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Donor Challenges IRS Valuation of Gifts

JUL. 31, 2001

David A. Fry v. Commissioner

DATED JUL. 31, 2001
DOCUMENT ATTRIBUTES
  • Case Name
    DAVID A. FRY, DONOR, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
  • Court
    United States Tax Court
  • Docket
    No. 9689-01
  • Authors
    Fiore, Owen G.
    Ramsbacher, John F.
    Prokey, John W.
  • Institutional Authors
    The Fiore Law Group, LLP
  • Code Sections
  • Subject Area/Tax Topics
  • Index Terms
    gift tax, valuation
  • Jurisdictions
  • Language
    English
  • Tax Analysts Document Number
    Doc 2001-24587 (17 original pages)
  • Tax Analysts Electronic Citation
    2001 TNT 195-112

David A. Fry v. Commissioner

 

=============== SUMMARY ===============

 

David Fry has challenged a 1996 gift tax deficiency determination totaling $1.2 million, asserting that the Service over valued three gifts of limited partnership units made to three separate donees.

Fry states that he and his wife Lisa gifted 56,665 limited partnership units in the Taw, L.P. on December 28, 1996 to each of their three children. Fry explains that the Taw, L.P.'s most significant asset was a block of common shares in Fry's Electronics Inc.. Fry contends that in determining the enterprise value of Fry's Electronics Inc., the IRS erroneously relied on a valuation methodology using a one-times-book multiple. Fry contends that he determined the correct value of Fry's Electronics Inc. by taking the proportionate share of the 100 percent book value of Fry's Electronics Inc. represented by the block of common shares owned by The Taw, L.P. Fry further states that he then correctly determined the enterprise value of The Taw, L.P. by using a multiple of one- times-book value after taking into account 1)an upward adjustment to book value to the assets of the The Taw, L.P. to reflect real estate appreciation and 2)using the value for Fry's Electronics as described above. Fry also maintains that he correctly determined and applied a discount for lack of marketability.

 

=============== FULL TEXT ===============

 

PETITION

Petitioner hereby petitions for a redetermination of the gift tax deficiency set forth by the Commissioner of Internal Revenue in the Commissioner's Notice of Deficiency (No Symbols) dated May 3, 2001, and as the basis for Petitioner's case alleges as follows:

1. Petitioner is David A. Fry with mailing address and legal residence now at 18775 Cabernet Drive, Saratoga, California 95070. Petitioner's taxpayer identification number (Social Security Number) is [TIN omitted]. Petitioner timely filed a federal gift tax return (IRS Form 709) on or before August 15, 1997, with the Fresno, California Service Center of the Internal Revenue Service.

2. The Notice of Deficiency for gift tax (copy of which is attached hereto and marked "Exhibit A") was mailed to Petitioner on May 3, 2001, and was issued by the San Jose, California office of the Internal Revenue Service.

3. The deficiency, as determined by the Commissioner, is for gift tax for the calendar year 1996, in the amount of $859,500.00, all of which is in dispute. In addition, the Commissioner has determined a gift tax valuation understatement penalty pursuant to Internal Revenue Code Section 6662(h) in the amount of $343,800.00, all of which is in dispute.

4. The Commissioner's determination of gift tax and penalties set forth in said Notice of Deficiency is based upon the following errors alleged by Petitioner:

a. The Commissioner erroneously states the aggregate number of limited partnership units in The Taw, L.P. gifted by Petitioner to three donees as 169,995 units in The Taw, L.P. Such error is due to the Commissioner erroneously adding the number of limited partnership units in The Taw, L.P. gifted by Petitioner's spouse to the number of limited partnership units in The Taw, L.P. gifted by Petitioner.

b. The Commissioner erroneously INCREASES the Form 709, Schedule A reported value of three gifts to separate donees, each consisting of 28,332.50 limited partnership units in The Taw, L.P. by $1,980,000. Such error is due to the Commissioner's (i) erroneous determination of the value of the block of common shares in Fry's Electronics, Inc. owned by The Taw, L.P. on December 28, 1996; and (ii) erroneous determination of the value of a nonmarketable, minority limited partnership interest in The Taw, L.P., specifically a single block of 28,332.50 limited partnership units, representing approximately 0.9941% of the ownership therein.

c. The Commissioner erroneously assesses a gift tax valuation understatement penalty in the amount of $343,800 for gross understatement of the value on each of the three gifts of 28,332.50 limited partnership units in The Taw, L.P., as reported on Petitioner's timely filed federal gift tax return (IRS Form 709). Such error is due to (i) Commissioner erroneously increasing the Form 709, Schedule A reported value of three gifts to separate donees, each consisting of 28,332.50 limited partnership units in The Taw, L.P.; and (ii) Commissioner erroneously applying Internal Revenue Code Section 6662.

