T.C. Memo. 2019-144
UNITED STATES TAX COURT
WILLIAM CAVALLARO, DONOR, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent*
PATRICIA A. CAVALLARO, DONOR, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 3300-11, 3354-11. Filed October 24, 2019.
Ps owned KT Corp., and their three sons owned CS Corp. Ps and their sons merged the two in 1995, and CS Corp. was the surviving entity. In valuing the two companies for purposes of the merger, they incorrectly assumed that CS Corp. owned intangibles that instead KT Corp. owned. Ps therefore accepted a dispropor- tionately low number of shares in the new company, and their sons received a disproportionately high number of shares. Ps thereby made disguised gifts to their sons consisting of portions of the value of KT Corp.
* This opinion supplements our previously filed opinion Cavallaro v. Commissioner, T.C. Memo. 2014-189, aff’d in part, rev’d in part and remanded, 843 F.3d 16 (1st Cir. 2016). -2-
[*2] R issued notices of deficiency to Ps determining for each a gift tax liability. In Cavallaro v. Commissioner, T.C. Memo. 2014-189, we held that Ps had failed to meet their burden to prove the respective values of KT Corp. and CS Corp. On the basis of that failure, and by treating R’s valuation of CS Corp. as a concession (compared to the zero value in the notice of deficiency), we held that Ps made gifts to their sons in 1995 totaling $29.7 million. Ps appealed. The Court of Appeals affirmed our factual findings and our holding that Ps had the burden of proof; but the court held that we erred in our statement of the content of Ps’ burden of proof and concluded that we should have considered Ps’ arguments rebutting R’s expert witness testimony on the subject of valuation, in order to determine whether the resulting determination was arbitrary and excessive. On remand we now consider Ps’ arguments concerning R’s expert’s report.
Held: R’s valuation expert’s error caused him to overvalue the disguised gifts by $6.9 million and rendered R’s valuation arbitrary and excessive.
Held, further, after correcting for that error, we determine that Ps gave their sons gifts valued at a total of $22.8 million.
Matthew D. Lerner, for petitioners.
Carina J. Campobasso and Derek W. Kelley, for respondent.
SUPPLEMENTAL MEMORANDUM FINDINGS OF FACT AND OPINION
GUSTAFSON, Judge: These cases are before us on remand from the Court
of Appeals for the First Circuit for reconsideration on the issue of valuation. -3-
[*3] See Cavallaro v. Commissioner (“Cavallaro III”), 842 F.3d 16 (1st Cir. 2016),
aff’g in part, rev’g in part and remanding Cavallaro v. Commissioner (“Cavallaro
II”), T.C. Memo. 2014-189.1 At the trial of these cases the Commissioner
presented the report of an expert witness to assert, for purposes of sections 2501
and 2502,2 the proposed value of disguised gifts that William Cavallaro and
Patricia Cavallaro had made to their sons. The question before us on this remand
is whether the Commissioner’s expert’s valuation is “arbitrary and excessive”. If
it is, then we are tasked with determining the proper amounts of the Cavallaros’
tax liabilities.
FINDINGS OF FACT
Many of the relevant facts underlying these cases are set forth in
Cavallaro II and Cavallaro III, and we assume familiarity with those opinions. We
restate and summarize certain relevant facts below.
1 Before petitioning this Court for redetermination of their gift tax deficiencies, petitioners were involved in litigation related to the examination by the Internal Revenue Service (“IRS”), which resulted in Cavallaro v. United States, 284 F.3d 236 (1st Cir. 2002) (affirming the denial of petitioners’ motion to quash a third-party recordkeeper summons). 2 Unless otherwise indicated, all section references are to the Internal Revenue Code (26 U.S.C.), as amended and in effect for the relevant year, and all references to Rules are to the Tax Court Rules of Practice and Procedure. -4-
[*4] The Cavallaro family, Knight and Camelot, and the merger
In 1979 the Cavallaros incorporated Knight Tool Co., Inc. (“Knight”), a
machine shop and contract manufacturer. Mrs. Cavallaro owned 51% of Knight’s
stock, and Mr. Cavallaro owned 49%. The Cavallaros’ three sons (Ken, Paul, and
James) worked in the family business at various times. Mr. Cavallaro and his son
Ken worked with Knight engineers and employees to develop a liquid-adhesive
dispensing machine prototype, which came to be known as the “CAM/A LOT”
machine. Ken, Paul, and James incorporated Camelot Systems, Inc. (“Camelot”).
Knight manufactured the CAM/A LOT machines, and Camelot sold them.
In 1994 the Cavallaros’ accountants at Ernst & Young (“E&Y”) reviewed
the situations of the Cavallaros, Knight, and Camelot. E&Y accountant Lawrence
Goodman signed a letter dated December 15, 1994,3 recommending the merger of
the two companies. He projected that in such a merger “the majority of the shares
(possibly as high as 85%) [will] go[] to Bill and Patti.” E&Y valued the merged
company as being worth between $70 and $75 million. However, attorneys at
3 Mr. Goodman’s letter of December 15, 1994, is useful. It was commissioned by the Cavallaros and was written by their own accountant, who was knowledgeable about their affairs and had no bias against them; on the contrary, he came to his conclusions while pursuing their interests. He wrote his letter before becoming aware of the attempt (described below) by the Cavallaros’ attorneys at Hale & Dorr to concoct a transfer of intangibles and before the current controversy arose. In these respects it is very good evidence. -5-
[*5] Hale & Dorr later advised the Cavallaros to assume (incorrectly) that
Camelot, not Knight, owned the significant intangible assets. The accountants did
not agree with that view, and one of them wrote Mr. Hamel a letter concerning
errors he perceived in the affidavits that were prepared by Hale & Dorr; but
Mr. Hamel responded: “History does not formulate itself, the historian has to give
it form without being discouraged by having to squeeze a few embarrassing facts
into the suitcase by force.” As a result the accountants acquiesced, and E&Y
eventually attributed to Mr. and Mrs. Cavallaro considerably less than 85% of the
stock in the merged company. See Cavallaro II, at *28-*31.
On December 31, 1995, the Cavallaros and their sons merged Knight and
Camelot. In that merger Mrs. Cavallaro received 20 shares of the new company,
Mr. Cavallaro received 18 shares, and 54 shares each were distributed to Ken,
Paul, and James. Thus, Mr. and Mrs. Cavallaro received 19% of the shares, not
the “the majority of the shares (possibly as high as 85%)” that E&Y had foreseen.
