112 T.C. 130 (T.C. 1999), 23122-97, Estate of Simplot v. Commissioner of Internal Revenue
|Citation:||112 T.C. 130, 112 T.C. No. 13|
|Opinion Judge:||JACOBS, JUDGE.|
|Party Name:||ESTATE OF RICHARD R. SIMPLOT, DECEASED, v. COMMISSIONER OF INTERNAL REVENUE, Respondent JOHN EDWARD SIMPLOT, PERSONAL REPRESENTATIVE, Petitioner|
|Attorney:||David John Thornton, Gregory Allen Byron, and Sheldon I. Fink, for petitioner. David J. Mungo and Robert A. Varra, for respondent.|
|Case Date:||March 22, 1999|
|Court:||United States Tax Court|
Decision will be entered under Rule 155.
Decedent owned 18 of the outstanding 76.445 shares of the voting stock and 3,942.048 of the outstanding 141,288.584 shares of the nonvoting stock of J.R. Simplot Co. (the Company), a private, family-owned corporation. The remaining shares of outstanding voting stock were owned by decedent's three siblings. The voting stock is subject to a 360-day restriction on transferability or hypothecation. Both classes of stock are entitled to the same dividends (without preference) on a per-share basis, if and when dividends are declared. Holders of the nonvoting stock are entitled to a liquidating preference.
On the estate tax return, the fair market value for both classes of stock was reported as $ 2,650 per share. Petitioner agrees that because of an error by its appraiser in the calculation of the aggregate number of outstanding shares, the fair market value for both classes of stock should have been $ 3,025 per share. In the notice of deficiency, respondent determined the fair market value of the voting stock to be $ 801,994.83 per share and the fair market value of the nonvoting stock to be $ 3,585.50 per share. The disparate valuations are primarily attributable to the valuation methodologies employed by the parties.
HELD: On the basis of the facts and circumstances presented, a premium for voting privileges is appropriate and is determined in relation to the equity value of the Company (enterprise value plus cash minus liabilities). After application of a 35-percent marketability discount, the fair market value of the voting stock is $ 215,539.01 per share and after application of a 40-percent marketability discount, the fair market value of the nonvoting stock is $ 3,417.05 per share.
In the notice of deficiency, respondent reduced the amount reported for the marital deduction from $ 15,127,237 to $ 1,723,437. The amount of this reduction ($ 13,403,800) is due to: (1) Respondent's redetermination of the fair market value of the voting stock, all of which was bequeathed to the trustees of a credit shelter trust for the benefit of decedent's children, and (2) the charging of the Federal estate tax to that portion of the estate (the residue) passing to decedent's wife. In calculating the amount of the marital deduction, respondent did not consider the amount of State transfer and inheritance taxes which are payable with respect to the value of the voting stock bequeathed to the trustees of the credit shelter trust and which pursuant to decedent's will are chargeable against that bequest.
HELD: Because no State transfer or inheritance taxes have yet been paid, and because the amount of the marital deduction must be recalculated on the basis of our determination of the value of the voting stock passing to the trustees of the credit shelter trust, the parties must consider (and not reduce the marital deduction by) the amount of State transfer and inheritance taxes actually and timely paid by reason of the bequest of the voting stock to the trustees of the credit shelter trust.
In the notice of deficiency, respondent determined that petitioner is liable for penalties pursuant to sec. 6662(a), (g), (h)(1), and ( 2)(C), I.R.C. The penalties do not apply to any portion of the underpayment for which the taxpayer: (1) Had reasonable cause, and (2) acted in good faith with respect thereto.
HELD: Petitioner is not liable for the penalties at issue because petitioner acted reasonably and in good faith by relying on the advice of tax professionals and appraisers.
Respondent determined a $ 17,643,886 deficiency in petitioner's Federal estate tax and $ 7,057,554 in penalties pursuant to section 6662(a), (g), (h)(1), and (2)(C).
Following a concession by respondent, the issues for decision are: (1) The fair market value of 18 shares of class A voting common stock of J.R. Simplot Co. owned by Richard R. Simplot (decedent) on June 24, 1993 (the valuation date); (2) the fair market value of 3,942.048 shares of class B nonvoting common stock of J.R. Simplot Co. owned by decedent on the valuation date; (3) the amount of the section 2056 marital deduction to be allowed the estate of decedent (petitioner); and (4) whether petitioner is liable for the section 6662 penalties as determined by respondent. Subsumed in the resolution of the stock valuation issues is the question of whether a premium should be accorded the voting privileges of the class A stock; and, if so, the amount of that premium.
