Estate of Berg v. C.I.R., 91-3198

Decision Date03 November 1992
Docket NumberNo. 91-3198,91-3198
Citation976 F.2d 1163
Parties-6259, 92-2 USTC P 60,117 ESTATE OF Edgar A. BERG, Deceased; George Unruh, Jr., Elaine Unruh, Co-personal Representatives, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
CourtU.S. Court of Appeals — Eighth Circuit

Robert Vaaler of Grand Forks, N.D., argued, for petitioners.

Bruce Ellison, Dept. of Justice, of Washington, D.C., argued, for respondent.

Before McMILLIAN, JOHN R. GIBSON and MAGILL, Circuit Judges.

JOHN R. GIBSON, Circuit Judge.

The estate of Edgar A. Berg, by its representatives, appeals from a Tax Court decision sustaining an estate tax deficiency determined by the Commissioner of Internal Revenue and the addition of a ten percent assessment pursuant to 26 U.S.C. § 6660 (1988), a provision which has been repealed since its application in this case. The estate challenges the Tax Court's findings regarding the marketability and minority interest discounts applied to the valuation of the stock of a closely-held real estate holding company, Vaberg Properties, Inc. The estate claims that the Tax Court's findings are clearly erroneous. The Berg estate also argues that the addition to the tax under section 6660 was in error because the estate reasonably relied on its accountant and an earlier Tax Court decision to prepare the return. We affirm the deficiency determination but reverse the section 6660 addition to taxes and remand for further proceedings.

We could state the complex facts in this case in great detail, but the limited issues before us do not require that we do so. The estate tax deficiency was based on a valuation of the Vaberg stock. When Edgar A. Berg died, he owned 2,692 shares of the real estate investment corporation's stock (26.92 percent of the outstanding shares). Vaberg owned a number of apartments, office buildings, and garage and motel properties in the Grand Forks, North Dakota area. The total value of these assets is not an issue before us, but rather, we are concerned with the limited question of the value of the estate's interest in the Vaberg stock, and more specifically, with the Tax Court's determination of the marketability and minority interest discounts. The Commissioner determined that the value of the estate's Vaberg shares should be discounted twenty percent as a minority interest and ten percent for lack of marketability. The estate, however, argued that the minority discount should be forty percent and the lack of marketability discount should be twenty percent.

The estate relied on the recommendation of C.J. Whalen when it prepared its return. Mr. Whalen is an experienced Certified Public Accountant who has taught various tax courses at the University of North Dakota for twenty-four years and has testified previously about valuation discounts. Whalen testified for the estate and his appraisal was submitted to support the estate's valuation claim. Arthur H. Cobb, a Certified Public Accountant, the President of a capital finance and litigation support firm, and a former university professor, also presented a report and testimony for the estate. Finally, the estate presented a 1975-1989 Grand Forks real estate market economic analysis. Dr. David E. Ramsett, Professor of Economics at the University of North Dakota, prepared the economic report and testified for the estate. The Tax Court, however, cited Whalen's lack of formal education as an appraiser and found that his appraisal was unpersuasive, attached no weight to Cobb's appraisal, and gave Ramsett's economic analysis little weight.

The Commissioner relied on an appraisal that was submitted and certified by Scott A. Torkelson, Appraiser, William C. Herber, Assistant Vice President, and Robert J. Strachota, President, all employees of Shenehon & Associate's, Inc., a company in the business of providing real estate and business valuations. Herber testified for the government. The Tax Court accepted the discounts provided in the Shenehon appraisal and sustained the Commissioner's determination of the marketability and minority interest discounts.

The Tax Court also concluded that under 26 U.S.C. § 6660(a), the Commissioner properly added ten percent or $12,761 to the deficiency of $127,608, for a total of $140,369. The Tax Court rejected the estate's arguments that it had shown a reasonable basis for the valuation claimed on the estate tax return and that the claim was made in good faith. The court thought it significant that the estate had not commissioned a formal appraisal of the fair market value of the Vaberg stock, but rather, had relied on an "earlier Tax Court opinion to prepare the return." The court held that the earlier opinion did not support the estate's resulting valuation, and concluded that the estate had not carried its burden of showing that the Commissioner abused his discretion in determining that the estate failed to show that there was a reasonable basis for the valuation on its tax return and that its claim was made in good faith.

I.

The Tax Court approached the marketability and minority interest discounts as factual issues and rejected an argument that earlier cases were determinative of the issue. We have no doubt that the discounts issue is a factual question. Thus, our review is governed by Rule 52 of the Federal Rules of Civil Procedure, the Supreme Court's teaching in Anderson v. Bessemer City, 470 U.S. 564, 105 S.Ct. 1504, 84 L.Ed.2d 518 (1985), and this court's numerous decisions applying the clearly erroneous test.

The estate argues that the Tax Court erred in determining the deficiency. The estate argues generally that the appraisals do not establish the value of the corporation's capital stock. The Tax Court opinion, however, makes clear that the parties agreed that the net asset value method (the value of the assets less the outstanding debts) was appropriate for valuing the stock of the closely-held Vaberg corporation. Moreover, the estate used this method in determining the value it reported, and we observe that the overall value of the Vaberg stock was that stated in the tax return--$6,054,153.

The real question then focuses on the marketability and minority interest discounts, and the Tax Court appropriately concentrated on this issue in its opinion. There is no dispute that the discounts were applicable. The issue before us is whether the Tax Court was clearly erroneous in its determination of these discounts.

We first observe that although five witnesses testified, most of the evidence before the Tax Court on this issue came from written reports. The estate attempts to make much of the Tax Court's reference to...

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  • Furman v. Commissioner
    • United States
    • U.S. Tax Court
    • 30 d4 Abril d4 1998
    ... ... T.C. Memo. 1998-157 ... Maude G. Furman, Donor, Deceased, and Estate of Maude G. Furman, Deceased, Robert G. Furman, Executor ... Commissioner [58-1 USTC ¶ 9117], 250 F.2d 242, 249 (5th Cir. 1957), affg. in part and remanding in part [Dec. 21,874(M)] T.C. Memo ... Commissioner [Dec. 48,254(M)], T.C. Memo. 1992-310; Estate of Berg v. Commissioner [Dec. 47,420(M)], T.C. Memo. 1991-279, affd. in part and ... ...
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    • U.S. Tax Court
    • 10 d3 Novembro d3 1993
    ...tax under section 6660 was an abuse of discretion. In Estate of Berg v. Commissioner, T.C.Memo. 1991–279, affd. in part and revd. in part 976 F.2d 1163 (8th Cir.1992), we held that respondent's discretion had not been abused in refusing to waive the section 6660 addition to tax. The Court o......
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    • 18 d5 Agosto d5 2000
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