                               T.C. Memo. 2018-178



                         UNITED STATES TAX COURT



  ESTATE OF FRANK D. STREIGHTOFF, DECEASED, ELIZABETH DOAN
              STREIGHTOFF, EXECUTOR, Petitioner v.
        COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 4379-15.                            Filed October 24, 2018.



      Michael C. Riddle and Harold A. Chamberlain, for petitioner.

      Susan M. Fenner and Christina D. White, for respondent.



            MEMORANDUM FINDINGS OF FACT AND OPINION


      KERRIGAN, Judge: Respondent determined a deficiency of $491,750 in

the Federal estate tax of the Estate of Frank D. Streightoff (estate). The issue for

consideration is the type and value of an interest that Frank D. Streightoff

(decedent) transferred during his lifetime to a revocable trust. Unless otherwise
                                        -2-

[*2] indicated, all section references are to the Internal Revenue Code in effect for

the date of decedent’s death, and all Rule references are to the Tax Court Rules of

Practice and Procedure. We round all monetary amounts to the nearest dollar.

                               FINDINGS OF FACT

      Some of the facts have been stipulated, and the stipulated facts are

incorporated in our findings by this reference. Decedent died May 6, 2011. He

resided in Texas at the time of his death. Decedent’s daughter, Elizabeth Doan

Streightoff (Ms. Streightoff), was appointed executor of the estate. She resided in

Texas when the petition was filed. During decedent’s lifetime Ms. Streightoff also

held decedent’s power of attorney (POA). The estate was probated in Texas.

I.    Streightoff Investments, LP

      On October 1, 2008, decedent, through Ms. Streightoff, formed Streightoff

Investments, LP (Streightoff Investments), as a limited partnership under the

provisions of the Texas Revised Limited Partnership Act (TRLPA), Tex. Rev. Civ.

Stat. Ann. art. 6132a-1 (West 2008). Streightoff Investments did not hold

partnership meetings or have votes.

      The partnership agreement stated that the purpose of Streightoff

Investments was to make a profit, increase wealth, and provide a means for

decedent’s family to manage and preserve family assets. Decedent funded
                                         -3-

[*3] Streightoff Investments with assets including marketable equity securities,

municipal bonds, mutual fund investments, other investments, and cash. As of

January 31, 2009, 61.6% of Streightoff Investments’ assets consisted of

marketable equity securities, 23.6% consisted of fixed-income investments in

municipal bonds, and 13.3% was invested in mutual funds. Its portfolio of

publicly traded marketable equity securities was managed by professional money

managers. The remaining 1.5% was invested in cash and other investments.

      Streightoff Management, LLC (Streightoff Management), was Streightoff

Investments’ sole general partner. Ms. Streightoff was manager of Streightoff

Management. The partnership agreement for Streightoff Investments provided

that the general partner “shall perform or cause to be performed * * * the trade or

business of the Partnership”, subject only to limitations set forth expressly in the

partnership agreement.

      Decedent, his daughters, his sons, and his former daughter-in-law were

Streightoff Investments’ original limited partners under the partnership agreement.

The limited partners other than decedent received their limited partnership

interests as gifts. Decedent reported these gifts on a Form 709, United States Gift

(and Generation-Skipping Transfer) Tax Return, filed for 2009.
                                        -4-

[*4] The partnership agreement specified that decedent and the other partners

received the following interests upon formation:

                                                                     Percentage
                 Partner                   General or limited         interest

      Streightoff Management                       General                 1.00%
      Decedent                                     Limited              88.99
      Elizabeth Streightoff                        Limited               1.54
      Ann Fennell Brace                            Limited               1.54
      Camille Schuman                              Limited               1.54
      Jennifer Ketchum Hodges                      Limited               1.54
      Hilary Dane Billingslea                      Limited               1.54
      Charles Franklin Streightoff                 Limited               0.77
      Frank Hatch Streightoff                      Limited               0.77
      Priscilla Streightoff                        Limited               0.77

      Section 1.5 of the partnership agreement provided that Streightoff

Investments would terminate December 31, 2075, unless terminated sooner upon

the happening of certain events. Section 1.5(b) provided that the partnership

terminated upon the removal of the general partner. Under article V limited

partners could remove the general partner by written agreement of limited partners

owning 75% or more of the partnership interests held by all limited partners.

