Brothers Dispute Liability Linked to Stock Transfers to Trusts

ROBIN SORENSEN, ET AL.,
Petitioners,
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent.

Trial Calendar: Atlanta, GA
Date: July 18, 2022

First Amended Pretrial Memorandum

AMENDED PRETRIAL MEMORANDUM FOR PETITIONER

Judge David Gustafson

ATTORNEYS:

Petitioner:
Stephanie Loomis-Price
(713) 650-2750

Briana Loughlin
(713) 650-2686

Abigail Earthman
(713) 650-2639

Respondent:
Blake J. Corry
(602) 636-9616

David W. Sorensen
(801) 799-6631

Miriam C. Dillard
(904) 661-3021

AMOUNTS IN DISPUTE

Docket No.	Year	Deficiencies/Liabilities	Additions/Penalties
24797-18	2014 (gift)	Robin Sorensen $8,952,276	$3,580,910
24798-18	2014 (gift)	Chris Sorensen $8,952,276	$3,580,910
20285-19	2015 (gift)	Robin Sorensen $4,616,907	$1,846,763
20284-19	2015 (gift)	Chris Sorensen $4,616,907	$1,846,763

CURRENT ESTIMATE OF TRIAL TIME

Petitioners estimate 1-2 days.

MOTIONS PETITIONER EXPECTS TO MAKE

(1) Motion to Shift the Burden of Proof under Rule 142(a) and I.R.C. Section 7491;

(2) Motion in Limine to exclude evidence related to subsequent sale of Firehouse in 2021; and

(3) Motion in Limine to exclude report of Jeff Anderson.

STATUS OF STIPULATIONS OF FACTS

First Stipulation of Facts filed on March 14, 2022. Second Stipulation of Facts to be filed on June 24, 2022.

ISSUES

Issue 1

Whether Respondent erred in determining the number of non-voting shares in Firehouse Restaurant Group, Inc. (“Firehouse”) that Petitioners transferred, respectively, to the Robin O. Sorensen Family Trust and the Chris R. Sorensen Family Trust (together, “the Family Trusts”) on December 31, 2014.

In order to reach a decision on this issue, the Court will need to address the following sub-issues:

A. Whether Petitioners correctly reported on their 2014 Forms 709, United States Gift (and Generation-Skipping Transfer) Tax Returns (“the 2014 Gift Tax Returns”), the number of shares equivalent in fair market value to $5,000,000 of non-voting shares of Firehouse that each Petitioner gave on December 31, 2014 (“the 2014 Gifted Shares”) to the Family Trusts; and

B. Whether the number of non-voting Firehouse shares given by Petitioners to the Family Trusts in 2014 is governed by the defined-value formula contained in the agreements specifying the conditions governing the gifts to the Family Trusts, such that only that number of shares equal in fair market value to $5,000,000 was given to the Family Trusts.

Issue 2

Whether Respondent erred in determining that the fair market value of the non-voting shares of Firehouse that Petitioners sold on March 31, 2015, to the Family Trusts was $11,957,458 for each Petitioner, rather than $2,858,418.35 as reflected in the sale documents between Petitioners and the trustees of the Family Trusts.

Issue 3

Whether Respondent erred in determining that accuracy-related penalties under I.R.C. Section 6662(b)(5), (g), and (h) apply to Petitioners' December 31, 2014, gifts of non-voting Firehouse shares to the Family Trusts and Petitioners' sales of 5,365 non-voting Firehouse shares to the Family Trusts on March 31, 2015 (“the 2015 Sold Shares”).

In order to reach a decision on this issue, the Court will first need to address Issues 1 and 2. If the Court holds that Respondent erred, the Court need not address this Issue 3; if, on the other hand, the Court holds that the Taxpayers did not accurately report the fair market value of the 2014 Gifted Shares or the 2015 Sold Shares, then the Court will need to address whether Petitioners had reasonable cause and acted in good faith pursuant to I.R.C. Section 6664.

Issue 4

Whether Respondent appropriately imposed accuracy related penalties on the basis of negligence with respect to the 2014 Gifts and the 2015 Sales.