Rather, it was the Cavallaros’ sons who received the majority of the shares of the
new company--i.e., 81% in the aggregate--which allegedly represented the pre-
merger value of Camelot. -6-
[*6] Examination and notices of deficiency
The IRS conducted a gift tax examination relating to the Cavallaros, and on
November 18, 2010, the IRS issued statutory notices of deficiency to Mr.
Cavallaro and Mrs. Cavallaro for the tax year 1995, determining that, by means of
the merger, each of the parents had made a taxable gift of $23,085,000 to their
sons, resulting in gift tax liabilities. The Cavallaros timely petitioned this Court
for redetermination of their gift tax deficiencies.
Valuations in Cavallaro II
During trial Mr. and Mrs. Cavallaro entered into evidence two reports on
the issue of valuation--the E&Y valuation performed by Timothy Maio in 1996
(valuing the combined companies as of October 31, 1995), on which the post-
merger share distribution had been based, and the valuation prepared for trial in
Cavallaro II by John Murphy of Atlantic Management Co. Mr. Maio had valued
the combined company at $70 to $75 million, and Mr. Murphy valued the
combined company at $72.8 million. Both assumed (contrary to our factual
findings in Cavallaro II) that Camelot had owned the CAM/A LOT technology
and that Knight had been a contractor for Camelot.
The Commissioner retained Marc Bello of Edelstein & Co. to determine the
1995 fair market values of Knight and Camelot. His report assumed (correctly, -7-
[*7] per our findings in Cavallaro II) that Knight had owned the significant
intangible assets. Mr. Bello adjusted for the non-arm’s-length nature of the two
companies and then valued the combined entities using a discounted cashflow
(“DCF”) method. Mr. Bello concluded that the total value of the merged entity
was $64.5 million (i.e., less than the value as reckoned by Mr. Maio and
Mr. Murphy), that Knight’s value was $41.9 million (i.e., 65% of the total), and
that Camelot’s value was $22.6 million (i.e., 35% of the total). On the basis of
Mr. Bello’s analysis, the Commissioner argued that the December 31, 1995,
merger of Knight and Camelot and the disproportionate distribution of shares
resulted in a gift to the Cavallaros’ sons totaling $29.7 million. The Cavallaros
cross-examined Mr. Bello, challenged his methodology, and alleged that his
valuation was flawed for a number of reasons.
Holding in Cavallaro II
In Cavallaro II we found that Mr. and Mrs. Cavallaro’s corporation Knight,
rather than their sons’ corporation Camelot, owned the technology; that “the 1995
merger transaction was notably lacking in arm’s length character”; that the merger
of the two companies with the issuance of 81% of the stock of the new combined
entity to the sons reflected a presumption that Camelot had owned the technology;
that the 81%-19% allocation of the stock was therefore not in accord with the -8-
[*8] actual relative values of the two companies; and that the transaction therefore
resulted in disguised gifts to the sons. See Cavallaro II, at *33-*34, *54-*56, *60-
*61.
In Cavallaro II we held in favor of the Commissioner on the basis of the
Cavallaros’ failure to meet their burden of proof. (They put on no evidence as to
the relative values of the two corporations under the correct assumption that
Knight, not Camelot, owned the intangibles.) Consequently, we did not rule on
the merits of the Cavallaros’ arguments concerning the Bello valuation. Id. at *52,
*60-*61 (citing Graham v. Commissioner, 82 T.C. 299, 308 (1984), aff’d, 770
F.2d 381 (3d Cir. 1985)). We held that on December 31, 1995, Mr. and Mrs.
Cavallaro made gifts to their sons totaling $29.7 million4 (i.e., the gift tax liability
that was based on the Bello valuation). Id. at *60-*61.
The First Circuit’s opinion in Cavallaro III
The Cavallaros appealed Cavallaro II to the U.S. Court of Appeals for the
First Circuit, alleging that this Court erred in three respects: (1) not shifting the
burden of proof to the Commissioner; (2) concluding Knight owned the
4 Our prior opinion rounded down the valuation of $29,670,000 to “$29.6 million”. However, the closer rounded value is $29.7 million, which we employ in this opinion. -9-
[*9] intangibles; and (3) misstating the Cavallaros’ burden of proof and failing to
consider flaws in the Bello valuation. See generally Cavallaro III.
The Court of Appeals held that we were correct in not shifting the burden of
proof to the Commissioner, see Cavallaro III, 842 F.3d at 21-23, and affirmed our
findings concerning the property ownership issue, id. at 23-25. The Court of
Appeals then considered the Cavallaros’ argument that we had erred in our
statement that they had “the burden of proof to show the proper amount of their
tax liability”. Id. at 25; Cavallaro II, at *60. The Cavallaros alleged that this
“‘legal error’ * * * led to another: the court refused to consider their evidence that
the Bello valuation was ‘fatally flawed.’” Cavallaro III, 842 F.3d at 25. On this
issue the Court of Appeals agreed with the Cavallaros and found that we misstated
the content of their burden. Id. at 26. The Court of Appeals stated:
[W]e remand so that the Tax Court can evaluate the Cavallaros’ arguments that the Bello valuation had methodological flaws that made it arbitrary and excessive. If the Tax Court determines that the Commissioner’s assessment was arbitrary, then it must determine the proper amount of tax liability for itself. * * * The court is free to accept in whole or in part, or reject entirely, the expert opinions presented by the parties on the subject. * * *
* * * * * * *
The extent of any further briefing, hearings, or evidence is left to the Tax Court’s sound discretion. [Id. at 27; fn. ref. omitted.] - 10 -
[*10] The Cavallaros’ arguments regarding the Bello valuation
In accordance with the directive of the Court of Appeals, we ordered further
briefing from the parties on whether the Commissioner’s valuation was “arbitrary
and excessive” and explained that only after resolving that issue would we order
proceedings as to the second issue (the “proper amount of tax liability”). The
Cavallaros took this remand as an occasion not only to renew arguments that we
had not previously addressed but also to renew arguments that we had previously
rejected and to raise new arguments that they had not previously made before this
Court.
OPINION
In accordance with the directive of the Court of Appeals, we evaluate “the
Cavallaros’ arguments that the Bello valuation had methodological flaws that
made it arbitrary and excessive.” Id. To do so, we ask first whether the
$29.7 million value that the Bello report ascribed to the disguised gift is arbitrary
and excessive; and we find that it is, on account of one error described below in
part II.B.4. That being so, the directive of the Court of Appeals is that we then
“must determine the proper amount of tax liability”; and in making that
determination we are “free to accept in whole or in part, or reject entirely, the
expert opinions presented by the parties on the subject.” Id. We find that, after - 11 -
[*11] we correct the error mentioned above, the Bello report establishes that the
value is $22.8 million.