Section 1.5 provided that if the partnership terminated by reason of the general
                                         -5-

[*5] partner’s removal, then 75% of the limited partners could reconstitute the

partnership and elect a successor general partner. Limited partners owning at least

75% of the ownership percentage in the partnership could approve the admission

of additional limited partners to the partnership.

      Section 7.2 of the partnership agreement provided that a limited partner

could not sell or assign an interest in Streightoff Investments without obtaining the

written approval of the general partner, which the agreement provided would not

be unreasonably withheld. Pursuant to section 7.2 any partner who assigned his or

her interest remained liable to the partnership for promised contributions or

excessive distributions unless and until the assignee was admitted as a substituted

limited partner. Once the assignee was admitted as a substituted limited partner,

the assignor no longer was liable to the partnership. The general partner could

elect to treat an assignee as a substituted limited partner in the place of the

assignor. An assignor was deemed to continue to hold the assigned interest for the

purposes of any vote taken by limited partners under the partnership agreement

until the assignee was admitted as a substituted limited partner.

      All transfers of interests in Streightoff Investments were subject to

limitations. Section 9.2 provided that partners in the partnership were allowed to

make only permitted transfers of their interests. Permitted transfers were transfers
                                          -6-

[*6] (1) to any member of the transferor’s family, (2) to the transferor’s executor,

trustee, or personal representative to whom his or her interest passes at death or by

operation of law, or (3) to any purchaser, but subject to the right of first refusal

held by the persons listed in section 9.4.

      Section 9.4 provided that any partner who received an outside purchase

offer for his or her interest was required, before accepting the offer, to provide

each of the “priority family”,1 the partnership, and the general partner an

opportunity to acquire the interest according to terms the same as or better than

those offered by the outside purchaser. Whether the partnership exercised its right

of first refusal to purchase a partner’s interest was subject to the approval of the

general partner and limited partners owning at least 50% of the partnership

interests held by all limited partners (with the exception of the seller if he or she

was a limited partner).

      The partnership agreement referred to persons who acquired interests in

Streightoff Investments but who were not admitted as substituted limited partners

to the partnership as “unadmitted assignees”. Section 9.6 provided that

“unadmitted assignees” were entitled only to allocations and distributions in

      1
        The partnership agreement defines priority family as the transferor’s
“spouse, natural or adoptive lineal ancestors or descendants, and trusts for his or
their exclusive benefit.”
                                         -7-

[*7] respect of their acquired interests. “Unadmitted assignees” had no right to

any information or accounting of the affairs of the partnership, were not entitled to

inspect the books or records of the partnership, and did not have any of the rights

of a general or limited partner under TRLPA.

      The partnership agreement provided that a transferee of an interest in

Streightoff Investments could become a substituted limited partner upon

satisfaction of certain conditions set out in section 9.7. These conditions included:

(1) that each general partner consent; (2) that the interest with respect to which the

transferee is being admitted be acquired by means of a permitted transfer;

and (3) that the transferee become a party to the partnership agreement as a limited

partner and execute such documents and instruments as the general partner may

request to confirm that the transferee agreed to be bound by the terms and

conditions of the partnership agreement. The partnership agreement provided that

an interest holder who was admitted to the partnership as a substituted limited

partner would be treated the same as an original limited partner under the terms of

the partnership agreement.

II.   Frank D. Streightoff Revocable Living Trust

      On October 1, 2008, the same day that decedent formed Streightoff

Investments, he established the Frank D. Streightoff Revocable Living Trust
                                         -8-

[*8] (revocable trust). Also on October 1, 2008, he transferred his 88.99% interest

in Streightoff Investments to the revocable trust. Decedent was grantor of the

revocable trust, and he held the power during his life to amend, alter, revoke, or

terminate it. He was the revocable trust’s sole beneficiary, and Ms. Streightoff

was the trustee. Decedent was entitled to receive distributions of trust income and

could receive distributions of the trust principal upon his request.

      On October 1, 2008, decedent, through Ms. Streightoff, executed an

agreement entitled “Assignment of Interest” (agreement), which designated

decedent as “assignor” and the revocable trust as “assignee”. The agreement

provided that decedent made an “assignment” of all of his limited partnership

interest in Streightoff Investments. It provided that decedent transferred “[his]

interest in the above described premises, together with all and singular the rights

and appurtenances thereto in anywise belonging, unto the said Assignee, its

beneficiaries and assigns forever” and that he bound himself and “[his] heirs,

executors, and administrators to * * * provide any further documentation or

execute any additional legal instruments necessary to provide the assignee all the

rights the Assignor may have had in the property.” The agreement provided that

the revocable trust “by signing this Assignment of Interest, hereby agrees to abide
                                         -9-

[*9] by all the terms and provisions in that certain Limited Partnership Agreement

of STREIGHTOFF INVESTMENTS, LP, dated effective October 1, 2008.”

