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.
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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.