I. Burden of proof
In general, the IRS’s notice of deficiency is presumed correct, “and the
petitioner has the burden of proving it to be wrong.” Welch v. Helvering, 290
U.S. 111, 115 (1933); see also Rule 142(a). The Court of Appeals held that this
Court did not misallocate the burden of proof in Cavallaro II, but it held that we
misstated the content of that burden. Cavallaro III, 842 F.3d at 26. Accordingly,
on remand the burden of proof remains with the Cavallaros to prove that the Bello
valuation had methodological flaws that made it arbitrary and excessive. See
Helvering v. Taylor, 293 U.S. 507, 515 (1935) (“Unquestionably the burden of
proof is on the taxpayer to show that the Commissioner’s determination is
invalid”). If the Cavallaros show the Commissioner’s determination to be
arbitrary and excessive, then we cannot sustain that determination and we will
determine the correct amounts of tax. See id. at 515-516; Cavallaro III, 842 F.3d
at 26-27.
We therefore turn to the details of the Cavallaros’ critique. The Cavallaros
allege that the Bello valuation is arbitrary for a variety of reasons. In reviewing
their criticisms, we divide the arguments into two groups: arguments raised - 12 -
[*12] during the trial of Cavallaro II (discussed below in part II), and arguments
not raised during that trial (discussed below in part III).
II. Arguments raised during the Cavallaro II trial
In their briefs on remand the Cavallaros renewed and expanded upon
several arguments that they advanced during the trial in Cavallaro II. The renewed
arguments that they raised during trial can be subdivided according to whether
they are consistent with our factual findings in Cavallaro II.
A. Arguments inconsistent with the Court’s findings of fact
Some of the Cavallaros’ arguments on remand are implicitly or explicitly
contrary to our findings of fact in Cavallaro II. For example, on remand the
Cavallaros argue that the Bello valuation erred by not taking into consideration the
1995 “confirmatory” bill of sale that attested to a 1987 transfer between Knight
and Camelot, which the Cavallaros contend on remand is a “cloud on the title”,
and that the Bello valuation therefore erred by not discounting the value of Knight,
because a “buyer considering the acquisition of Knight without Camelot would
have to take into account the risk that Camelot might claim rights to the IP.”
This argument is based on premises that are explicitly contrary to our
factual finding that “the [1995] ‘confirmatory’ bill of sale confirmed a fiction”,
and “[i]f an unrelated party had purchased Camelot before the merger and had then - 13 -
[*13] sued Knight to confirm its supposed acquisition of the CAM/A LOT
technology, without doubt that suit would fail.” Cavallaro II, at *55-*56
(emphasis added). The Court of Appeals explicitly affirmed this finding, stating
that the Cavallaros “advanced no argument that would warrant overturning the
Tax Court’s finding that Knight owned all of the CAM/A LOT technology at the
time of the merger.” Cavallaro III, 842 F.3d at 25; see also id. n.11 (“The record
shows that the Tax Court carefully considered the gravitas of the Camelot name
stamp and other proprietary claims from the viewpoint of an unrelated
purchaser”).
The consideration and affirmance of our findings on this issue by the Court
of Appeals forecloses all such arguments under the “law of the case” doctrine.
“The law of the case doctrine ‘posits that when a court decides upon a rule of law,
that decision should continue to govern the same issues in subsequent stages in the
same case.’” United States v. Moran, 393 F.3d 1, 7 (1st Cir. 2004) (quoting
Arizona v. California, 460 U.S. 605, 618 (1983)); see also Field v. Mans, 157 F.3d
35, 40 (1st Cir. 1998) (“The law of the case doctrine is a prudential principle that
‘precludes relitigation of the legal issues presented in successive stages of a single
case once those issues have been decided’” (quoting Cohen v. Brown Univ., 101
F.3d 155, 167 (1st Cir. 1996))). Under the “mandate rule” (a branch of the law of - 14 -
[*14] the case doctrine), when the reviewing court prescribes in its mandate that a
court shall proceed in accordance with the opinion of the reviewing court, it
incorporates its opinion into its mandate. Commercial Union Ins. Co. v. Walbrook
Ins. Co., 41 F.3d 764, 770 (1st Cir. 1994). “When a case is appealed and
remanded, the decision of the appellate court establishes the law of the case and it
must be followed by the trial court on remand.” United States v. Rivera-Martinez,
931 F.2d 148, 150 (1st Cir.1991) (quoting 1B J. Moore, J. Lucas, & T. Currier,
Moore’s Federal Practice, para. 0.404[1] (2d ed. 1991)).5
In Cavallaro III the Court of Appeals did not disturb this Court’s factual
findings in Cavallaro II, and it found we erred only in one respect. We correct that
error in this opinion. Accordingly, on remand we will not allow the Cavallaros to
relitigate the ownership of the CAM/A LOT technology by arguing that there was
a “cloud on the title”,6 nor will we undertake the chore of considering their other
5 The law of the case doctrine is not completely inflexible, and may “tolerate a ‘modicum of residual flexibility’ in exceptional circumstances.” United States v. Bell, 988 F.2d 247, 251 (1st Cir. 1993) (quoting United States v. Rivera-Martinez, 931 F.2d 148, 151 (1st Cir. 1991)). However, the Cavallaros, who would be the proponents of reopening these already decided matters, do not argue any of the exceptions for doing so; and even if they did, none of the exceptions applies to this case. See Bell, 988 F.2d at 251; Rivera-Martinez, 931 F.2d at 151. 6 If the Cavallaros are arguing not that Camelot owned the intangibles but that prospective buyers of Knight might have supposed that Camelot owned them, (continued...) - 15 -
[*15] similarly flawed arguments that are contrary to our undisturbed, post-trial
legal conclusions and undisturbed factual findings.
B. Arguments raised at trial that are not inconsistent with the findings of fact
Some of the arguments that the Cavallaros advance on remand constitute
arguments (and variations of arguments) that they raised at trial and that do not
contradict our explicit findings. We summarize those arguments here and find that
only one (discussed below in part II.B.4) has merit.