5. The facts upon which Petitioner relies, as the basis of Petitioner's case, are as follows:

a. Petitioner and his spouse, Lisa A. Fry, gifted 56,665 limited partnership units in The Taw, L.P. on December 28, 1996 to each of their three children. A total of 169,995 limited partnership units in The Taw, L.P. were gifted by Petitioner and his spouse. Petitioner is considered to have gifted 28,332.50 limited partnership units in The Taw, L.P. to each of his three children, or a total of 84,997.50 limited partnership units in The Taw, L.P., on December 28, 1996.

b. The Taw, L.P.'s most significant asset, in terms of value, was a block of common shares in Fry's Electronics, Inc. as of December 28, 1996. In determining the enterprise value (100% outstanding stock) of Fry's Electronics, Inc., Petitioner relied on a valuation methodology utilizing a one-times-book multiple. A one- times-book multiple is comparable to the value certain publicly traded competitors of Fry's Electronics, Inc. were trading on public markets at that time. A one-times-book multiple was also the purchase price set forth in the buy-sell agreement restricting all common shares in Fry's Electronics, Inc. held by The Taw, L.P. In determining the value of the block of common shares in Fry's Electronics, Inc. owned by The Taw, L.P., Petitioner relied on a value determined by taking the proportionate share of the 100% book value of Fry's Electronics, Inc. represented by the block of common shares owned by The Taw, L.P.

c. In determining the enterprise value (100% ownership) of The Taw, L.P., Petitioner relied on a valuation methodology utilizing a multiple of one-times-book value after taking into account (i) an upward adjustment to book value to the assets of The Taw, L.P. to reflect real estate appreciation; and (ii) using the value for the block of common shares of Fry's Electronics, Inc. owned by The Taw, L.P. as detailed in immediately preceding paragraph b in determining such book value. In determining the value of a nonmarketable, minority interest block of 28,332.50 limited partnership units in The Taw, L.P., representing approximately 0.9941% of the proportionate ownership therein, Petitioner relied on (i) a value determined by multiplying the proportionate share of book value of The Taw, L.P. represented by 28,332.50 limited partnership units therein; and (ii) sequentially applying downward valuation adjustments of 45% and 25% to reflect lack of control and lack of marketability respectively.

d. Petitioner maintains that there is no gift tax deficiency, thus there is no applicable penalty under Internal Revenue Code Section 6662(a), 6662(g) or 6662(h).

e. In the event this court determines there is a gift tax deficiency sufficient to trigger a penalty under Internal Revenue Code Section 6662(a), 6662(g) or 6662(h), Petitioner believes he had reasonable cause for any such understatement and acted in good faith. Specifically, Petitioner relied on (i) analysis and advice of counsel to Fry's Electronics, Inc. and the gift tax return preparer, among other things, with respect to the value of the block of common shares in Fry's Electronics, Inc. owned by The Taw, L.P. and the value of nonmarketable, minority limited partnership interests in The Taw, L.P.; (ii) a value determination of the block of common shares in Fry's Electronics, Inc. based on a one-times-book multiple, a multiple in the range several publicly traded competitors to Fry's Electronics, Inc. were being traded at that time; (iii) the purchase price set forth in the buy-sell agreement restricting all common shares of Fry's Electronics, Inc. owned by The Taw, L.P.; and (iv) sequentially applied downward valuation adjustments of 45% and 25% to reflect lack of control and lack of marketability, respectively, for nonmarketable, minority limited partnership interests in The Taw, L.P.

WHEREFORE, the Petitioner prays that this Court may hear the proceeding, and

1. Determine that the Commissioner erred as alleged in each assignment of error set forth in paragraph 4 above;

2. Find that there is no deficiency in gift tax;

3. Find that no gift tax valuation understatement penalty pursuant to Internal Revenue Code Section 6662(a), 6662(g) or 6662(h) should be assessed; and

4. Give such other and further relief as the Court may deem appropriate.

Dated: July 31, 2001

 

 

OWEN G. FIORE, ESQ.

 

#FO0007

 

 

JOHN F. RAMSBACHER, ESQ.

 

#RJ0999

 

 

JOHN W. PROKEY, ESQ.

 

#PJ0849

 

 

Owen G. Fiore, Esq.

 

John F. Ramsbacher, Esq.

 

John W. Prokey, Esq.

 

The Fiore Law Group LLP

 

125 South Market Street

 

Suite 1150

 

San Jose, CA 95113

 

Telephone (408) 293-3616

 

Facsimile (408) 293-0430

 

 

[attachment omitted]

[Editor's Note: The attachment has been omitted. However, this document in its entirety can be obtained through our Tax Analysts' Access Service as Doc 2001-24587 (17 pages) [PDF].]

DOCUMENT ATTRIBUTES
  • Case Name
    DAVID A. FRY, DONOR, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
  • Court
    United States Tax Court
  • Docket
    No. 9689-01
  • Authors
    Fiore, Owen G.
    Ramsbacher, John F.
    Prokey, John W.
  • Institutional Authors
    The Fiore Law Group, LLP
  • Code Sections
  • Subject Area/Tax Topics
  • Index Terms
    gift tax, valuation
  • Jurisdictions
  • Language
    English
  • Tax Analysts Document Number
    Doc 2001-24587 (17 original pages)
  • Tax Analysts Electronic Citation
    2001 TNT 195-112
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