B.T.A. 994, 1006 (1935); see United States v. Scheffer, 523 U.S. 303, 317 n. 13, 118 S.Ct. 1261, 140 L.Ed.2d 413 (1998) (whereas expert opinion is considered evidence, the facts upon which such an expert relies in forming that opinion are not considered evidence until introduced at trial by a fact witness); see also United States v. 0.59 Acres of Land, 109 F.3d 1493, 1496 (9th Cir.1997). In a case such as this, where an expert witness relies upon facts which are critical to the Court's analysis of an issue, we expect that the party calling the witness will enter into evidence those critical facts.

The facts in this case support the valuation conclusions reached by Mr. Anderson in Mr. Anderson's Opening Report.

As of December 31, 2014 and March 31, 2015, the valuation dates, FRG was a successful and growing business. For FRG's fiscal years ended December 27, 2009 through December 28, 2015, FRG's revenues grew at an average rate of 15.45% and more than doubled from December 27, 2009 to December 28, 2014. FRG's revenue for its fiscal year ended December 28, 2014 was $72,924,781. During this same period, FRG's operating income more than doubled from December 27, 2009 to December 28, 2014, and FRG's operating income almost tripled from December 27, 2009 to December 27, 2015.

FRG made distributions during the six-year period preceding petitioners' gift transfers on December 31, 2014 in the amount of $95,428,145, which is $27,000,000 more than DHG's Return Appraisal's valuation of FRG as of December 31, 2014. Such distributions were not unusual, as shown by FRG's distributions for the following six-year period totaling $110,039,981, which is $42,000,000 more than DHG's Return Appraisal's valuation of FRG as of December 31, 2014. FRG's distributions for its tax year ended December 27, 2009 through its tax year ended December 27, 2020 total $205,468,126. Even with these distributions, FRG sold to Restaurant Brands International, Inc. for a net amount of $935,307,689 in December 2021.

Overall, DHG's Return Appraisal valued FRG at $67,300,000 as of December 31, 2014, whereas Mr. Anderson's Opening Report valued FRG at $257,941,854. Mr. Rey valued FRG at $70,400,000 as of March 31, 2014, whereas Mr. Anderson's Opening Report valued FRG at $276,790,345 as of March 31, 2015. The facts in this case support the fair market value determinations found in Mr. Anderson's Opening Report and do not support the fair market value determinations found in DHG's Return Appraisal or Mr. Rey's proposed expert report. Therefore, this Court should find for respondent on the valuation issues presented in these cases.

Issue 4 — The Fair Market Value of One Nonvoting Share of FRG as of March 31, 2015 is $2,228.62 (rounded)

Mr. Anderson's Opening Report determined the value of one nonvoting share of FRG as of March 31, 2015 equaled $2,228.62 (rounded). Like his methodology in 2014, Mr. Anderson's Opening Report explains that he used the income approach and market approach methodologies, giving each a 50/50 weight, to reach his conclusion of value. Mr. Anderson updated the figures in his income approach and market approach to reflect the March 31, 2015 valuation date to determine that 5,365 nonvoting shares of FRG as of March 31, 2015 equaled $11,956,566.

As stated in Issue 3A. and B., above, the income approach should not be tax affected and the facts of this case support Mr. Anderson's Opening Report's March 31, 2015 valuation conclusion.

Issues 5 and 8 — Petitioners are liable for a Gross Valuation Misstatement Penalty under I.R.C. 6662(a), (g), and (h)

Respondent determined in the 2014 notice of deficiency that the value of one nonvoting share of FRG stock was $1,923.56 as of December 31, 2014, for a total gift by each petitioner of $25,666,061.

In Mr. Anderson's Opening Report, Mr. Anderson valued one nonvoting share of FRG stock at $2,076.86 (rounded) as of December 31, 2014. Given that each petitioner gifted 9,385 nonvoting shares of FRG stock to their respective Irrevocable Family Trusts on December 31, 2014, each petitioner gifted FRG shares worth $19,491,348. This gift amount results in an adjustment and deficiency that is less than the amounts listed in the notice of deficiency issued to petitioners for their 2014 tax year and the First Amendments to Answer filed in petitioners' applicable cases. The reason for the decreased deficiency is that the parties now agree that each petitioner transferred 9,385 nonvoting shares of FRG stock, rather than 13,343 nonvoting shares of FRG, to his respective Irrevocable Family Trust on December 31, 2014.