1. Mr. Bello’s supposed bias
The Cavallaros allege that Mr. Bello impermissibly followed the Commis-
sioner’s instructions and that this bias caused him to fail to interview the
principals of Knight and Camelot in his process of valuing them and caused him to
fail to do a site visit. The Cavallaros suggest that these failures caused Mr. Bello
to misunderstand the nature of Knight and Camelot’s businesses, which caused
him to overvalue Knight and undervalue Camelot. The Cavallaros say that Mr.
6 (...continued) and that this supposition would have diminished Knight’s fair market value, then we reject that argument as well. Such a diminution would have been possible only if the Cavallaros had publicized the fiction of Camelot’s ownership of the intangibles. There is no evidence that they did publicize that fiction, and we do not think that a donor should be able to reduce his gift tax liability by arguing the hypothetical possibility that the value of his gift was lower because he could have slandered his own title to the donated assets. - 16 -
[*16] Bello “acted like a member of Respondent’s trial team, not an expert useful
to this Court in making technical determinations”. They argue that his bias is
further shown by errors in his report.
We do not agree. The determination of whether expert testimony is helpful
to the trier of fact is a matter within our sound discretion. See Laureys v.
Commissioner, 92 T.C. 101, 127 (1989). It is true that an expert is not helpful to
the Court and loses credibility when giving testimony tainted by overzealous
advocacy. Transupport, Inc. v. Commissioner, T.C. Memo. 2016-216, at *17-*18
(collecting cases), aff’d, 882 F.3d 274 (1st Cir. 2018). An expert who is merely an
advocate of a party’s position does not assist the trier of fact in understanding the
evidence or in determining a fact in issue. Id. at *18 (citing Sunoco, Inc. v.
Commissioner, 118 T.C. 181, 183 (2002), and Snap-Drape, Inc. v. Commissioner,
105 T.C. 16, 20 (1995), aff’d, 98 F.3d 194 (5th Cir. 1996)). But Mr. Bello’s
opinion was not tainted by these flaws, and we found his opinion helpful.
With respect to Mr. Bello’s decisions not to not interview the Cavallaros7
and not to visit Knight and Camelot, he testified credibly that he had enough
7 Similarly, Mr. Maio did not rely on interviews with the Cavallaros--but he still testified that his report was reliable, using information that he received from financial statements and marketing materials and from meeting with management. - 17 -
[*17] information to understand the companies,8 so it was not necessary for him to
interview the owners of the business nor to make a site visit many years after the
merger at issue. We conclude that any errors in his report were the result of
mistake and not bias. We are satisfied that Mr. Bello considered the objective and
relevant facts, and we conclude that his valuation was not tainted by overzealous
advocacy. Mr. Bello’s value for the two combined companies (i.e., $64.5 million)
was significantly lower than the corresponding values put forth in both of the
valuations that the Cavallaros relied upon (i.e., $70-75 million and $72.8 million);
and the proportion of that value that Mr. Bello allocated to Knight (i.e., 65%) was
well within (and was not at the top of) the range of values that the Cavallaros’
accountant postulated in 1994 (i.e., 51% to 85%). See Cavallaro II, at *59-*60.
His valuation prompted the Commissioner to make a substantial partial concession
before trial (i.e., his valuation caused the Commissioner to change his position in
8 In determining whether a site visit and interviews are necessary, a “determining factor is the degree to which the analyst was able to gather and interpret” written material. Shannon P. Pratt & Alina V. Niculita, Valuing a Business: The Analysis and Appraisal of Closely Held Companies 92 (5th ed. 2008). “The need for the valuation analyst to visit the company facilities and have personal contact with the company personnel and other related people varies greatly from one valuation to another. The extent of necessary fieldwork depends on many things”. Id. In this instance, Mr. Bello did not err in his decision, more than a decade after the merger, not to visit the companies’ facilities and have personal contact with their personnel, and that decision was not indicative of any bias. - 18 -
[*18] the Cavallaros’ favor). Id. We do not find any merit in the Cavallaros’
arguments to the effect that Mr. Bello was biased.
2. The profit reallocation calculation
On remand the Cavallaros renew their criticisms of the profit reallocation
calculation that Mr. Bello performed before valuing the two companies. They
argue that the profit reallocation was generally unnecessary, and they also criticize
various aspects of it (i.e., his reasons for performing the reallocation, the
reallocation calculation’s methodology, the industry classifications, and the inputs
that he used, such as the Robert Morris Associates (“RMA”) data discussed
below).
The Cavallaros’ general argument that the profit reallocation was
unnecessary is contrary to our finding that “Knight received less income than it
should have as the manufacturer of the machines, while Camelot received more
than it should have as the mere seller”, id. at *20, and to our finding that the
allocation of stock in the merger was not done at arm’s length, id. at *54-*56. Mr.
Bello’s profit reallocation corrected for the distortions that we found. According
to an authority cited in both parties’ briefs, such adjustments to the financial
statements “require both analytical judgment and an understanding of accounting
principles. * * * [And an] analyst should be guided by common sense, experience, - 19 -
[*19] and understanding of the compan[ies] in determining what adjustments
should be made to present the statements in the manner most appropriate for
valuation purposes.” Shannon P. Pratt & Alina V. Niculita, Valuing a Business:
The Analysis and Appraisal of Closely Held Companies 150 (5th ed. 2008).
Mr. Bello’s profit reallocation adjustment reflected such judgment and
understanding--the correct view, as adopted by this Court, that Knight and
Camelot were not dealing with each other at arm’s length, that Knight was
effectively subsidizing Camelot’s operations, and that Knight, rather than
Camelot, owned the CAM/A LOT technology. We conclude not only that this part
of the valuation was not arbitrary but also, in light of our factual findings in
Cavallaro II, that this reallocation (or another similar type of profit normalization
between the two companies) was entirely necessary to yield an accurate valuation
of the two companies. See Cavallaro II, at *16-*19.
As to the details of Mr. Bello’s profit reallocation adjustment, we are not
persuaded by the Cavallaros’ critique. Mr. Bello sufficiently described the logic
and reasoning underlying the steps he performed in the profit reallocation. His
selection of the industry classification for the companies was well reasoned, and it
was based in part on the industries that the Cavallaros had self-reported. See id. at
*41-*42. His decision to use the RMA data--a composite source of privately - 20 -
[*20] owned company data--is supported by the treatise cited by both parties,
which describes the RMA data as “the most popular source of composite company
data, including privately owned company data”. Pratt & Niculita, supra, at 110.
