                           125 T.C. No. 1



                    UNITED STATES TAX COURT



VAN DER AA INVESTMENTS, INC., A DISSOLVED DELAWARE CORPORATION,
          TERRY L. VAN DER AA, TRUSTEE, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



    Docket No. 21342-03.                Filed July 6, 2005.



         P has moved for partial summary judgment (the
    motion). R objects on the ground that P has failed to
    establish that there is no genuine issue as to any
    material facts. In particular, R claims that many of
    P’s exhibits constitute hearsay and are so unreliable
    that, without the opportunity for formal discovery and
    cross-examination, the documents should not be before
    the Court and the Court should not rely upon them in
    ruling on the motion. In support of the motion, P has
    offered an expert valuation report, claiming that it
    constitutes admissible hearsay as a business record
    under Fed. R. Evid. 803(6).

    1. Held: The report is inadmissible hearsay without
    the availability of the preparing expert for cross-
    examination. See Fed. R. Evid. 705.
                                 - 2 -

       2. Held: The motion will be denied because P has
       failed to establish that there is no genuine issue as
       to any material facts.


       Daniel A. Dumezich, Charles P. Hurley, and Gary S. Colton,

Jr., for petitioner.

       Marjory A. Gilbert and Catherine M. Thayer, for respondent.



                                OPINION


       HALPERN, Judge:   This matter is before the Court on

petitioner’s motion for partial summary judgment (the motion).

Respondent objects.

       Unless otherwise indicated, all section references are to

the Internal Revenue Code of 1986, as amended, and all Rule

references are to the Tax Court Rules of Practice and Procedure.

       Rule 121 provides for summary judgment.   Summary judgment

may be granted with respect to all or any part of the legal

issues in controversy “if the pleadings, answers to

interrogatories, depositions, admissions, and any other

acceptable materials, together with the affidavits, if any, show

that there is no genuine issue as to any material fact and that a

decision may be rendered as a matter of law.”     Rule 121(a) and

(b).
                               - 3 -

     Because we are persuaded that there is a genuine issue as to

a material fact, we shall deny the motion.   Our reasoning is as

follows.

                            Background

The Notice

     By notice of deficiency dated September 15, 2003 (the

notice), respondent determined a deficiency in the Federal income

tax of Van Der Aa Investments, Inc. (Investments),1 for its 1999

taxable (calendar) year (1999) in the amount of $62,604,069, an

addition to tax on account of delinquency under section

6651(a)(1) (the delinquency addition) in the amount of

$12,520,814, and an accuracy-related penalty under section 6662

(the accuracy-related penalty) in the amount of $3,124,797.    For

1999, Investments made a Federal income tax return as an S

corporation.2   On that return, among other things, Investments

reported a built-in gain tax liability of $1,520,140.    The

deficiency in tax determined by respondent results from his

adjustment increasing Investments’s built-in gain tax liability

from $1,520,140 to $64,124,209.


     1
        Petitioner, Terry L. Van Der Aa, trustee, refers to the
corporate entity Van Der Aa Investments, Inc., as “petitioner”.
We shall use the term “petitioner” to refer to Terry L. Van Der
Aa, trustee, and the term “Investments” to refer to Van Der Aa
Investments, Inc.
     2
        See sec. 1361(a) for definitions of the terms “S
corporation” and “C corporation”.
                                - 4 -

The Motion

     By the motion, petitioner seeks summary adjudication in its

favor on three issues:    (1) Whether Investments properly reported

its built-in gain tax liability on its 1999 Federal income tax

return; (2) the delinquency addition, and (3) the accuracy-

related penalty.

     Petitioner claims that the undisputed evidence in the case

shows that Investments’s calculation of the 1999 built-in gain

tax liability was supported by prior returns, audited financial

statements, and a 1995 calculation of net unrealized built-in

gain utilizing a contemporaneous valuation of the assets subject

to built-in gain tax, “which was performed by an independent,

well-respected appraiser.”

     Petitioner argues:

          Because * * * [Investments] has properly
     calculated its built-in gain tax liability and because
     Respondent does not possess any evidence to the
     contrary, Petitioner is entitled to judgment as a
     matter of law on the issue of Petitioner’s proper
     built-in gain tax liability and on the accuracy-related
     penalty and “delinquency penalty” imposed by Respondent
     in regard to the built-in gain tax liability.