Issue 5

Whether Respondent bears the burden of proof under I.R.C. Section 7491 with respect to the factual issues in this case.

Issue 6

Whether Respondent bears the burden of proof under Tax Court Rule 142 for the positions not raised in the Notices of Deficiency and espoused for the first time in Respondent's Answer and Amended Answer.

Settled Issues

Petitioners and Respondent are working on a Proposed Stipulation of Settled Issues to be filed separately.

WITNESSES PETITIONER EXPECTS TO CALL

(1) Robin O. Sorensen — Robin Sorensen is a co-founder and the former President of Firehouse. He is expected to testify regarding his personal knowledge and understanding of the creation and development of Firehouse and all of its related entities, the facts and circumstances surrounding the 2014 gifts and the 2015 sales, advice he received related to the transfers at issue in this case, and his reliance on the advice received in engaging in and reporting those transfers.

(2) Chris R. Sorensen — Chris Sorensen is a co-founder and the former Vice President of Firehouse. He is expected to testify regarding his personal knowledge and understanding of the creation and development of Firehouse and all of its related entities, the facts and circumstances surrounding the 2014 gifts and the 2015 sales, advice he received related to the transfers at issue in this case, and his reliance on the advice received in engaging in and reporting those transfers.

(3) Tabitha Sorensen — Tabitha Sorensen is the wife of Robin Sorensen and the trustee of Robin O. Sorensen Family Trust. Tabitha Sorensen is expected to testify regarding her personal knowledge and understanding surrounding the 2014 gifts and the 2015 sales to the Robin O. Sorensen Family Trust, and the trust's obligations to comply with the agreement governing the 2014 gifts.

(4) Kirsten Sorensen — Kirsten Sorensen is the wife of Chris Sorensen and the trustee of the Chris R. Sorensen Family Trust. Kirsten Sorensen is expected to testify regarding her personal knowledge and understanding surrounding the 2014 gifts and the 2015 sales to the Chris R. Sorensen Family Trust, and the trust's obligations to comply with the agreement governing the 2014 gifts.

(5) Jamie Smith — Jamie Smith is a tax partner at Dixon Hughes Goodman (“DHG”) and the tax return preparer of the 2014 and 2015 Gift Tax Returns for Petitioners. Mr. Smith is expected to testify regarding the facts and circumstances surrounding the 2014 gifts and the 2015 sales of non-voting Firehouse shares at issue in these cases, including advice he gave to Petitioners regarding the transfers and transfer tax reporting of those transfers.

(6) Robert “Bo” Trudeau — Mr. Trudeau is a Florida-licensed attorney who represented Petitioners with regard to their business and estate planning endeavors, including the 2014 gifts and 2015 sales of non-voting Firehouse shares at issue in these cases. Mr. Trudeau is expected to testify regarding the facts and circumstances surrounding the transfers of non-voting Firehouse shares at issue, including advice he gave to Petitioners regarding the transfers and transfer tax reporting of those transfers.

(7) Don Fox — Based on his knowledge obtained through his role as CEO of Firehouse of America, LLC, Mr. Fox is expected to testify regarding the corporate structure of Firehouse (including shareholders at various times as well as relationship of the various Firehouse businesses), company decisions regarding debt, distributions, and recapitalization. In the event that the Court denies Petitioners' Motion in Limine to exclude evidence related to the 2021 sale of Firehouse that occurred nearly seven years after the first of the transfers at issue in this case, Mr. Fox is also expected to testify regarding the differences between the Firehouse businesses in late 2014 and early 2015 and those sold in late 2021.

(8) Vincent Burchianti¹ — Based on his knowledge through his role as CFO of Firehouse of America, LLC and involvement with Firehouse, Mr. Burchianti is expected to testify regarding his financial knowledge of Firehouse and company decisions regarding debt, distributions, and recapitalization. Mr. Burchianti is also expected to testify regarding his personal knowledge regarding the transactions at issue as well as communications with and information provided to DHG related to the appraisal at issue.