Thus, we conclude that the individual steps undertaken by Mr. Bello as part of the
profit reallocation, the selection of the comparable industries, and the inputs he
used in performing the profit reallocation were not “arbitrary” (except for the
calculation discussed below in part II.A.4).
3. The discounted cashflow calculation
After performing the profit reallocation between Knight and Camelot,
Mr. Bello then valued Camelot and Knight using the DCF method. The
Cavallaros argue that even if the profit reallocation adjustment was justified, and
even if there were no errors in the profit reallocation, Mr. Bello’s use of the DCF
method was arbitrary. As with their arguments concerning the profit reallocation,
the Cavallaros advance criticisms concerning Mr. Bello’s use of the DCF method
generally and also advance specific criticisms of the inputs underlying the DCF
calculation (e.g., the growth rate, the risk premium, and the discount rate).
With respect to their general arguments about the use of the DCF method to
value Knight and Camelot--two closely held companies--this argument is not
convincing, because this Court has used this methodology to value similar - 21 -
[*21] property. See, e.g., Estate of Magnin v. Commissioner, T.C. Memo. 2001-
31, 81 T.C.M. (CCH) 1126, 1141 (2001), supplementing T.C. Memo. 1996-25,
rev’d and remanded on other grounds, 184 F.3d 1074 (9th Cir. 1999). Mr. Bello
explained why he considered and rejected alternative methodologies--the asset
accumulation method/going concern; the market approach; the guideline publicly
traded company method; the guideline transaction method; the prior sales method;
and the dividend payout method--and in doing so he was appropriately guided by,
and considered a number of factors set forth in, Rev. Rul. 59-60, 1959-1 C.B. 237.
Mr. Bello explained convincingly why the DCF methodology that he ultimately
selected to determine Knight’s and Camelot’s values was the best valuation
method for this case.
With respect to the Cavallaros’ arguments concerning the details of
Mr. Bello’s inputs for his DCF analysis, such as the risk premiums, working
capital, depreciation, capital expenditures, and growth rates, we find that these
arguments are also unpersuasive. Keeping in mind the fact that “[a] determination
of fair market value, being a question of fact, will depend upon the circumstances
in each case * * * [and] the fact that valuation is not an exact science”, Rev. Rul.
59-60, sec. 3.01, 1959-1 C.B. at 238, we think that Mr. Bello adequately explained
his rationale behind his selection and use of inputs in his DCF model. His - 22 -
[*22] explanations demonstrate that he used “the elements of common sense,
informed judgment, and reasonableness” to value Knight and Camelot. Id.; see
26 C.F.R. sec. 25.2512-2(a), (f), Gift Tax Regs.
In summary, the Cavallaros’ criticisms of and arguments concerning the
Bello valuation generally lack merit. Mr. Bello’s valuation was not arbitrary and
excessive, except in the one respect to which we now turn.
4. The 90th percentile profit margin calculation
When Mr. Bello performed the profit reallocation to normalize the profits
between Knight and Camelot, he “calculated the returns available to Camelot
based on the expected 4.1% return from the RMA [data] and added a [3.4%9]
premium to reflect the strategy of premium pricing and higher profitability
[totaling 7.5%] as of the valuation date which would put Camelot in the top 90%
for all distributors.” The result of this profit allocation calculation is that “both
Camelot and Knight were in the top 10% (90th percentile) with regards to
profitability within their respective industries.”
On remand, however, the Cavallaros pointed out an error in Mr. Bello’s
attempt to calculate a profit margin that would place each company in the 90th
9 The Bello report purported to state this premium as 3.65%, but that was a typographical error, and the actual intended premium was 3.4%. Thus, the total for the return that he used in his calculation was 7.5%. - 23 -
[*23] percentile of its industry. The Cavallaros demonstrated (and the
Commissioner acknowledged) that “[t]he RMA data on which he purports to rely
reflect that a profit margin of 7.5% would place Camelot in the 88.3rd percentile”,
not the 90th. The Cavallaros and the Commissioner subsequently corresponded
about how Mr. Bello had arrived at the 7.5% value, and it became clear that Mr.
Bello had attempted to extrapolate the 90th percentile through a method that was
not statistically reliable. Mr. Bello apparently believed that the underlying data
was unavailable, so in his attempt to arrive at the 90th percentile, he employed a
method that was not statistically correct. He knew only the mean profit margin
from the RMA data, 4.1%. He assumed that the mean profit margin would not be
that far off from the median or 50th percentile, so he inferred that the theoretical
100th percentile would be 8.2% and that the 90th percentile would be 7.38%
(making the 7.5% figure that he employed in the profit reallocation calculation
greater than his inferred 90th percentile).
The Cavallaros characterize this as Mr. “Bello’s deceptive and erroneous
profit allocation adjustment” and argue that the Court should disregard Mr. Bello’s
expert report and testimony.10 Despite this error, the Commissioner defends
10 We agree that the allocation was erroneous, but we do not at all conclude that it was deceptive. We reject the Cavallaros’ contention that this error rendered (continued...) - 24 -
[*24] Mr. Bello’s 7.5% profit margin on the grounds that he had intended only to
make Camelot a “top performer” (not specifically in the 90th percentile) and that
even the 88.3rd percentile used in Mr. Bello’s analysis, which allocated 35% of
the overall value to Camelot, was “generous”. But this defense falls flat. At trial
and in his report Mr. Bello was very explicit about his intent to place Camelot in
the 90th percentile; and even on remand, the Commissioner initially reiterated Mr.
Bello’s intention to place Camelot in the 90th percentile.11 But we now know (and
the Commissioner admits) that his method did not do so.
Using a profit margin in the 88.3rd percentile versus the 90th percentile
makes a substantial difference in the valuation, and therefore a substantial
difference in the value of the disguised gift. Using the correct percentage for the
actual 90th percentile of net income before tax--9.66%, rather than the 7.5% Mr.
Bello used--results in Camelot’s having a value of $29.14 million, or 45% of the
total value of the combined entities (rather than the $22.6 million value that
10 (...continued) his entire valuation arbitrary and excessive, or otherwise unreliable. 11 The Commissioner’s brief on remand insisted: “The selection of the 3.4% premium was not ‘randomly chosen’ * * * as petitioners claim. Rather, as Mr. Bello explains in his report, it was explicitly chosen to put Camelot in the 90th percentile of its wholesaler category peers in terms of profitability, giving it a net profit of 7.5%.” (Emphasis added.) - 25 -
[*25] represented 35% of the combined entities’ valuation, as Mr. Bello had
computed); and although the Commissioner continues to insist that correction of
this error is not necessary or appropriate, he admits that if one does correct for this
error, the correction reduces the value of the disguised gift by $6.9 million.12
We find that this one error in this subcalculation was arbitrary, and we
conclude that it did result in an excessive gift tax determination, which must be
corrected.