Under I.R.C. §§ 6662(a) and 6662(h)(2)(C), a 40 percent penalty for a gross estate or gift tax valuation misstatement penalty applies if the value of any property claimed on any return is 40 percent or less of the amount determined to be the correct amount of such valuation. See also I.R.C. § 6662(b)(5) & (g)(1). With respect to tax year 2014, each petitioner claimed the value of 9,385 shares of FRG stock was $5,000,000 as of December 31, 2014. Thus, if the Court determines the value of 9,385 nonvoting shares of FRG stock is equal to or exceeds $12,500,000, a 40% penalty applies under I.R.C. § 6662(h). Mr. Anderson determined that the value of one nonvoting share of FRG stock is $2,076.86 (rounded) as of December 31, 2014. This results in a value of the 9,385 nonvoting shares of FRG stock gifted by each petitioner of $19,491,348. This amount exceeds $12,500,000, thus a 40% gross valuation misstatement penalty under I.R.C. §§ 6662(a) & (h) applies to petitioners' respective underpayments for their 2014 tax year.

For petitioners' 2015 tax years, each petitioner claimed the value of 5,365 nonvoting shares of FRG stock as of March 31, 2015 was $2,858,418. Thus, if the Court determines the value of 5,365 nonvoting shares of FRG stock is equal to or exceeds $7,146,045, a 40% penalty applies under I.R.C. § 6662(h). Mr. Anderson determined that the value of one nonvoting share of FRG stock is $2,228.62 (rounded) as of March 31, 2015. This results in a value of the 5,365 nonvoting shares of FRG stock transferred by each petitioner of $11,956,566. This amount exceeds $7,146,045, thus a 40% gross valuation misstatement penalty under I.R.C. §§ 6662(a) & (h) applies to petitioners' respective underpayments for their 2015 tax year.

Issues 6 and 9 — In the Alternative, Petitioners are Liable for a Substantial Estate or Gift Tax Valuation Misstatement Penalty Under I.R.C. § 6662(a), (b)(5), and (g)

Under I.R.C. §§ 6662(a), (b)(5), and (g), a 20% penalty for a substantial estate or gift tax valuation applies if the value of any property claimed on any return is 65 percent or less of the amount determined to be the correct amount of such valuation. With respect to the 2014 tax year, each petitioner claimed the value of 9,385 shares of FRG stock as of December 31, 2014 is $5,000,000. Thus, if the Court determines the value of 9,385 shares of FRG stock is equal to or exceeds $7,692,307.69, a 20% penalty applies under I.R.C. §§ 6662(a), (b)(5), & (g). In Mr. Anderson's Opening Report, Mr. Anderson valued one nonvoting share of FRG Stock at $2,076.86 (rounded) as of December 31, 2014. This results in a total gift by each petitioner in the amount of $19,491,348. This amount exceeds $7,692,307.69. Thus, a 20% substantial valuation misstatement penalty under I.R.C. § 6662(a), (b)(5) & (g) applies to petitioners' respective underpayments for their 2014 tax year.

With respect to the 2015 tax year, each petitioner claimed the value of 5,365 nonvoting shares of FRG stock as of March 31, 2015 is $2,858,418. Thus, if the Court determines the value of 5,365 shares of FRG stock is equal to or exceeds $4,397,566.15, a 20% penalty applies under I.R.C. §§ 6662(a), (b)(5), & (g). Mr. Anderson determined that the value of one nonvoting share of FRG stock is $2,228.62 (rounded) as of March 31, 2015. This results in a value of the 5,365 nonvoting shares of FRG stock transferred by each petitioner of $11,956,566, which exceeds $4,397,566.15. Thus, a 20% substantial valuation misstatement penalty under I.R.C. §§ 6662(a), (b)(5) & (g) applies to petitioners' respective underpayments for their 2015 tax year.