All section references are to the Internal Revenue Code in effect as of the date of decedent's death, and all Rule references are to the Tax Court Rules of Practice and Procedure.
FINDINGS OF FACT
Some of the facts have been stipulated, and the stipulations of facts are incorporated in our findings by this reference.
Decedent, a resident of Boise, Idaho, died testate on June 24, 1993. He was 59 years old. At the time the petition was
filed herein, John Edward Simplot, decedent's son and personal representative, resided in Boise, Idaho.
Decedent and his siblings are the children of Jack R. Simplot (J.R. Simplot), who was living on the trial date of this case. At the time of his death, decedent owned 18 shares of class A voting common stock (class A voting stock) and 3,942.048 shares of class B nonvoting common stock (class B nonvoting stock) of J.R. Simplot Co., constituting 23.55 percent of the outstanding shares of class A voting stock and 2.79 percent of the outstanding shares of class B nonvoting stock. The remaining shares of class A voting stock were owned by decedent's siblings: Gay C. Simplot Otter (Gay), Don J. Simplot (Don), and Scott R. Simplot (Scott). As of the date of decedent's death, virtually all of the shares of class B nonvoting stock were owned, directly or indirectly, by the descendants of J.R. Simplot and an Employee Stock Ownership Plan (ESOP) established in 1978.
B. THE HISTORY AND BUSINESS OF J.R. SIMPLOT CO.
J.R. Simplot Co. (through a predecessor entity) was founded in the 1930's by J.R. Simplot. It was incorporated in Nevada in 1955. None of its stock is publicly traded. J.R. Simplot originally owned all of the Company's stock; he transferred the stock to his children in the 1960's.
J.R. Simplot's philosophy was to reinvest the Company's cash-flows into long-term assets (such as real estate mineral reserves, water rights, and natural-resource-based operations), operate the Company privately, and pass ownership of the Company on to his descendants. From J.R. Simplot Co.'s inception through the valuation date, J.R. Simplot was the Company's chairman of the board and played a dominant role in the Company's operations.
J.R. Simplot Co. is a major frozen food processing and agribusiness chemical company. Its predecessor developed the technique for producing frozen French fried potatoes in the 1950's. It is headquartered in Boise, Idaho, and operates in the western part of the United States and in Mexico, Turkey, and Canada. J.R. Simplot Co.'s taxable year ends August 31. On the valuation date, J.R. Simplot Co. employed between 9,000 and 10,000 individuals.
For the 9 months ended May 31, 1993, J.R. Simplot Co. had net sales of $ 1,282,526,000 and net income of $ 25,506,000. For its fiscal year ended August 31, 1993, the Company had net sales of $ 1,778,768,000 and net income of $ 37,825,000. On May 31, 1993, J.R. Simplot Co. had assets with a book value of $ 1,340,803,000 and shareholders' equity of $ 481,001,000. On August 31, 1993, J.R. Simplot Co. had assets with a book value of $ 1,222,610,000 and shareholders' equity of $ 490,905,000. 
As of the valuation date, J.R. Simplot Co. was operationally divided into five groups: (1) The food products group (FPG), which comprises J.R. Simplot Co.'s potato, fruit, and vegetable processing operations; (2) the agriculture group (AG), which owns approximately 70,000 head of cattle and is one of the largest suppliers of cattle in the United States; (3) the diversified product group (DPG), which essentially manages two businesses -- WSI, a producer and marketer of assorted agribusiness products including livestock feeds and livestock handling equipment, and Simplot Transportation, the transportation management division of the Company; (4) the minerals and chemical group (MCG), which manufactures and markets fertilizers and chemicals, mainly in the Western United States and in Canada; and (5) the development and corporate group (DCG).
1. THE FOOD PRODUCTS GROUP
FPG is composed of three businesses: Potato processing, fruit and vegetable processing, and other operations. As of the valuation date, it represented approximately 55 percent or $ 718.3 million of J.R. Simplot Co.'s consolidated revenue for the 9-month period ended May 31, 1993.
Through its processing plants, J.R. Simplot Co. produces hundreds of millions of pounds of frozen French fries each year. It is one of the two largest potato processors in the world. Potato processing involves the following: Purchasing new-crop potatoes, sorting and grading the potatoes, storing potatoes for use in year- round production, transporting potatoes
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