III. Arguments made on remand that were not raised at trial
On remand, the Cavallaros advance a number of arguments that they did not
make during trial in Cavallaro II. We reject these arguments both (a) as untimely
and (b) on their merits.
A. The untimeliness of the new arguments on remand
On appeal the Cavallaros attempted to advance new arguments that they had
not made before this Court. The Court of Appeals refused to consider those
12 The parties agree that the substitution of the correct 90th percentile value for the incorrect value (while simultaneously holding all other aspects of Mr. Bello’s valuation constant) results in a decrease in the gift’s value by $6,879,640. In this and subsequent discussions, we do not correct for the arithmetical discrepancies that result from rounding. - 26 -
[*26] arguments.13 We see in the same light the Cavallaros’ attempt, now on
remand, to assail the Bello valuation by fact-intensive arguments they did not raise
at trial, and we conclude that they waived those arguments.
The Court of Appeals for the First Circuit has explained that whether a party
has waived an argument by its failure to raise that argument during an earlier
proceeding depends on whether the party had sufficient incentive to raise the
issue. United States v. Ticchiarelli, 171 F.3d 24, 32-33 (1st Cir. 1999) (holding
that in the criminal context, a defendant may not raise a new argument on remand
for resentencing if he or she had reason to raise it initially (citing United States v.
13 In particular, the Cavallaros attempted to contend on appeal “that the Tax Court should have ruled that Camelot owned two crucial property rights at the time of the merger: the trade secrets embodied in Camelot’s mechanical drawings and the copyrighted CAM/A LOT operating software.” Cavallaro III, 842 F.3d at 24. But in the First Circuit the law “is crystalline: a litigant’s failure to explicitly raise an issue before the district court forecloses that party from raising the issue for the first time on appeal.” CMM Cable Rep, Inc. v. Ocean Coast Props., Inc., 97 F.3d 1504, 1525-1526 (1st Cir. 1996) (quoting Bos. Beer Co. Ltd. P’ship v. Slesar Bros. Brewing Co., 9 F.3d 175, 180 (1st Cir. 1993)). The Court of Appeals observed that at trial in Cavallaro II the Tax Court “suggested that assessing potentially discrete proprietary components of CAM/A LOT might be a better approach * * * [and] invited the parties to consider such an approach only insofar as it was helpful to framing the case[s] and clearly warned that such an approach might not ‘survive the expert testimony.’” Cavallaro III, 842 F.3d at 24. But the Cavallaros ignored our invitation and continued to press their views--only to later “complain [on appeal] that the Tax Court erroneously treated CAM/ALOT as a ‘monolithic property interest,’ rather than seeing it for its discrete proprietary components.” Id. at 24. - 27 -
[*27] de la Cruz-Paulino, 61 F.3d 986, 994 n.5 (1st Cir. 1995) (noting, in the
context of Fed. R. Crim. P. 12, that “government violations of Rule 12(d)(2)
should excuse a defendant’s failure to move to suppress evidence prior to trial
* * * since defendants have no incentive to move to suppress evidence that the
government will not be introducing”))). In Ticchiarelli, 171 F.3d at 33, the Court
of Appeals explained that “[t]his approach requires a fact-intensive, case-by-case
analysis”, so we examine the facts of the instant case:
Before and during trial in Cavallaro II, the Cavallaros had every reason (and
every opportunity) to thoroughly analyze and criticize the Bello valuation. Even
though the Commissioner’s case was based on the Bello valuation, the Cavallaros
did not advance several of the criticisms that they now allege on remand. Rather,
during their cross-examination of Mr. Bello, the Cavallaros chose to focus almost
exclusively on criticizing the “foundational premise” of the Bello valuation: that
Knight owned the intangible assets. That is, the Cavallaros put all their chips on
that factual issue, but on that issue we found in favor of the Commissioner. See
Cavallaro III, 842 F.3d at 23-25; Cavallaro II, at *22-*25. Knight did own the
intangible assets. Id.
Now on remand, the Cavallaros are attempting to avoid the consequence of
their litigation strategy by advancing new criticisms and arguments. Whether the - 28 -
[*28] Cavallaros omitted certain arguments because they overlooked them or
whether instead such omissions were the result of deliberate choices, the outcome
is the same. The Cavallaros had every opportunity and every incentive to advance
all possible criticisms of the Bello valuation during the trial in Cavallaro II. We
therefore treat the Cavallaros as having waived all arguments that they advance
now for the first time on remand.
However, the outcome is the same--i.e., we do not sustain these arguments--
even if we consider them on their merits, which we now do.
B. The lack of merit of the new arguments on remand
1. Discounts
The most significant of these new arguments that the Cavallaros direct
against the Bello report are its failure to make three discounts, i.e.--
• failing to discount the value of Knight because of the risk of losing its “key man”, Mr. Cavallaro14 (i.e., failing to apply a “key man” discount);
• valuing Knight and Camelot without applying a discount for lack of control; and
14 In Cavallaro II the Cavallaros argued to the contrary: In their post-trial opening brief in Cavallaro II, they argued that “Knight did not have a key leader, comparable to Kenneth Cavallaro”; and in their reply brief they argued that “Kenneth, not William Cavallaro, was the key man in the success of the dispensing machines”. - 29 -
[*29] • valuing Knight and Camelot without applying a discount for lack of marketability.
Our caselaw does show that these three discounts are properly used in some
instances, but the Cavallaros’ current argument fails for complete lack of evidence
that those discounts would be necessary, or even appropriate, in this particular
case.15 On the contrary, the only possible inference to be drawn from the record in
this case is that those discounts would not be appropriate here, because neither of
the Cavallaros’ own appraisers, Mr. Maio and Mr. Murphy, made a key man
discount or discounts for lack of control or lack of marketability. The Cavallaros
represented that their appraisers’ valuations were accurate and that they used
“Legally Prescribed and Widely Accepted Methodology”, yet those valuations
made the same omissions for which the Cavallaros now criticize the Bello report.
No expert in this case used those discounts, and no expert testimony criticized the
absence of those discounts. Consequently, one can hardly say, on this record, that
the omission of these discounts from the Bello valuation was an error.