       Decedent’s transfer of his interest was a permitted transfer under section 9.2

of the partnership agreement. Ms. Streightoff signed the transfer agreement in her

capacities as holder of decedent’s POA, trustee of the revocable trust, and

managing member of Streightoff Management.

III.   Estate Tax Return and Notice of Deficiency

       On August 9, 2012, the estate filed a Form 706, United States Estate (and

Generation-Skipping Transfer) Tax Return (estate tax return). Ms. Streightoff as

decedent’s executor elected to use the alternate valuation date of November 6,

2011, to value the estate’s assets. On the estate tax return the estate reported a

gross estate less the exclusion of $5,051,299.

       On November 6, 2011, the partnership’s net asset value (NAV) was

$8,212,103. It held the following assets with the following market values:
                                         - 10 -

[*10]               Assets                                     Market value

          Cash                                                   $198,453
          Marketable equity securities                           5,590,778
          Marketable municipal bonds                             2,386,277
          Marketable corporate bonds                                30,366
          Sovereign debt                                             6,229
           Total                                                 8,212,103

        The estate reported on the estate tax return that decedent had made transfers

described in section 2035, 2036, 2037, or 2038 during his lifetime. It filed with

the estate tax return a Schedule G, Transfers During Decedent’s Life, identifying

those transfers. A supplemental statement attached to the estate tax return

provided the following explanation with respect to decedent’s lifetime transfers:

        THE DECEDENT ESTABLISHED * * * [the revocable trust], FOR
        WHICH THE TERMS WERE REVOCABLE AND AMENDABLE
        BY THE DECEDENT DURING HIS LIFETIME. THE VALUE OF
        THE ASSETS TRANSFERRED TO THE TRUSTEE DURING THE
        LIFETIME OF THE DECEDENT HAVE BEEN REPORTED,
        PURSUANT TO SECTION 2038 OF THE INTERNAL REVENUE
        CODE, ON SCHEDULE G * * *.

        On Schedule G the estate described the property transferred to the revocable

trust as an assignee interest in an 88.99% limited partnership interest. The estate

reported the value of the transferred interest as $4,588,000 as of the alternate
                                        - 11 -

[*11] valuation date. The estate’s valuation of the transferred interest calculated

88.99% of the partnership’s NAV on the alternate valuation date (i.e., $7,307,951)

and discounted that value by 37.2%. In a supplemental statement the estate

indicated that it claimed discounts for lack of marketability, lack of control, and

lack of liquidity.

      On January 9, 2015, respondent sent the notice of deficiency on which this

case is based (notice), determining a deficiency of $491,750. The notice contained

a letter addressed to the estate’s representative and its counsel, Michael C. Riddle,

with several enclosures. The enclosures included a Form 1273, Report of Estate

Tax Examination Changes, a Form 6180, Line Adjustment--Estate Tax, and two

Forms 886-A, Explanation of Items. The Form 6180 showed an adjustment in

value to items reported on Schedule G of $1,405,000. The attached Forms 886-A

stated respondent’s determination that the corrected value of decedent’s interest in

Streightoff Investments on the alternate valuation date was $5,993,000.

IV.   Procedural Backround

      On June 19, 2015, the estate filed a motion for summary judgment

contending that in issuing the notice respondent had violated provisions of the

Administrative Procedure Act (APA). On September 13, 2016, a hearing was held
                                        - 12 -

[*12] on the motion. The estate argued that the notice was invalid and should be

set aside and that the Court lacked jurisdiction.

      On September 15, 2016, the Court rendered an Oral Findings of Fact and

Opinion on the estate’s motion. We rejected the estate’s contentions regarding the

validity of the notice and held that the Court had jurisdiction to redetermine the

deficiency at issue. We concluded that “the application of APA to proceedings for

the redetermination of a deficiency, such as this one, have been soundly rejected in

Ax v. Commissioner, 146 T.C. __ (April 11, 2016).” On October 11, 2016, the

Court issued an order denying the motion for summary judgment.

