Estate of Borgatello v. Commissioner, Docket No. 24756-97.
| Decision Date | 18 August 2000 |
| Docket Number | Docket No. 24756-97. |
| Citation | 80 T.C.M. 260 |
| Parties | Estate of Charles A. Borgatello, Deceased, C. Norman Borgatello and Josephine E. Donnelly, Co-Executors, and C. Norman Borgatello, Successor Trustee to The Charles A. Borgatello Living Trust v. Commissioner. |
| Court | U.S. Tax Court |
John W. Ambrecht and Gregory Arnold, for the petitioners. Donna F. Herbert, for the respondent.
Respondent determined a deficiency of $3,424,504 in the Federal estate tax of the estate of Charles A. Borgatello (the estate). After concessions, the issues we must decide involve the fair market value of stock representing an 82.76-percent interest in Valley Improvement Co., Inc. (VIC)1 as of January 12, 1994. To value the 82.76-percent shareholder's interest in VIC, we must first decide the fair market value of two shopping centers owned by VIC, Montecito Village North (MVN) and Montecito Village South (MVS), as of January 12, 1994. The parties agreed on the value of VIC's other assets. Some of the facts have been stipulated and are incorporated herein by this reference. Unless otherwise noted, all section references are to the Internal Revenue Code, and all Rule references are to the Tax Court Rules of Practice and Procedure. Charles Borgatello died a resident of California. Mr. Borgatello died on July 12, 1993.*
For the purpose of valuing Mr. Borgatello's assets, the estate's executors elected the alternate valuation date of January 12, 1994. On the alternate valuation date, VIC owned 100 percent of MVN and MVS. VIC also owned other assets with a total value (pursuant to the parties' stipulations) of $3,188,000 (rounded).2 Per the parties' stipulations, on the alternate valuation date, VIC had total liabilities of $2,543,000. The net value of VIC's assets3 on the alternate valuation date equaled the values of MVN and MVS, plus $645,000 (assets of $3,188,000 minus liabilities of $2,543,000).
The estate contends that the combined value of MVN and MVS is $13,375,000 (MVN, $8,375,000 and MVS, $5,000,000). On the basis of those values and the stipulated value of VIC's other assets, the estate contends that Mr. Borgatello's 1,037 shares of VIC stock are worth $7,542,101. Respondent contends that the combined value of MVN and MVS is $15,799,000 (MVN, $9,925,000 and MVS, $5,874,000). On the basis of those values and the stipulated value of VIC's other assets, respondent contends that Mr. Borgatello's interest in VIC is worth $9,930,000.
Before we tackle the issues of the fair market values of MVN and MVS and Mr. Borgatello's interest in VIC, we must first address an evidentiary issue concerning certain appraisal reports prepared by the experts in this case. The estate commissioned several appraisals of MVN and MVS. One of the real estate appraisers, Wayne Holden, was asked to value MVN and MVS as of the date of Mr. Borgatello's death. For this purpose, Mr. Holden produced a set of appraisals that he completed on January 14, 1994 (Holden I reports). Subsequently, the estate asked Mr. Holden to appraise MVN and MVS as of the alternate valuation date. Mr. Holden updated his previous appraisals in two letters dated February 21, 1994 (Holden II reports). The Holden II reports ostensibly adjusted Mr. Holden's conclusions regarding the shopping center values in the Holden I reports for changes in the real estate market during the 6 months between the date of Mr. Borgatello's death and the alternate valuation date. On the basis of the Holden II reports, the estate decided to elect the alternate valuation date.
During the audit of the instant case, the estate provided respondent with the Holden I and II reports. Later, during discussions with respondent's Appeals Office, the estate provided the Appeals officer with two reports by Carlos A. Cardenas (Cardenas reports) valuing MVN and MVS on the alternate valuation date. The Cardenas reports were not used in the preparation of the estate's tax return and were not provided to the Internal Revenue Service during the audit of the estate. At trial, the estate did not use the Holden I or II reports or the Cardenas reports. Instead, the estate used two new appraisals by Mr. Holden (Holden III reports), which valued MVN and MVS on the alternate valuation date.
