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valued the promissory note at its face value, $45 million, and
the convertible subordinated debentures at $84,210,240, on the
basis of a 20-percent discount from their face value.
Accordingly, the estate reported $110,451,865 of taxable gain on
its return.
In 1982, the estate converted the debentures into Holiday
Inns stock, which resulted in a basis of $16 per share. In this
year, the Government determined a deficiency in estate tax,
contending that the value of the Harrah's stock was $34.05 rather
than $13.325 as reported on the return.
In 1983, the estate sold 679,400 shares of Holiday Inns
stock for $25,159,789, and distributed 1,101,447 shares to a
marital trust that was established by William F. Harrah's will,
which also provided that the marital trust was to be funded from
the estate. In 1984, the estate sold 58,200 shares of Holiday
Inns stock for $2,620,487, and the marital trust sold all its
shares for $58,177,080. In each of these sales, the $16 basis
was used to compute the gain realized.
The estate filed a petition with this Court, contesting the
Commissioner's determination of the value of the Harrah's stock
that it reported on the estate tax return. In 1986, during the
pendency of this litigation, the estate filed a timely income tax
refund claim for 1980, on the ground that if it had undervalued
the Harrah's stock, it had then overstated the gain it realized
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