                                      OPINION

I.    Validity of the Notice

      The estate contends that the notice states a naked deficiency amount

because it describes no basis for the determination of any additional tax due. It

argues that respondent valued a property interest that decedent did not own on his

date of death. Respondent contends that the notice is valid and does not violate

section 7522(a).

      Section 7522(a) provides that any deficiency notice “shall describe the basis

for * * * the tax due * * * in such notice.” An inadequate description of the basis

for the deficiency does not invalidate the notice. Id. Generally, we have required
                                        - 13 -

[*13] that a notice provide a formal notification that a deficiency in tax has been

determined. Pietz v. Commissioner, 59 T.C. 207, 213-214 (1972). We look at the

notice with all the attachments as a whole. See Saint Paul Bottling Co. v.

Commissioner, 34 T.C. 1137, 1138 (1960).

      The notice states the year and the amount of estate tax due. Attached to the

notice were Forms 886-A, which showed respondent’s determination of the value

of decedent’s interest in Streightoff Investments. We conclude on the evidence

that respondent complied with section 7522(a). Even if we concluded that

respondent had not provided the basis for the determination, the case would not be

dismissed, because an inadequate description does not invalidate a notice of

deficiency. See sec. 7522(a)

II.   Burden of Proof

      Generally, the taxpayer bears the burden of proving that the Commissioner’s

determinations in the notice of deficiency are erroneous. Rule 142(a); Welch v.

Helvering, 290 U.S. 111, 115 (1933). The burden of proof may shift to the

Commissioner if the taxpayer establishes that it complied with the requirements of

section 7491(a)(2)(A) and (B) to substantiate items, to maintain required records,

and to cooperate fully with the Commissioner’s reasonable requests. The estate

contends that the burden of proof should be shifted to respondent.
                                         - 14 -

[*14] We conclude that the parties have stipulated all operative facts and

documents needed to decide the issues presented, and which party bears the

burden of proof is irrelevant. Estate of Morgens v. Commissioner, 133 T.C. 402,

409 (2009), aff’d, 678 F.3d 769 (9th Cir. 2012). The nature of the property

interest transferred to the revocable trust is a legal issue that can be decided on the

basis of the agreed facts.

       The question of fair market value is an question of fact. Estate of

Newhouse v. Commissioner, 94 T.C. 193, 217 (1990). The parties’ experts offer

different conclusions regarding the value of the transferred interest based on

differing interpretations of the relevant facts. However, we are not bound by the

opinion of any expert witness when that opinion is contrary to our own judgment.

Estate of Hall v. Commissioner, 92 T.C. 312, 338 (1989). We resolve the

valuation issue on the preponderance of the evidence in the record with the

guidance of those expert opinions that we find most helpful.

III.   Type of Interest

       The parties disagree as to the type of interest that must be valued and

included in the value of decedent’s gross estate.2 The estate contends that the

       2
       The parties agree that the value of decedent’s interest in Streightoff
Investments transferred to the revocable trust is includible in the value of the gross
                                                                        (continued...)
                                        - 15 -

[*15] agreement created an assignee interest in decedent’s limited partnership

interest under Texas State law and the partnership agreement. It contends that it

valued and reported decedent’s interest in the revocable trust correctly as an

assignee interest on Schedule G of its tax return.

       Respondent contends that the agreement did not create an assignee interest

held by the revocable trust. Respondent argues that decedent transferred his

88.99% limited partnership interest to the revocable trust and the value to be

included in the value of the gross estate should be that of a limited partnership

interest.

       We need to determine whether the interest decedent transferred to the

revocable trust was a limited partnership interest or an assignee interest.

Generally, State law determines the property interest that has been transferred for

Federal estate tax purposes. See McCord v. Commissioner, 120 T.C. 358, 370

(2003), rev’d and remanded on other grounds, 461 F.3d 614 (5th Cir. 2006).

TRLPA (as in effect for the relevant period) provides that a partnership interest is

personal property and is assignable, in whole or in part, unless the partnership

agreement provides otherwise. Tex. Rev. Civ. Stat. Ann. art. 6132a-1, secs. 7.01


       2
        (...continued)
estate pursuant to sec. 2038.
                                        - 16 -

[*16] and 7.02(a)(1) (West). An assignee of a partnership interest is entitled to

receive, to the extent assigned, allocations of income, gain, loss, deduction, credit,

or similar items, and to receive distributions to which the assignor is entitled, but

an assignment does not entitle the assignee “to become, or to exercise rights or

powers of, a partner”. Id. sec. 7.02(a)(2) and (3). The assignee may become a

limited partner, with all rights and powers of a limited partner under a partnership

agreement, in the manner that the partnership agreement provides or if all partners

consent. Id. sec. 7.04(a) and (b).