Respondent's valuation of MVN and MVS is based upon two appraisal reports (in a single bound volume) prepared by David Marx. Mr. Marx prepared a Limited Summary report in which he reviewed the Holden I, II, and Cardenas reports and adopted some background data and conclusions from those reports. In particular, Mr. Marx adopted background data pertaining to Montecito-Santa Barbara area vacancy rates and fair rental value. He also agreed with the estate's experts' analyses pertaining to highest and best use, zoning, site and improvement, and neighborhood description. The first two pages of each of Mr. Marx's reports contain cover letters dated March 7, 1999, from Mr. Marx to respondent's attorney. Both letters contain the following disclaimer:
This Limited Summary Report is valid only if another reviewer or entity is in possession of the [Holden I, Holden II, and Cardenas appraisals] * * *. The appraiser agreed on some of the factual data and issues in these reports, and these items were used in this Limited Summary Report as part of the analysis of the subject. The three appraisals being reviewed, will be relied upon as to facts concerning the site, improvements, zoning and other descriptions. The appraiser will not complete a zoning analysis, site & improvement analysis or Highest and Best Use or neighborhood descriptions. These items are found in the appraisals reviewed by David Marx, and are assumed to be valid. [Emphasis in the original.]
At the trial of the instant case, the estate objected to the admission of Mr. Marx's reports, the Cardenas reports, and the Holden I and II reports. The Court admitted, over the estate's objection, the Holden I and II reports into evidence. The Court conditionally admitted Mr. Marx's reports, but reserved ruling on the admissibility of the Cardenas reports. The Court instructed the parties to brief the admissibility of Mr. Marx's reports and the Cardenas reports.
The estate disputes the admissibility of Mr. Marx's reports on several grounds. Chiefly, however, the estate argues that the Cardenas reports are inadmissible hearsay pursuant to rule 802 of the Federal Rules of Evidence. Additionally, the estate argues that if the Cardenas reports were excluded, it would cause Mr. Marx's reports to become invalid in accordance with the above-quoted disclaimer. Respondent contends that the Cardenas reports are not hearsay because they constitute admissions by the estate.
Rule 801(d)(2)(B) of the Federal Rules of Evidence expressly provides that any statement offered against a party where that party has manifested an adoption or belief in the statement's truth is admissible. See Fed. R. Evid. 801(d)(2)(B). Statements admitted pursuant to rule 801(d)(2)(B) of the Federal Rules of Evidence are admissible only against parties who have adopted them or who bear a specified relationship to the declarant.* See Hospital Corp. of Am. v. Commissioner [Dec. 51,705(M)], T.C. Memo. 1996-559. In the instant case, the Cardenas reports were given to respondent before trial by the estate's counsel. The reports were not obtained by respondent directly from the estate's experts. The estate supplied the reports to respondent as representations of the values (and the data underlying those values) of MVN and MVS. The act of producing the reports to respondent constitutes an adoption of belief in the truth of their contents pursuant to rule 801(d)(2)(B) of the Federal Rules of Evidence. Consequently, we hold that the requirements of rule 801(d)(2)(B) of the Federal Rules of Evidence are satisfied and the Cardenas reports are admissible.4
The estate vaguely suggests that the Cardenas reports were provided to respondent during settlement negotiations and, therefore, are inadmissible pursuant to rule 408 of the Federal Rules of Evidence. Although respondent acknowledged at trial that there may be some question as to whether the Cardenas reports were provided to respondent during settlement negotiations, the estate failed to demonstrate that such was the case. Consequently, we hold that the estate has not shown that the Cardenas reports are inadmissible pursuant to rule 408 of the Federal Rules of Evidence.
The estate's other main argument against the admission of Mr. Marx's report is based upon our holding in Diego Investors IV v. Commissioner [Dec. 46,174(M)], T.C. Memo. 1989-630. In Diego Investors IV, the Court refused to allow an expert selected and paid for by the Commissioner to testify as the taxpayers' witness. The taxpayers in Diego Investors IV sought to call the Commissioner's expert to enhance their tactical position by using selected portions of a report pertaining to sales data while refuting the remainder of the expert's unfavorable conclusions. Although Diego Investors IV is distinguishable from the instant case in numerous ways, one critical distinction is that in the instant case, respondent has gained no tactical advantage by adopting some of the information in the estate's expert's reports.
In the instant case, the estate provided the Holden I, II, and Cardenas reports to respondent as evidence of the values of MVN and MVS, as well as to provide the facts and data underlying those values. The estate now seeks to exclude those reports because they believe that if they are successful, we shall conclude that Mr. Marx's reports are invalid based on the language in Mr. Marx's disclaimer. However, it appears that the estate failed to appreciate that the use of expert testimony is within the sound discretion of the trial judge. The test for admissibility of expert testimony is whether the testimony will aid...
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