Johann T. and Johanna Hess - Page 20

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          was not quantified by HII management at the time of the gift.19             
          Petitioners fail to convince us that the alleged understatement             
          was known or knowable as of the gift date.  Further, as a general           
          rule, subsequent events are not considered in fixing fair market            
          value, except to the extent that they were reasonably foreseeable           
          at the date of valuation.  First Natl. Bank of Kenosha v. United            
          States, 763 F.2d 891, 894 (7th Cir. 1985); Estate of Gilford v.             
          Commissioner, 88 T.C. 38, 52 (1987).  The record reflects that              
          the alleged understatement was not discovered or quantified until           
          1997, almost 2 years after the gift of HII stock and after the              
          audit of petitioners’ gift tax returns.  On the basis of the                
          evidence in the record, we are not convinced that the discovery             
          of the alleged understatement was reasonably foreseeable on the             
          gift date.20                                                                
               The adjustment proposed in the 1997 memorandum should not              
          have been considered in valuing the HII stock.21  Making this               


               19Petitioners allege that HII management informally                    
          recognized the understatement of reserves as of Nov. 15, 1995,              
          but they had not quantified the amounts.  They allege that the              
          understatement would have been discovered and quantified by an              
          investor conducting due diligence as of the date of the gift.  We           
          are not convinced that due diligence or any other investigation             
          would have sufficiently disclosed the alleged understatement.               
               20Mr. Engstrom testified that, in his opinion, the                     
          adjustment was not foreseeable as of the valuation date.                    
               21Petitioners also allege that HII failed to follow the                
          substantial completion accounting rules in booking its sales for            
          1995; i.e., it booked sales prematurely.  They claim that if                
                                                             (continued...)           




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