Issues 7 and 10 — In the Alternative, Petitioners are Liable for the Accuracy-Related Penalty Due to Their Negligence Under I.R.C. § 6662(a), (b)(1), and (c)

I.R.C. § 6662(a), (b)(1), and (c) imposes a 20% penalty on any understatement attributable to negligence or disregard of rules or regulations. Negligence is defined in Treas. Reg. § 1.6662-3(b)(1) as “any failure to make a reasonable attempt to comply with the provisions of the internal revenue laws or to exercise ordinary and reasonable care in the preparation of a tax return. Negligence also includes any failure by the taxpayer to keep adequate books and records or to substantiate items properly.” Disregard of rules or regulations “includes any careless, reckless or intentional disregard” of the Internal Revenue Code or Treasury Regulations. A taxpayer is careless when the taxpayer “does not exercise reasonable diligence to determine the correctness of a return position that is contrary to the rule or regulation.” Treas. Reg. § 1.6662-3(b)(2).

Petitioners' 2014 understatements in this case are attributable to negligence and disregard of rules and regulations. Petitioners knew they gifted 9,385 nonvoting shares of FRG on December 31, 2014 as shown by their actions of reporting their respective Irrevocable Family Trusts as the owners of the shares on FRG's 2015 through 2020 tax returns, FRG's stock ledgers, and on their own gift tax returns. Further, each petitioner had no qualms about the Irrevocable Family Trusts receiving the benefits of owning the shares since December 31, 2014, including each Irrevocable Family Trust receiving $153,286,537.88 from Restaurant Brands International, Inc.'s acquisition of FRG. Petitioners knew 9,385 nonvoting shares were worth substantially more than $5,000,000 because FRG's prior five years of distributions, revenue and operating income growth, and store expansion. Therefore, petitioners negligently ignored the rules and regulations in taking their respective positions on their 2014 gift tax returns.

Petitioners' 2015 understatements in this case are attributable to negligence and disregard of rules and regulations. For the reasons stated at issues 2 and 4 above, petitioners failed to report a transaction in which they transferred stock in FRG for far less than its value. Petitioners were also careless and did not exercise reasonable diligence to determine the fair market value of their transferred shares of FRG in 2015. Further, petitioners ignored Treas. Reg. § 25.2512-8 in failing to report the March 31, 2015 transfer because petitioners failed to properly account for the transfer on their 2015 Forms 709. This is especially true since petitioners relied on a valuation with a December 31, 2014 valuation date to determine the fair market value of the property each petitioner transferred in 2015. Thus, petitioners disregarded the rules and regulations and negligently ignored precedent in taking their respective positions on their 2015 Gift Tax Return.

EVIDENTIARY PROBLEMS

Respondent may object to the authenticity of certain documents, but the parties are working to resolve any authentication issues. Respondent also anticipates filing the above-described Motions in Limine. Respondent will object to any documents submitted that were not exchanged in accordance with the Court's standing pre-trial order.

Respectfully submitted,

DRITA TONUZI
Deputy Chief Counsel (Operations)
Internal Revenue Service

Date: June 23, 2022

By: BLAKE J. CORRY
Special Trial Attorney
(Small Business/Self-Employed)
Tax Court Bar No. CB0335
MS 2200 PX
4041 N. Central Avenue, Ste 112
Phoenix, AZ 85012
Telephone: (602) 636-9616
Blake.j.corry@irscounsel.treas.gov

Date: June 23, 2022

By: DAVID W. SORENSEN
Special Trial Attorney
(Small Business/Self-Employed)
Tax Court Bar No. SD0717
178 South Rio Grande Street
Salt Lake City, UT 84101
Telephone: (801) 799-6631
david.w.sorensen@irscounsel.treas.gov

Date: June 23, 2022

By: MIRIAM C. DILLARD
Senior Attorney
(Small Business/Self-Employed)
Tax Court Bar No. DM0382
Stop C, Room 240
400 West Bay Street
Jacksonville, FL 32202
Telephone: (904) 661-3021
Miriam.c.dillard@irscounsel.treas.gov

OF COUNSEL:
JOSEPH W. SPIRES
Division Counsel
(Small Business/Self-Employed)

JULIE L. PAYNE
National Strategic Litigation Counsel
(Small Business/Self-Employed)

W. BENJAMIN MCCLENDON
Strategic Litigation Counsel
(Small Business/Self-Employed)