True v. United States, C81-158.

• Decision Date: 27 September 1982
• Docket Number: No. C81-158.,C81-158.
• Citation: 547 F. Supp. 201
• Parties: H. A. TRUE, Jr., and Jean D. True, Plaintiffs, v. UNITED STATES of America, Defendant.
• Court: U.S. District Court — District of Wyoming

547 F. Supp. 201

H. A. TRUE, Jr., and Jean D. True, Plaintiffs, v. UNITED STATES of America, Defendant.

No. C81-158.

United States District Court, D. Wyoming.

September 27, 1982.

R. Stanley Lowe, William H. Brown, Claude W. Martin, Casper, Wyo., and Claude M. Maer, Jr., Denver, Colo., for plaintiffs.

Robert L. Baker and Michael Chun, Washington, D. C., for defendant.

MEMORANDUM OPINION

KERR, District Judge.

The question for consideration in this case is what value should be assessed for gift tax purposes to the gifts of 8% restricted interest in True Oil Company to each of four children made by the taxpayer plaintiffs. This Court has jurisdiction pursuant to 28 U.S.C. § 1346(a)(1).

Plaintiffs were sole owners in a partnership known as True Oil Company (True Oil). True Oil is engaged in the exploration of unproven oil and gas leases, otherwise known as "wildcatting." This type of business is very risky. In the summer of 1973 arrangements were made to transfer interests in True Oil to plaintiffs' four children. On August 1, 1973 8% restricted interest in True Oil was transferred to each of four children as a gift. The gift at that time was oral, but was later memorialized by way of written amendment to the original partnership agreement. Said amendment was effective August 1, 1973.

Relevant provisions of the partnership agreement include: an obligation on the part of the partners to make contributions of capital, when necessary, in proportion to the partners' interest; required sale to other partners if a substantial amount of each partners' time is not devoted to the partnership; general restrictions on disposal of the partnership interest; and a restriction on transferability of the interest which requires a withdrawing partner to sell his interest at book value to the remaining partners and requires the remaining partners to purchase said interest at book value. Undisputed testimony at trial revealed that the four children were aware of the restrictions to be placed upon their gifts, and agreed to abide by those restrictions as of the date of transfer, August 1, 1973.

The gifts were properly reported by plaintiffs through timely filed gift tax returns. Each plaintiff consented to application of § 2513 of the Internal Revenue Code, allowing treatment of the gifts as having been made one-half by each plaintiff. The book value of True Oil on August 1, 1973 was $683,160.38, making the book value of each gift $54,653. Plaintiffs reported total gifts of True Oil interests of $218,612 and gift tax was paid on that amount.

On March 6, 1981, Internal Revenue Service sent a notice of deficiency to plaintiffs alleging that the interests transferred on August 1, 1973 had an increased value of $3,018,328. Each plaintiff was charged with a $457,342 deficiency. Plaintiffs paid the alleged deficiency and made claims for refund in that amount. The refund claims were disallowed by the Internal Revenue Service and this suit was filed. On December 31, 1981, plaintiffs paid the assessed interest on the alleged gift tax deficiency, in the amount of $258,846.17 each, totaling $517,692.34. Plaintiffs made claims for refund on the alleged interest, which claims were also disallowed by the Internal Revenue Service.

To resolve the question presented, a determination must be made regarding "fair market value" of the property in question. The term is defined as to gift tax in 26 C.F.R. § 25.2512-1 entitled, Valuation of Property; in general. The definition requires a willing buyer and a willing seller, with no compulsion to buy and reasonable knowledge of relevant facts. Fair market value is the net amount willingly paid when all these elements exist.

However, most valuations, including the one at hand, involve a host of additional, complicating factors. Both parties frequently refer to Rev.Rul. 59-60 which offers guidance in the valuation of stocks in closely held corporations. The same factors are applicable to valuation in closely held partnerships. The revenue ruling lists the following as fundamental factors requiring careful analysis: nature and history of enterprise, general economic outlook, industry outlook, book value, financial condition of business, earning capacity, dividend-paying capacity, goodwill or other intangibles, sales of stock, size of stock block valued, and the market price of stocks in similar types of business. Rev.Rul. 59-60, Sec. 4. The ruling also specifically mentions restrictive...