(9) Mary Rawlins — Based on her knowledge through her role as SVP of Financial and Payroll/Benefits Services and involvement with Firehouse, Ms. Rawlins is expected to testify regarding her financial knowledge of Firehouse and company decisions regarding debt, distributions, and recapitalization. Ms. Rawlins is also expected to testify regarding his personal knowledge regarding the transactions at issue as well as communications with and information provided to DHG related to the appraisal at issue.

(10) Alexander Rey — Mr. Rey is a Managing Director at Dixon Hughes Goodman (“DHG”).² Mr. Rey is expected to testify regarding his education, training, and experience as a valuation appraiser. Mr. Rey is also expected to testify, consistent with his reports, that (a) the fair market value of one non-voting share in Firehouse as of December 31, 2014 was $532.79, and the number of non-voting Firehouse shares equal in fair market value to $5,000,000 was 9,384.56; and (b) the fair market value of one non-voting share in Firehouse as of March 31, 2015 was $557.33. Mr. Rey is also expected to testify, consistent with his rebuttal report, that the report of the Commissioner's purported expert, Jeff Anderson, grossly overstates values and is unreliable as a result of flawed assumptions and methods. Copies of Mr. Rey's expert report, including any supplements, as well as his rebuttal expert report, have been provided to the Court and to counsel for Respondent and are incorporated herein by reference.

(11) Curtis Kimball — Mr. Kimball is a Managing Director of Willamette Management Associates (“WMA”). Mr. Kimball is expected to testify regarding his education, training, and experience as a valuation appraiser. Mr. Kimball is also expected to testify, consistent with his rebuttal report, that the report of the IRS's purported expert, Jeff Anderson, is unsupported and value conclusions expressed as opinions in Mr. Anderson's report would be significantly lower if the methodology were corrected.

(12) Ken Kirschner — Mr. Kirschner served as outside corporate counsel for Firehouse in 2014 and 2015. Mr. Kirschner is expected to testify regarding Firehouse's books and records as well as the 2014 recapitalization.

SUMMARY OF FACTS

Petitioner in Docket Nos. 24797-18 and 20285-19 is Robin O. Sorensen (“Robin”), and Petitioner in Docket Nos. 24798-18 and 20284-19 is Chris R. Sorensen (“Chris”). (Together, Robin and Chris are referred to as “the Sorensen Brothers” and sometimes as “Petitioners”).

Chris was born on October 16, 1960. He married Kirsten G. Sorensen (“Kirsten”) and together, they have three children.

Robin was born on May 6, 1968. He married Tabitha Leigh Sorensen (“Tabitha”), and together, they have four children.

The Sorensen Brothers both currently reside in St. Johns, Florida, with their families.

The Sorensen Brothers grew up in a family of firefighters, and their father served as captain at the firehouse in their hometown. The Sorensen Brothers spent considerable time during their childhood and teenage years at the firehouse, where meals were served family style and cooked by fellow firefighters. It was this childhood communal dining experience that would shape their eventual careers.

In addition to serving as Captain at the firehouse, the Sorensen Brothers' father, along with their mother, owned a local television store. The Sorensen Brothers watched their parents run a small business, where they learned the value and importance of providing good customer service. As a young teen, Robin decided he would one day open his own restaurant.

Chris, who is eight years older than Robin, started his career as a rock musician traveling across the United States. At age 23, he added to his career repertoire the titles of professional firefighter and EMT, where he made $12,500 per year. Shortly thereafter, Robin joined his father and Chris in the family profession — becoming a firefighter and EMT at age 19 and 20, respectively.

Robin and Chris soon decided to explore their true calling — making and serving quality food with excellent customer service. Robin spent two years training at two local restaurants, where he learned to appreciate the importance of profits/losses and the impact of the cost of food on the bottom line.

In the early 1990s, Robin and Chris decided that they were ready to open their own shop, choosing the sandwich business because they understood it was less expensive than other types of restaurants to get started in.

Prior to opening the business, the Sorensen Brothers sat down to plan the business and outline how they would set themselves apart from other sandwich shops. They decided to differentiate themselves by providing excellent customer  service and taking a unique approach to subs — steaming the meat and cheese in their sandwiches. Their initial plans were literally made on the back of a napkin.