     Petitioner supports his argument with a “Statement of

Undisputed Material Facts” containing 26 numbered statements of

facts that petitioner claims are undisputed and established by

the petition, answer, and various documents and affidavits.

Accompanying the motion are Exhibits A through O.
                                - 5 -

Respondent’s Objections

      Respondent has filed his notice of objection to the motion

(the notice).3   Respondent claims that the motion is premature,

insufficient as a matter of law, and fails to establish that

there is no genuine issue as to any material fact.   In

particular, respondent claims that many of petitioner’s exhibits

constitute hearsay and are so unreliable that, without the

opportunity for formal discovery and cross-examination, the

documents should not be before the Court and the Court should not

rely upon them in ruling on the motion.    Respondent claims that

there are genuine issues of material fact that must be resolved

with respect to each of the three issues for which petitioner

seeks summary adjudication.

                              Discussion

I.   Built-In Gain Tax

      Section 1374(a) imposes a corporate-level tax on the net

recognized built-in gain of an S corporation that has converted

from C corporation to S corporation status.   The tax applies only

during the 10-year period beginning with the first taxable year

for which the corporation is an S corporation.   See sec.

1374(d)(7).   Built-in gain is measured by the appreciation in

value of any asset over its adjusted basis as of the time the



      3
        Petitioner has replied to the notice (the reply), and
respondent has responded to the reply (the response).
                                - 6 -

corporation converts from C to S status.    N.Y. Football Giants,

Inc. v. Commissioner, 117 T.C. 152, 155 (2001); see sec.

1374(d)(3).

II.   The Valuation Report

      Critical to petitioner’s claim that there are no genuine

issues of material fact with respect to his liability for the

built-in gain tax is petitioner’s claim that Investments’s

calculation of its 1999 built-in gain tax liability was supported

by, among other things, a 1995 calculation of net unrealized

built-in gain utilizing a contemporaneous valuation of the assets

subject to built-in gain tax.   The report containing that

valuation (the valuation report or, simply, the report) is

attached to the motion as Exhibit A and supported by paragraphs 9

and 10 of an affidavit by James K. Murphy (the affidavit),

attached to the motion as Exhibit G.    In the affidavit, Mr.

Murphy describes himself as either vice president of finance or

chief financial officer of the entity requesting the valuation

report.   Paragraphs 9 and 10 of the affidavit read as follows:

           9. At the time of its S corporation election,
      Vancom Holdings, Inc. took careful steps to calculate
      its * * * [net unrealized built-in gain] in compliance
      with its obligations under the Code. Vancom Holdings,
      Inc. engaged Arthur Andersen’s valuation group to
      determine the fair market value of the business
      enterprise of Vancom Holdings, Inc. and to conclude an
      estimate of the fair market value of the assets of
      Vancom Holdings, Inc. as of the effective date of the S
      corporation election.
                                  - 7 -

            10. Exhibit A is a true and accurate copy of the
       valuation report that Arthur Anderson prepared for
       Vancom Holdings, Inc.

III.    Admissibility

       A.   Introduction

       With respect to affidavits supporting a motion for summary

judgment, Rule 121(d) provides, among other things, that the

affidavits “shall set forth such facts as would be admissible in

evidence”.

       Respondent claims that petitioner cannot rely on the

valuation report to support the motion because it constitutes

hearsay that would be inadmissible under the Federal Rules of

Evidence.

       B.   Hearsay

             1.   Introduction

       If the valuation report is offered for the truth of the

matters asserted therein, the report constitutes hearsay.       Fed.