15 There are other discounts that appraisers sometimes apply--e.g., discounts for illiquidity, trapped-in capital gains taxes, “portfolio” (nonhomogeneous assets), contingent liabilities, voting versus non-voting stock, and blockages, see generally Pratt & Niculita, supra, at 397-469--but we would not assume, without evidence, that the absence of any of them would necessarily invalidate a valuation. - 30 -
[*30] The Cavallaros’ general argument that prompted the Court of Appeals to
remand this case for further consideration was that the Tax Court “refused to
consider their evidence that the Bello valuation was ‘fatally flawed.’”
Cavallaro III, 842 F.3d at 25 (emphasis added). Of course, the Court of Appeals
did not insist that, on remand, the Tax Court should sustain arguments about
discounts for which there is no evidence.
The Court of Appeals did order that, on remand, we “may take new
evidence, including a new expert valuation”. Id. at 27 (emphasis added). But it
stated that “[t]he extent of any further briefing, hearings, or evidence is left to the
Tax Court’s sound discretion.” Id. We will exercise that discretion not to conduct
a new trial. As we stated in our order directing proceedings on remand--
Long before the time of the trial of this case, petitioners had clear notice of the factual and valuation issues at stake (including whether Knight owned the technology, and what the values of the companies were if it did). By receipt of Mr. Bello’s report * * * [six16] months before trial and the taking of his deposition one month before trial, petitioners had every opportunity to develop their contention that Mr. Bello’s conclusions were arbitrary and excessive.
At trial, petitioners had every opportunity to put on evidence on all the valuation issues and on all the defects in Mr. Bello’s
16 Our order incorrectly stated that the Cavallaros received the Bello report “three months before trial”, but in fact they received it on February 17, 2012, and the first day of trial in Cavallaro II was more than six months later on August 27, 2012. - 31 -
[*31] conclusions. This Court’s legal error that the Court of Appeals identified (“the Tax Court did not misallocate the burden of proof at trial” but “misstated the content of that burden”, Ct. App. slip op. at 21) occurred after trial in the Tax Court’s opinion, not in any ruling before or during trial that could have limited petitioners’ ability to put on evidence. Anything omitted [at trial] from petitioners’ critique of Mr. Bello was the result of their own choices. * * *
We therefore look to the evidence admitted at the trial already conducted to
determine whether and to what extent the Bello valuation erred by not making the
discounts for key man, lack of control, or lack of marketability, and we find that
there is no evidence of any error in this regard.
2. Transfer pricing allocation
Another new argument on remand that the Cavallaros direct against the
Bello report is that it reallocated profits between Knight and Camelot in a manner
that was inconsistent with transfer pricing regulations. See 26 C.F.R. secs. 1.482-
1(c), 1.482-9(h), 1.6662-6(d), Income Tax Regs.17 But as with the discounts
discussed above in part III.B.1, neither of the Cavallaros’ own appraisers, Mr.
Maio and Mr. Murphy, made adjustments pursuant to the transfer pricing
regulations.
17 The Cavallaros argue: “If a taxpayer presented the Bello Report as evidence to support its transfer pricing, the taxpayer would face penalties for improper transfer pricing under Treas. Reg. § 1.6662-6.” - 32 -
[*32] Mr. Maio made no adjustment at all to the allocation of profits between
Knight and Camelot--a serious flaw, already discussed in Cavallaro II, at *34.
Mr. Murphy’s valuation attempted a profit reallocation between the companies by
postulating a “royalty” that Camelot would owe to Knight; but in so doing he
made no showing of compliance with the selection-of-pricing-method principles
of section 482, which the Cavallaros belatedly allege is a standard that should be
applied to valuations in this case. In fact, Mr. Murphy’s valuation violated that
standard, since he argued that no adjustment was necessary but then performed
such an adjustment anyway. This approach contradicts the requirement that a
taxpayer evaluate the potential applicability of specified methods in a manner
consistent with the principles of the best method rule, and reasonably conclude
that the method employed is the “most reliable”. See 26 C.F.R. sec.
1.6662-6(d)(2)(ii)(A), (3)(ii)(B) and (C), Income Tax Regs.
Section 482 is an income tax provision. It gives the IRS discretion to
allocate income and deductions among taxpayers that are owned or controlled by
the same interests, for purposes of preventing the evasion of taxes or to clearly
reflect income. Broadly speaking, “[t]he purpose of section 482 is to prevent the
artificial shifting of the net incomes of controlled taxpayers by placing controlled
taxpayers on a parity with uncontrolled, unrelated taxpayers”. Sundstrand Corp. & - 33 -
[*33] Subs. v. Commissioner, 96 T.C. 226, 353 (1991). Section 482 is expressly
applicable when the issue in dispute is the income tax of the subject companies,
not the gift tax of their shareholders. This generality does not mean that principles
and authorities under section 482 may never be considered in analogous contexts,
see Crown v. Commissioner, 67 T.C. 1060, 1064-1065 (1977) (alluded to section
482 principles in a gift tax case involving an interest-free loan), aff’d, 585 F.2d
234 (7th Cir. 1978); but neither is section 482 the governing authority every time a
gift tax valuation requires allocating profits between two companies--and the
Cavallaros acknowledge that there is no “legal requirement that one purporting to
value a company must always apply transfer pricing principles.” Consequently,
we disagree with the Cavallaros’ argument that “Bello must identify specific
transactions that were conducted off-market and analyze and adjust them” under
section 1.482-1(b)(1), Income Tax Regs.
However, even if we were to review Mr. Bello’s adjustment under the
section 482 standard, we would hold that it satisfies that standard. “In reviewing
the reasonableness of * * * [the Commissioner’s] allocation under section 482, we
focus on the reasonableness of the result, not the details of the methodology
employed.” Bausch & Lomb, Inc. v. Commissioner, 92 T.C. 525, 582 (1989)
(citing Eli Lilly & Co. v. United States, 372 F.2d 990, 997 (Ct. Cl. 1967)), aff’d, - 34 -
[*34] 933 F.2d 1084 (2d Cir. 1991). For the reasons set forth in this opinion (and
especially in the comparison below), we find that Mr. Bello’s result was
reasonable by any standard.