In 1994, the Sorensen Brothers started Firehouse Subs, Inc. in Jacksonville, Florida with approximately $28,000 borrowed from family and friends ($16,000 on Tabitha's mother's credit card, $2,000 on Chris's credit card, a $5,000 loan from a cousin (collateralized by their father's 1972 Rolex watch), and a $5,000 loan from a friend). The Sorensen Brothers hired a local artist to paint a mural in the first store and Chris helped to paint the mural in order to reduce costs. (The same artist went on to paint a mural in nearly every Firehouse store that opened thereafter.)

On the day the first store opened, the Sorensen Brothers had less than $100 left collectively in their accounts.

Firehouse Subs started with one paid employee; the rest of the restaurant's staffing needs were covered by members of the Sorensen family, including (in addition to Robin and Chris) Robin and Chris's parents, wives, and sisters, and ultimately some of their children.

Robin took a very little pay (on the order of $10,000 per year). Chris, still working full-time as a firefighter, spent his days off at Firehouse Subs and did not take a salary at all for over four years. Once Chris left the firehouse in late 1999 after 15 years of service, he and Robin paid themselves $48,000 per year.

In 1995, the Sorensen Brothers formed Firehouse Restaurant Group, Inc. (“Firehouse”). Firehouse originally served as a franchisor. Firehouse also generally managed and licensed trademarks related to sub sandwiches under the name of “Firehouse Subs.” Firehouse elected to be taxed under the provisions of Subchapter S of the Internal Revenue Code.

During their ownership of Firehouse, the Sorensen Brothers emphasized putting the company's financial needs before their own. Consistent with their philosophy, in many years, Firehouse made no or only nominal distributions, preserving funds to reinvest the money in the business. Both the Sorensen Brothers maintained modest salaries throughout their ownership, not taking any meaningful distributions until Firehouse's 10^th anniversary in October of 2004, when Firehouse made a $1 million distribution spread proportionately among all of its shareholders. Chris and Robin took their share (then 34.5% each) and paid off their home mortgages.

Until very recently, Robin served as Firehouse's President, and Chris served as Firehouse's Vice President and Secretary; in these roles, Robin and Chris were not involved in day-to-day operations but were involved in big picture decision-making. Robin and Chris describe their careers as follows: “Big picture, we love to cook, we love to serve people, and we love the hospitality industry. We make sandwiches for a living.”

The Sorensen Brothers routinely surround themselves with knowledgeable advisors to assist them in areas outside of their wheelhouse as sandwich makers. As the sandwich business started to grow, Robin and Chris brought on executives to run the company.

In the early 2010s, various trusted friends and advisors encouraged the Sorensen Brothers to engage in more sophisticated estate planning.

The Robin Sorensen Living Trust (“Robin's Living Trust”) was created on June 15, 2011, with Robin as Grantor and Trustee. Robin's Living Trust was later amended and restated on May 22, 2015.

The Chris Sorensen Living Trust (“Chris's Living Trust”) was created on July 29, 2011, with Chris as Grantor and Trustee. Chris's Living Trust was later amended and restated on June 30, 2015.

After further encouragement from friends and advisors, in 2014 the Sorensen Brothers updated their estate plans. On December 31, 2014, the Robin O. Sorensen Family Trust (“Robin's Family Trust”) was created by Robin, as settlor, and Tabitha, as initial (and currently serving) trustee. Robin's Family Trust includes a power of substitution (Article XII), intended to qualify the trust as a grantor trust under I.R.C. § 675 for federal income tax purposes.

Also, on December 31, 2014, The Chris R. Sorensen Family Trust (“Chris's Family Trust”) was created by Chris, as settlor, and Kirsten, as initial (and currently serving) trustee. Chris's Family Trust also includes a power of substitution (Article XII), intended to qualify the trust as a grantor trust under I.R.C. Section 675 for federal income tax purposes.

