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Petitioners also argue that the redemption agreement was not
entered into at arm’s length, and, therefore, is not reflective
of fair market value. We cannot agree with this contention. We
do agree, however, that there were present considerations that
would not be present if the seller in that transaction were not
Mr. Kucklick and if the buyer were not HII. There were certain
elements of consideration exchanged which cannot be quantified.
We agree that the redemption transaction provides some indication
of the value of HII stock; however, we are convinced that the
particular circumstances of that transaction indicate that the
value of HII stock was less than the value that Mr. Engstrom
derived from that transaction.32
31(...continued)
T.C. Memo. 2002-113; see also Kreider v. Commissioner, 762 F.2d
580 (7th Cir. 1985), affg. T.C. Memo. 1984-68. However, in the
instant case, the agreement and the allocation therein represent
a transaction which is entirely collateral to Mr. Hess’s gift of
HII shares and the valuation of those shares. We are not
persuaded that the strong proof rule applies in these
circumstances.
32Mr. Engstrom did not apply a minority interest discount to
the value he derived from the redemption transaction, because he
concluded that Mr. Kucklick’s shares represented a minority
interest in HII stock. Petitioners argue that the redemption of
Mr. Kucklick’s stock did not involve a minority interest, because
Mr. Hess and Mr. Kucklick treated each other as equals in all
aspects of their relationship at HII. However, the redemption
was clearly of a minority interest in HII stock, regardless of
whether Mr. Hess and Mr. Kucklick treated each other as equals.
Further, there is evidence that they were not in fact equals in
all such aspects. Indeed, the negotiations leading up to the
redemption transaction suggest this much.
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