      Although we consult State law to determine what property interests were

transferred, our inquiry may not end there. See McCord v. Commissioner, 120

T.C. at 371. The Federal tax effect of a particular transaction is governed by the

substance of the transaction rather than its form. Frank Lyon Co. v. United States,

435 U.S. 561, 573 (1978). The doctrine that the substance of a transaction will

prevail over its form has been applied in Federal estate and gift tax cases. See

Heyen v. United States, 945 F.2d 359, 363 (10th Cir. 1991); Estate of Murphy v.

Commissioner, T.C. Memo. 1990-472. In particular, we have indicated a

willingness to look beyond the formalities of intrafamily partnership transfers to

determine what, in substance, was transferred. See Kerr v. Commissioner, 113

T.C. 449, 464-468 (1999), aff’d, 292 F.3d 490 (5th Cir. 2002). We will consider
                                        - 17 -

[*17] both the form and the substance of decedent’s transfer to the revocable trust

to determine whether the property interest transferred was an assignee interest or a

limited partnership interest.

      The partnership agreement in this case allowed for transfers of limited

partnership interests and for the admission of substituted limited partners. Section

9.6 provided that a transferee who was not admitted as a substituted limited

partner would hold the right to allocations and distributions with respect to the

transferred interest but would have no right to any information or accounting or to

inspect the books or records of the partnership and would not have any of the

rights of a general or limited partner (including the right to vote on partnership

matters). Under section 9.7 conditions had to be met for the admission of a

transferee of a partnership interest as a substituted limited partner. The estate

contends that these conditions were never met with respect to the interest that

decedent transferred to the revocable trust and that upon the execution of the

agreement the revocable trust received only an assignee interest in decedent’s

88.99% limited partnership interest.

      The agreement provided that decedent made a transfer to the revocable trust

of “[a]ll of * * * [his 88.99%] limited partnership interest” in Streightoff

Investments. It further stated that decedent transferred with the interest “all and
                                        - 18 -

[*18] singular the rights and appurtenances thereto in anywise belonging”.

Although the transfer was labeled an “[a]ssignment”, the agreement states that the

revocable trust is entitled to all rights associated with the ownership of decedent’s

88.99% limited partnership interest, not those of an assignee. All “rights and

appurtenances” belonging to decedent’s interest include the right to vote as a

limited partner and exercise certain powers as provided in the partnership

agreement.

      The agreement provided that decedent was bound to provide any

documentation or execute any legal instruments necessary “to provide * * * [the

revocable trust] all the rights * * * [decedent] may have had” in the limited

partnership interest. Decedent’s rights in the limited partnership interest were

those of a limited partner in the partnership. The agreement satisfied all the

conditions for the transfer of decedent’s limited partnership interest and the

admission of the revocable trust as a substituted limited partner.

      Section 9.7 provided that for a transferee to be admitted as a substituted

limited partner in respect of a transferred interest in Streightoff Investments (1) the

general partner must consent to the transferee’s admission, (2) the transferee must

have acquired the interest by means of a permitted transfer, and (3) the transferee

must agree and execute the instruments necessary to be bound by the terms of the
                                        - 19 -

[*19] partnership agreement. Ms. Streightoff signed the agreement as manager of

Streightoff Investments’ general partner and gave consent to its terms, which

provided for the transfer of all of decedent’s rights in the limited partnership

interest to the revocable trust. The parties have stipulated that the transfer was a

permitted transfer. Lastly, the agreement provided that the revocable trust agreed

to abide by all terms and provisions of the partnership agreement, and Ms.

Streightoff executed the agreement on behalf of the revocable trust.

      We conclude that the form of the agreement establishes that decedent

transferred to the revocable trust a limited partnership interest and not an assignee

interest. The economic realities underlying the transfer of decedent’s interest also

support our conclusion that the transferred interest should be treated as a limited

partnership interest for Federal estate tax purposes. This is because we conclude

that regardless of whether an assignee or a limited partnership interest had been

transferred, there would have been no substantial difference before and after the

transfer to the revocable trust. See Kerr v. Commissioner, 113 T.C. at 467-468.

