- 28 -
restricted stock of publicly traded corporations.11 C&L Bailey
is not a publicly traded corporation. Consequently, we are
unpersuaded that Schwartz appropriately relied on these
restricted stock studies in deriving his recommended 40-percent
marketability discount. See Furman v. Commissioner, T.C. Memo.
1998-157; Mandelbaum v. Commissioner, T.C. Memo. 1995-255, affd.
91 F.3d 124 (3d Cir. 1996).
Respondent’s Expert
Smith’s recommended 27.44-percent marketability discount
represents the sum of his recommended 21.44-percent discount for
the tax on built-in gains of C&L Bailey’s assets and a 6-percent
discount for “stock sale costs”.
To derive his recommended discount for tax on built-in
gains, Smith assumed that the value of C&L Bailey’s assets would
be $4,160,177, after an assumed 5-year holding period, during
which he assumed the assets would grow at an annual rate of 2
percent. He assumed selling expenses of 7 percent and estimated
that at the end of the assumed 5-year holding period the tax
basis of the assets would be $1,721,279, yielding an estimated
gain of $2,147,686, to which he applied an assumed combined
Federal and State tax rate of 39.06 percent, to yield an
estimated tax on potential gain of $838,886. Smith concluded
11 Ironically, petitioner criticizes the report of
respondent’s expert, Smith, for inappropriately relying on
studies of publicly traded companies in arriving at his
recommended 20-percent minority discount.
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