IV. Determining the proper amounts of tax liabilities
As is noted above, we explained to the parties, after the Court of Appeals
issued its remand, that we would first determine whether the Bello valuation was
“arbitrary and excessive”, and that thereafter we would “order proceedings as to
the second issue, if appropriate”--i.e., the issue of the correct amounts of the
liabilities. Our proceedings to date have identified the sole error in the Bello
report (i.e., the 90th percentile profit margin calculation); and the parties agree on
the effect of that error (i.e., that the 7.5% profit margin figure places Camelot in
the 88.3rd, rather than the 90th, percentile), and they agree on the effect that the
error had on the amount of the disguised gifts (i.e., that using the correct 90th
percentile profit margin of 9.66% would, in Mr. Bello’s calculation, reduce the
gifts’ total value by $6,879,640). We are therefore able to say now that further
proceedings are not necessary.
Because of that error, the Commissioner’s valuation was “arbitrary and
excessive”. Under the remand, we therefore may not let that valuation stand but
must determine the proper amounts of the tax liabilities. See Cavallaro III, 842 - 35 -
[*35] F.3d at 27 n.14 (citing Estate of Elkins v. Commissioner, 767 F.3d 443 (5th
Cir. 2014), aff’g in part, rev’g in part 140 T.C. 86 (2013)); Taylor v.
Commissioner, 445 F.2d 455, 460 (1st Cir. 1971), aff’g T.C. Memo. 1966-29 and
Moss v. Commissioner, T.C. Memo. 1969-213. In making this determination we
are “free to accept in whole or in part, or reject entirely, the expert opinions
presented by the parties on the subject.” See Cavallaro III, 842 F.3d at 27 (citing
Helvering v. Nat’l Grocery Co., 304 U.S. 282, 295 (1938), and Silverman v.
Commissioner, 538 F.2d 927, 933 (2d Cir. 1976), aff’g T.C. Memo. 1974-285).
This one error does not make us unable to use Mr. Bello’s valuation, and it
does not require a new trial or necessitate receiving additional evidence. Rather,
we “accept * * * in part * * * the expert opinion[] presented by * * * [the
Commissioner] on the subject.” Cavallaro III, 842 F.3d at 27. On the basis of the
trial record, the Cavallaros’ identification of the error and proposal of a correction,
and the Commissioner’s acceptance of the Cavallaros’ calculation, we are able to
correct for this error and determine the proper amount of the Cavallaros’ gift. The
parties agree that if Mr. Bello had used the correct 90th percentile figure, 9.66%
rather than the 7.5% incorrect value, the value of the disguised gifts would be
reduced from approximately $29.7 million to $22.8 million, a difference of about - 36 -
[*36] $6.9 million. We conclude that the $22.8 million value is the correct value
of the disguised gifts made by the Cavallaros to their sons.
As a check on the reliability of the Bello report, as thus corrected, we make
the following simple comparison of the Bello valuation to the valuations relied on
by the Cavallaros:
First, any such valuation must begin with the value of the combined pre-
merger companies, and a higher value for the combined companies is
disadvantageous to the Cavallaros. Nonetheless, Mr. Bello’s combined value
($64.5 million) is lower than the combined value as reckoned by Mr. Maio in 1996
($70 to $75 million) and by Mr. Murphy in this litigation ($72.8 million). See
Cavallaro II, at *32-*33, *37-*39. In comparison to the Cavallaros’ valuations,
Mr. Bello’s $64.5 million valuation is not at all excessive but is more favorable to
the Cavallaros.
Second, the valuation must determine what portion of that combined value
is attributable to Knight. Mr. Bello’s conclusion that Knight accounts for 65% of
the combined value is easily within the range that the Cavallaros’ own accountant
(Mr. Goodman from E&Y) estimated in 1994 (before the Cavallaros’ lawyers
postulated a fictitious transfer of the intangibles): Mr. Goodman said that in a
merger “the majority of the shares (possibly as high as 85%) [will] go[] to” the - 37 -
[*37] owners of Knight (Mr. and Mrs. Cavallaro). Mr. Bello’s 65% represents a
fairly conservative valuation within Mr. Goodman’s range of a “majority” (i.e.,
greater than 50%) to “possibly as high as 85%”.
Third, numbers derived from the Cavallaros’ personnel suggest a gift
amount not too far off Mr. Bello’s. Where a range of possible values is given, we
take for this purpose the value within that range that is most favorable to the
Cavallaros, as follows: First, to value the combined companies, we use the lower
combined value ($70 million) of Mr. Maio’s range ($70 to $75 million). Next, for
the proportion attributable to Knight, we use the lowest number--51%--from
Mr. Goodman’s range (“majority” to 85%). Since the owners of Knight received
not 51% but only 19% of that value in stock from the merger, we determine that
the Cavallaros forfeited in favor of their sons 32% (i.e., 51% minus 19%) of that
combined value to which they were entitled. We therefore conclude, under this
alternative approach, that they made disguised gifts totaling 32% of
the $70 million combined company, or $22.4 million.18 This amount is reasonably
close to the $22.8 amount of the disguised gifts, as calculated after correcting
18 Thus, if we were persuaded that the Bello report was irreparably flawed (we are not), then we could well find on the basis of other evidence in the existing trial record (i.e., Mr. Maio and Mr. Goodman’s valuations) that the total value of the disguised gift was at least $22.4 million. - 38 -
[*38] Mr. Bello’s computation for the one error that rendered its conclusion
arbitrary and excessive, as we explained above in part II.B.4. The corrected
$22.8 million value of the disguised gift that is yielded by Mr. Bello’s
methodology is less than 2% higher than the $22.4 million amount suggested by
our rough-and-ready use of the numbers derived from the Cavallaros’ own
personnel. We think this further validates our conclusion.
CONCLUSION
We have considered all of the Cavallaros’ criticisms of the Bello valuation
and, except for their objection to Mr. Bello’s flawed 90th percentile profit
calculation, we find that they are without merit. For the reasons set forth above
and argued by the Commissioner, we find now that, aside from the one previously
discussed exception (which rendered the Commissioner’s valuation “arbitrary and
excessive”), Mr. Bello’s inputs and methodology were reasonable; and we
conclude that his valuation reasonably determined Knight and Camelot’s total
combined fair market value. After correcting for the one error in Mr. Bello’s
allocation of that total value between Knight and Camelot, we conclude that Mr.
and Mrs. Cavallaro made gifts totaling $22.8 million on December 31, 1995. - 39 -
[*39] So that Mr. and Mrs. Cavallaro’s separate gift tax liabilities can be
recomputed,
Decisions will be entered under
Rule 155.