      Pursuant to Streightoff Investments’ partnership agreement only the general

partner had the right to direct the partnership’s business; neither limited partners

nor assignees had managerial rights. The partnership agreement provided that

assignees had no rights to any information regarding the business of the
                                         - 20 -

[*20] partnership or to inspection of the books or records of the partnership.

However, this distinction made no difference in this case because Ms. Streightoff

was both a partner entitled to information regarding Streightoff Investments and

the trustee of the revocable trust.

      The partnership agreement provided that an “unadmitted assignee” did not

have the right to vote as a limited partner. In Kerr v. Commissioner, 113 T.C. at

467, we determined that the only real difference between the rights of a limited

partner and those of an assignee was the right to vote on partnership matters, and

we concluded that this difference was not significant. We held that under such

circumstances the transferred interest should be valued as a limited partnership

interest rather than as an assignee interest. Id. Here, we conclude similarly that

whether the revocable trust held the voting rights associated with a limited

partnership interest would have been of no practical significance.

      There were no votes by limited partners following the execution of the

agreement. Additionally, during his life decedent held the power to revoke the

transfer to the revocable trust. If he had revoked the transfer, he would have held

all the rights of a limited partner in Streightoff Investments, including the right to

vote on partnership matters. Also, Streightoff Management as the general partner

could have treated the holder of an assignee interest as a substitute limited partner.
                                        - 21 -

[*21] Under the facts and circumstances of this case, there was no difference in

substance between the transfer of a limited partnership interest in Streightoff

Investments and the transfer of an assignee interest in that limited partnership

interest. See id.; Astleford v. Commissioner, T.C. Memo. 2008-128, slip op. at 16.

Accordingly, as a matter of both form and substance, the interest to be valued for

estate tax purposes is an 88.99% limited partnership interest in Streightoff

Investments.

IV.   Fair Market Value

      Generally, the value of an item of property included in the value of a

decedent’s gross estate is the fair market value of the item at the time of the

decedent’s death or, if an election is made, on the alternate valuation date. See

sec. 20.2031-1(b), Estate Tax Regs. “The fair market value is the price at which

the property would change hands between a willing buyer and a willing seller,

neither being under any compulsion to buy or to sell and both having reasonable

knowledge of relevant facts.” Id. The hypothetical willing buyer and the

hypothetical willing seller are presumed to be dedicated to achieving the

maximum economic advantage. See Estate of Davis v. Commissioner, 110 T.C.

530, 535 (1998).
                                        - 22 -

[*22] Both parties submitted expert reports regarding the fair market value of the

interest that decedent transferred to the revocable trust. Juliana Vicelja was

respondent’s expert, and Oliver Warnke and Alan Harp, employees of Howard

Frazier Barker Elliot, Inc. (HFBE), were experts for the estate.

      Both parties’ experts characterize the partnership as an asset holding entity.

They employed valuation methods that determined the value of the transferred

interest in Streightoff Investments as 88.99% of the NAV of the partnership, less

certain discounts. The parties have stipulated the NAV of the partnership on the

alternate valuation date.

      A.     Lack of Control

      Ms. Vicelja’s report determines that decedent’s limited partnership interest

holds considerable influence and control over the management of Streightoff

Investments because of specific provisions in the partnership agreement. The

report notes that under article V limited partners with a 75% interest hold the

power to remove general partners, and under section 1.5 a general partner’s

removal terminates the partnership. It states that a prospective purchaser of

decedent’s 88.99% limited partnership interest would pay more for the degree of

control embodied in the interest, including the ability to unilaterally terminate the

partnership if he or she does not agree with the management of the general partner.
                                        - 23 -

[*23] Her report concludes that no discount for lack of control should be applied

to the interest.

       HFBE’s report assumes that the interest to be valued is an assignee interest

in decedent’s limited partnership interest and that a hypothetical buyer would pay

less for an interest that does not give the holder access to or control over the

underlying assets of the partnership. The report acknowledges that the partnership

agreement provided limited partners with the right to vote on decisions affecting

partnership management, including the removal of the general partner and

termination of the partnership, but determines that the interest at issue would

provide none of these control benefits because it was an assignee interest. It

concludes that a 13.4% discount for lack of control should be applied in valuing

the interest.

       Since we have determined that the interest transferred was an 88.99%

limited partnership interest, we conclude that the interest did not lack control.

