Estate Disputes IRS Valuation of Stock

The estate insists that it retained the services of Management Planning Inc. (MPI) to prepare a valuation of all the stock owned by Nelson on the date of his death and that it reported those values on the estate tax return. The estate insists that the fair market values determined by MPI after its extensive analysis are a true reflection of the values of these stocks and should be sustained. The estate maintains that the IRS's determinations as to the stocks values are arbitrary and capricious in that only the quantitative and not the qualitative attributes were considered, which is contradictory to the IRS's own published rulings.

1. The petitioner is the Estate of Braxton T- Nelson, Deceased, Joseph E. Triano, Executor, with mailing address now at Echo Lake Road, P.O. Box 429, Watertown, Connecticut 06795-0429.

2. Petitioner's taxpayer identification number is 041-28-9962V.

3. The estate tax return (Form 706) involved was filed with the Office of the Internal Revenue Service at Andover, Massachusetts.

4. The notice of deficiency, a copy of which, including so much of the statement and schedules accompanying the notice as is material, is attached and marked Exhibit A, was mailed to the petitioner on August 9, 2001, and was issued by the Office of the Internal Revenue Service, Manhattan Appeals Office, at 290 Broadway, 11th floor, New York, New York 10007.

5. The deficiencies as determined by the Commissioner are in estate taxes for the date of death of November 24, 1997, in the amount of $4,561,057.00, almost all of which is in dispute.

6. The determination of the estate tax set forth in the said notice of deficiency is based upon the following errors:

a. The Commissioner erred in determining that the fair market value of decedent's interest in 100 shares of Braxton Manufacturing Company, Inc. voting stock at decedent's date of death was $1,715,000.00 or $17,150.00 per share, instead of the reported amount of $1,253,200.00 or $12,532.00 per share.

b. The Commissioner erred in determining that the fair market value of the decedent's interest in 1000 shares of Braxton Manufacturing Company, Inc. non-voting stock at decedent's date of death was $16,293,000.00 or $16,293.00 per share, instead of the reported amount of $11,905,000.00 or $11,905.00 per share.

c. The Commissioner erred in determining that the fair market value of the decedent's interest in 100 shares of Braxton Caribbean Manufacturing Company, Inc. voting stock at decedent's date of death was $289,100.00 or $2,891.00 per share, instead of the reported amount of $208,000.00 or $2,080.00 per share.

d. The Commissioner erred in determining that the fair market value of the decedent's interest in 1000 shares of Braxton Caribbean Manufacturing Company, Inc. non-voting stock at decedent's date of death was $2,747,000.00 or $2,747.00 per share, instead of the reported amount of $1,976,000.00 or $1,976.00 per share.

e. The Commissioner erred in determining that the decedent in the calendar year 1997 made taxable gifts of $1,062,100.00 instead of the reported amount of $843,400.00.

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

a. Braxton T. Nelson died on November 24, 1997 (hereinafter sometimes referred to as the "Valuation Date")

b. At the date of death, Braxton T-Nelson was the owner through a revocable trust of 100 shares of Braxton Manufacturing Company, Inc. (hereinafter referred to as "BMC"), voting stock.

c. At the date of death, there were 209 shares of BMC voting stock outstanding.

d. At the date of death, Braxton T. Nelson was the owner through a revocable trust of 1000 shares of BMC non-voting stock.

e. At the date of death, there were 1063 shares of BMC non- voting stock outstanding.

f. At the date of death, Braxton T. Nelson was the owner through a revocable trust of 100 shares of Braxton Caribbean Manufacturing Company Inc. (hereinafter referred to as "BCMC"), voting stock.

g. At the date of death, there were 209 shares of BCMC voting stock outstanding.

h. At the date of death, Braxton T. Nelson was the owner through a revocable trust of 1000 shares of BCMC non-voting stock.

i. At the date of death, there were 1063 shares of BCMC non- voting stock outstanding[.]

j. Neither BMC nor BCMC stocks are listed on any stock exchange and no sales of either stock occurred before November 24, 1997.

k. No sales of BMC or BCMC stock have occurred since November 24, 1997 except for redemption of non-voting stock by BMC and BCMC under the provisions of Section 303 of the Internal Revenue Code of 1986 for the payment of expenses described in Section 303.

l. The Estate of Braxton T. Nelson (hereinafter referred to as the "Estate") retained the services of Management Planning, Inc.(hereinafter referred to as "MPI") to prepare a valuation of the BMC and BCMC stock owned by Braxton T. Nelson at his date of death.

m. On October 2, 1998, MPI issued a report determining that the fair market value of the 100 shares of BMC voting stock on the Valuation Date was $1,253,000.00, or $12,532.00 per share.

n. On October 2, 1998, MPI issued a report determining that the fair market value of the 1000 shares of BMC non-voting stock on the Valuation Date was $11,905,000.00, or $11,905.00 per share.

o. On October 2, 1998, MPI issued a report determining that the fair market value of the 100 shares of BCMC voting stock on the Valuation Date was $208,000.00, or $2,080.00 per share.

p. On October 2, 1998, MPI issued a report determining that the fair market value of the 1000 shares of BCMC non-voting stock on the Valuation Date was $1,976,000.00, or $1,976.00 per share.