R. Evid. 801(c).      In general, hearsay is not admissible.   See

Fed. R. Evid. 802.      Petitioner does not argue that, if offered in

evidence, the report would not be hearsay.      To the contrary,

petitioner argues that, if offered in evidence, the report would

constitute a business record of Vancom Holdings, Inc., which is

admissible hearsay.      See Fed. R. Evid. 802 and 803(6).
                                    - 8 -

           2.    Business Record

     In order to constitute a business record admissible under

Fed. R. Evid. 803(6), the record (report) must be “kept in the

course of a regularly conducted business activity,” and it must

be “the regular practice of that business activity” to make that

report.   Fed. R. Evid. 803(6).      Respondent argues that the

affidavit is inadequate to show that the valuation report was

kept in the regular course of a business activity of Vancom

Holdings, Inc.’s, or that it was the regular practice of the

business to make that kind of report.       We need not decide whether

the affidavit is adequate to that purpose or not, since, even if

we were to decide that it is, we would exclude the report from

evidence unless, along with the report, petitioner offered the

author of the report for cross-examination.

           3.    Expert Testimony

     By its own terms, the valuation report expresses an opinion

as to the fair market value of Vancom, Inc. (not Vancom Holdings,

Inc.) on December 31, 1994.     Also by its own terms, it reflects

the author’s “professional judgment” and is prepared “in

conformance with the ‘Uniform Standards of Professional Appraisal

Practice’”.     Clearly, the author has relied on specialized

knowledge in reaching the valuation conclusions expressed in the

report.   For that reason, if the report were offered as evidence

of the fair market value of Vancom, Inc., it would not be
                                - 9 -

admissible unless the author were testifying as an expert.     See

Fed. R. Evid. 701 (opinion testimony of witness not testifying as

an expert is limited and may not be based on scientific,

technical, or other specialized knowledge within the scope of

Fed. R. Evid. 702).    A witness qualified as an expert by

knowledge, skill, experience, training, or education may give

opinion testimony with respect to scientific, technical, or other

specialized knowledge within his purview.     Fed. R. Evid. 702.

Under our Rules, an expert generally prepares a written report,

which must set forth the qualifications of the expert and shall

state the expert’s opinion and the facts or data on which that

opinion is based.    Rule 143(f).   If the expert is accepted as

such by the Court, his report is received into evidence as the

expert’s direct testimony.    Id.   Rule 705 of the Federal Rules of

Evidence addresses the disclosure of facts or data underlying

expert opinion.   In pertinent part, the rule provides:    “The

expert may in any event be required to disclose the underlying

facts or data on cross-examination.”     Like the Court of Claims in

Forward Communications Corp. v. United States, 221 Ct. Cl. 582,

608 F.2d 485, 510 (1979), we do not view the business record rule

found in Fed. R. Evid. 803(6) as overriding the rules governing

opinion testimony.    If Fed. R. Evid. 803(6) were deemed to

override the rules governing opinion testimony, it would allow

the introduction of opinion testimony by lay witnesses in the
                              - 10 -

form of a report as to scientific, technical, or other

specialized matters and would allow an expert to express his

opinion in a report without being subject to cross-examination on

the facts and data underlying that opinion.   All that would be

required for admission would be the mere showing that the

preparer was in the business of giving such opinions.    If the

valuation report were offered into evidence by petitioner as

evidence of fair market value of Vancom Inc., we would not accept

the report without the accompanying availability of the author

for cross-examination.4   E.g., Pack v. Commissioner, T.C. Memo.

1980-65.

     C.    Conclusion

     Clearly, petitioner’s principal reliance on the valuation

report is not for the fact that Vancom, Inc., received it from

Arthur Andersen but for the opinion it expresses as to value.      To

rely on the valuation report for that purpose, petitioner must

introduce it into evidence; i.e., at trial or at some hearing at

which evidence is received.   Since we cannot accept the valuation

report as establishing the values it purports to determine, there

remains a genuine issue with respect to a material fact that

precludes rendering a decision as a matter of law as to whether


     4
        The character of the valuation report as opinion
testimony distinguishes this situation from those in which we
have allowed in business records without a live witness to
authenticate them. E.g., Stang v. Commissioner, T.C. Memo. 2005-
154.
                              - 11 -

Investments properly reported its built-in gain tax liability on

its 1999 Federal income tax return.    Likewise, there are genuine

issues as to material facts that preclude us from rendering a

decision as to the delinquency addition and the accuracy-related

penalty.

IV.   Conclusion

      As stated, we shall deny the motion.


                                               An order denying the

                                          motion will be issued.