Accordingly, there is no discount for lack of control.

       B.       Lack of Marketability

       Both parties’ experts relied on factors identified in Mandelbaum v.

Commissioner, T.C. Memo. 1995-255, 1995 WL 350881, aff’d, 91 F.3d 124 (3d

Cir. 1996), to determine a discount for lack of marketability. These factors, which
                                          - 24 -

[*24] generally make an interest in an entity more or less marketable, include:

(1) an analysis of the entity’s financial condition, (2) the entity’s capacity to pay

and history of paying distributions, (3) the nature of the entity and its economic

outlook, (4) the management of the entity, (5) the amount of control held by the

interest, (6) restrictions on the transferability of the interest, (7) the required

holding period for the interest, (8) the entity’s redemption policy, and (9) the costs

associated with making a public offering. Id. at *11.

      Respondent’s expert report states that generally no ready market exists for

sales of interests in privately held entities and a discount for lack of marketability

is necessary to entice prospective buyers. In quantifying an appropriate

percentage discount for lack of marketability Ms. Vicelja relies on data from

restricted stock studies. These studies reflect that discounts for lack of

marketability for restricted stocks have decreased in more recent years. This trend

is linked to amendments in Securities and Exchange Commission (SEC)

regulations that shortened the holding periods required for purchasers of restricted

stocks to resell their interests. Ms. Vicelja determined the appropriate discount for

lack of marketability for the transferred interest using more recent studies, which

considered stocks with shorter holding periods.
                                          - 25 -

[*25] Ms. Vicelja determined that Streightoff Investments was capable of making

distributions during each of the years under consideration and that the

partnership’s overall financial condition and prospects are strong. Her report

notes that the underlying assets of Streightoff Investments are highly liquid. She

testified that the diversification and high liquidity of the assets would make an

interest in the partnership highly attractive to a hypothetical buyer. The report

determines that the amount of control provided by an 88.99% limited partnership

interest is a factor favoring a lower discount. It also asserts that the right of first

refusal provided for in the partnership agreement warrants a lower discount. Her

report concludes that a discount for lack of marketability of 18% is appropriate.

      The HFBE report asserts generally that longer required holding periods,

riskier entities, and lower prospects for distributions indicate that a higher

discount should be applied than that which respondent determined. Like Ms.

Vicelja’s report, the HFBE report cites data from restricted stock studies.

However, it relies on older studies conducted when SEC regulations imposed the

longest holding period requirements for restricted stocks. The estate’s expert

report assumes that the interest to be valued is an assignee interest and that the

holder would have no ability to force liquidation. The report concludes that the

predicted holding period required for the subject interest indicates a higher
                                         - 26 -

[*26] discount relative to those reflected in the restricted stock studies. Mr. Harp

testified that “a very long holding period expected * * * [is] one of the main

drivers for lack of marketability discount”.

      The HFBE report states that the risk profile for an asset holding entity like

Streightoff Investments is low compared to those of the operating companies that

were considered in the restricted stock studies. It determines that, overall, the risk

factors for the partnership indicate a lower discount for the interest at issue. With

respect to the impact of the partnership’s distribution policy, the report relies on

statements made by partnership representatives that the partnership does not

intend to make distributions in excess of the partners’ tax liabilities for the

foreseeable future. It acknowledges that the majority of the companies considered

in the restricted stock studies also did not pay dividends but determines that the

partnership’s distribution policy warrants an increase in the applicable discount.

      The HFBE report concludes that a 27.5% discount for lack of marketability

is appropriate to apply to the transferred interest. Mr. Harp testified that his

analysis for the lack of marketability discount would have included different

considerations if the interest was a limited partnership interest with voting rights

under the partnership agreement.
                                        - 27 -

[*27] We agree with the experts that there should be a discount for the lack of

marketability. The estate’s experts took into consideration that the interest they

were valuing was an assignee interest, and this affected the conclusion in their

report. Since we concluded that the interest decedent transferred was a limited

partnership interest, the estate’s experts’ valuation is too high. The analysis in

respondent’s expert report is reasonable. We conclude that the interest should be

valued using an 18% discount rate for lack of marketability.

      We have considered all of the arguments made by the parties, and to the

extent we did not mention them above, we conclude that they are moot, irrelevant,

or without merit.

      To reflect the foregoing,


                                                 Decision will be entered

                                        for respondent.