q. In determining the value of the BMC and BCMC Estate stock MPI selected eight (8) comparable publicly held companies (hereinafter referred to as the "Guideline Companies").

r. The Commissioner's valuation report provided on June 27, 2000 (hereinafter referred to as "Valuation Report") accepted the comparable Guideline Companies determined by MPI.

s. MPI determined five (5) separate market value ratios pertaining to each of the Guideline Companies. The five (5) Market Value Ratios used by MPI in its valuation were:

(1) the total market value divided by net worth;

(2) the total market value divided by the latest five (5) year weighted average earnings;

(3) the total market value divided by the latest five (5) year weighted average cash flow;

(4) the total market value divided by the latest five (5) year average earnings; and

(5) the total market value divided by the latest five (5) year average cash flow.

t. The Commissioner's Valuation Report accepted the five (5) Market Value Ratios determined by MPI.

u. MPI then calculated the range of each of the five (5) Market Value Ratios for the Guideline Companies as of the Valuation Date.

v. MPI determined that based upon all of the quantitative and qualitative investment attributes of BMC and BCMC as well as other relevant factors gathered in their investigation, including meetings with company officers and employees, that in their opinion an investment in BMC and BCMC Corporations was much less attractive than an investment in the typical Guideline Company.

w. To reflect its opinion of BMC's and BCMC's lesser investment appeal, MPI selected five (5) Market Value Ratios to apply to the total market value of BMC and BCMC that were generally at the low end or below the range of Market Value Ratios of the Guideline Companies.

x. The Commissioner's Valuation Report applied the median value of each of the five (5) Market Value Ratios for the Guideline Companies to the total market value of BMC and BCMC.

y. MPI determined that for purposes of the valuation, the operations of both Companies should be consolidated as one operation, as if the Companies were one business with separate locations in Connecticut and California.

z. The Commissioner's Valuation Report accepted the concept of consolidation of the Companies utilized by MPI

aa. After determining a total freely traded value for the consolidated companies, MPI allocated the value eighty-five percent (85%) to BMC and fifteen percent (15%) to BCMC.

ab. The Commissioner's Valuation Report accepted the allocation percentages of the totally freely traded value utilized by MPI.

ac. MPI determined that the voting stock of each company should be allocated at a premium of five percent (5%) in excess of the value of the non-voting stock.

ad. The Commissioner's Valuation Report accepted the five percent (5%) premium allocation to the voting stock utilized by MPI.

ae. MPI then applied a thirty-five percent (35%) discount for lack of marketability in order to determine the final value of each of the Estate stocks on the Valuation Date.

af. The Commissioner's Valuation Report accepted the thirty-five percent (35%) discount for lack of marketability utilized by MPI.

ag. On September 18, 1997 Braxton T. Nelson gifted 50 shares of BMC voting stock to a non-related officer in BMC who had been involved with BMC since its inception in 1964.

ah. MPI valued the 50 shares of BMC voting shares gifted on September 18, 1997 by the same method as was used for valuing the shares as of the date of death, and in its report issued on October 2, 1998, determined a [sic] that the fair market value was $669,250.00 or $13,385.00 per share.

ai. On October 15, 1997 Braxton T. Nelson gifted 50 shares of BCMC voting stock to a non-related officer in BMC who had been involved with BMC since its inception in 1964.

aj. MPI valued the 50 shares of BCMC voting shares gifted on October 15, 1997 by the same method as was used for valuing the shares as of the date of death, and in its report issued on October 2, 1998, determined that the fair market value was $112,000.00 or $2,240.00 per share.

ak. The determination of value of the Estate stock by the Commissioner is based upon the use of the median percentage values of the Market Value Ratios for the Guideline Companies as of the Valuation Date instead of the lower Market Value Ratios utilized by MPI. The Commissioner accepted the MPI valuation method and all other adjustments made by MPI.

al. The determination of value by the Commissioner of the gifted stocks was based upon the upward adjustment of one percent (1%) of the values determined for the Estate stock as of the Valuation Date.

am. The fair market values for the Estate stock and gifted stocks determined by MPI based upon its extensive analysis are a true reflection of the values of these stocks and should be sustained.

an. The determinations of the Commissioner as to the fair market values of the Estate stock and gifted stocks are arbitrary and capricious in that only the quantitative and not the qualitative attributes are considered which is contradictory to the Commissioner's published rulings.

ao. The differing qualitative attributes of the Company in contrast to the Guideline Companies considered by MPI included: being smaller in terms of sales; the problems caused from extremely thin management, no management succession in place with management team approaching retirement; manufacturing in only two places; smaller array of product offerings; being a job shop with no trademarks, name brands or proprietary products; having no long term contracts; and competitive forces, both domestic and abroad, putting pressure on prices.

ap. The qualitative assumptions considered by MPI in its valuation were validated when the Companies consolidated income before taxes was reduced forty-eight percent (48%) from $4,898,094 to $2,554,717 in the first full year of operation after the Valuation Date.

WHEREFORE, the petitioner prays that this Court may hear this case and determine that the petitioner is not liable for the estate tax and grant the petitioner such other and further relief to which it may be entitled.

Date: 10/11/01