Prior to the transfers at issue in this case, on December 28, 2014, the Sorensen Brothers owned Firehouse stock through their revocable trusts — Robin's Living Trust and Chris's Living Trust. Specifically, the shareholders of Firehouse stock were as follows:

Shareholder	Shares	% Interest
Robin's Living Trust	3,200	35.56%
Chris's Living Trust	3,200	35.56%
Other Shareholders	2,600	28.88%
Total	9,000	100.00%

In late 2014, the Sorensen Brothers' advisors encouraged them to transfer a portion of their ownership in Firehouse for estate planning purposes. Until that time, the Sorensen Brothers had received relatively small monetary rewards from the business that they had spent two decades building, pouring nearly all of their time, effort, and energy (and nearly every penny) into the endeavor. As a result, the Sorensen Brothers were reluctant to give up Firehouse stock for any reason, given that they had not yet had the chance to enjoy the fruits of their labors.

The Sorensen Brothers ultimately heeded advisor recommendations and decided to make gifts of Firehouse stock to their respective Family Trusts prior to the end of 2014. The decision to complete the gifts prior to the end of 2014 was driven by the timing of when these discussions and decisions occurred, coupled with general unease that the then-current $5.34 million gift and estate tax exemption could be legislated away at any time.

In part to address the Sorensen Brothers' concerns regarding lack of rewards for their multi-year efforts, Firehouse increased and drew down on its line of credit with TD Bank to make shareholder distributions in mid-December of 2014.

Throughout their ownership of Firehouse, the Sorensen Brothers were heavily involved in the business, and they were concerned about maintaining their historical voting block. Specifically, the Sorensen Brothers always voted together on company matters, and their ownership effectively comprised a majority block (and a supermajority for certain company decisions).

In order to address the Sorensen Brothers' intent to maintain voting control while also facilitating gifts to the Family Trusts, on December 28, 2014, the Firehouse stock ownership was recapitalized, dividing the shares into voting stock and non-voting stock.

After recapitalization, the shareholders of Firehouse stock were as follows:

Shareholder	Voting	Non-voting	Total	% Interest
Robin's Living Trust	3,200	28,800	32,000	35.56%
Chris's Living Trust	3,200	28,800	32,000	35.56%
Other Shareholders	2,600	23,400	26,000	28.88%
Total	9,000	81,000	90,000	100.00%

The Sorensen Brothers consulted with their estate planning counsel, Mr. Trudeau, and their longtime accountant and professional tax advisor, Mr. Smith, in determining the best way to structure, appraise, and report the gifts. Based on Mr. Trudeau's and Mr. Smith's professional designations and certifications, as well  as the Sorensen Brothers' experience in conferring with Mr. Smith over time and Mr. Smith's recommendations regarding Mr. Trudeau's expertise, the Sorensen Brothers understood that Mr. Trudeau and Mr. Smith were professional advisors who were qualified to advise them in these matters.

After considering several potential structures for the gifts, and relying on the advice of their estate planning attorney Mr. Trudeau, the Sorensen Brothers decided to make defined value gifts of non-voting shares in the amount of $5,000,000 (an amount within the Sorensen Brothers' respective gift tax exemption amounts) to the Family Trusts. The Sorensen Brothers' decision was based both on their desire to utilize only the amount of their gift tax exemptions and on the logistical fact that an appraisal of the shares could not be completed in the 20 days between when they initiated the appraisal and the end of 2014, the date by which they wanted to ensure the gifts were made.

On December 31, 2014, Robin, as trustee of Robin's Living Trust, made a gift of Firehouse non-voting shares worth $5,000,000 to Tabitha, as trustee of Robin's Family Trust, defined in the Irrevocable Stock Power transfer document as:

[A] specific number of nonvoting shares in FIREHOUSE RESTAURANT GROUP, INC., a Florida corporation (the “Company”), that have a fair market value as finally determined for federal gift tax purposes equal to exactly $5,000,000. The precise number of shares transferred in accordance with the preceding sentence shall be determined based on all relevant information as of the date of transfer in accordance with a valuation report that will be prepared by the Dixon Hughes Goodman, LLP (“DHG”), Jacksonville, Florida, an independent third-party professional organization that is experienced in such matters and appropriately qualified to make such a determination. However, the determination of fair market value is subject to challenge by the Internal Revenue Service (“IRS”). While the parties intend to initially rely upon and be bound by the valuation report prepared by DHG, if the IRS challenges the valuation and a final determination of a different fair market value is made by the IRS or a court of law, the number shares transferred from the transferor to the transferee shall be adjusted accordingly so that the transferred shares have a value exactly equal to $5,000,000, in the same manner as a federal estate tax formula marital deduction amount would be adjusted for a valuation redetermination by the IRS and/or court of law.

Also on December 31, 2014, Chris, as trustee of Chris's Living Trust, made a gift of Firehouse non-voting shares worth $5,000,000 to Kirsten as trustee Chris's Family Trust, defined in the Irrevocable Stock Power transfer document in the same manner, specifically as:

[A] specific number of nonvoting shares in FIREHOUSE RESTAURANT GROUP, INC., a Florida corporation (the “Company”), that have a fair market value as finally determined for federal gift tax purposes equal to exactly $5,000,000. The precise number of shares transferred in accordance with the preceding sentence shall be determined based on all relevant information as of the date of transfer in accordance with a valuation report that will be prepared by the Dixon Hughes Goodman, LLP (“DHG”), Jacksonville, Florida, an independent third-party professional organization that is experienced in such matters and appropriately qualified to make such a determination. However, the determination of fair market value is subject to challenge by the Internal Revenue Service (“IRS”). While the parties intend to initially rely upon and be bound by the valuation report prepared by DHG, if the IRS challenges the valuation and a final determination of a different fair market value is made by the IRS or a court of law, the number shares transferred from the transferor to the transferee shall be adjusted accordingly so that the transferred shares have a value exactly equal to $5,000,000, in the same manner as a federal estate tax formula marital deduction amount would be adjusted for a valuation redetermination by the IRS and/or court of law.

The Sorensen Brothers engaged DHG to complete an appraisal of non-voting Firehouse stock in order to determine the number of shares equivalent to $5,000,000. As sandwich makers and former firefighters, not business appraisers, the Sorensen Brothers had little to no experience with business appraisals. Although the Sorensen Brothers have been successful in their Firehouse business endeavor, they will testify that much of Firehouse's success is due to a combination of intuition, luck, timing, and lots of good advice from others.

The Sorensen Brothers disclosed to DHG all facts known to be relevant to the proper tax treatment of the gift of non-voting shares, including the purpose for gifting the non-voting shares to the Family Trust in the manner in which the gift occurred. DHG's appraisal was not based on unreasonable factual or legal assumptions, and DHG did not unreasonably rely on any representations, statements, findings, or agreements. The Sorensen Brothers understood that DHG was a reputable valuation appraiser in Jacksonville, Florida, and nothing in the Sorensen Brothers' education or prior experience led them to believe otherwise.

In April of 2015, DHG issued its appraisal, opining that the value of one non-voting share of Firehouse stock as of the date of the gift, December 31, 2014, was $532.79. The Sorensen Brothers relied on this appraisal in reporting the 2014 Gifts.

Because the Sorensen Brothers' gifts as trustees of their respective Living Trusts were gifts from revocable trusts and treated as gifts from Robin and Chris individually, the gifts of $5 million worth of stock were reported on Robin's and Chris's 2014 Gift Tax Returns. The gifts were reported as follows: “[A] number of non-voting shares of stock in Firehouse Restaurant Group, Inc. (“Firehouse”) that have a value as finally determined for federal gift tax purposes equal to $5,000,000 as of the date of the transfer.”

In order to determine the number of shares transferred on December 31, 2014, counsel for the Sorensen Brothers used DHG's valuation of one non-voting share of Firehouse stock ($532.79) to calculate the number of shares transferred in the Sorensen Brothers' respective $5,000,000 gifts, resulting in transfers of 9,384.56 to each of the Sorensen Brothers' respective Family Trusts. The Sorensen Brothers reported this number on the Gift Tax Returns based on the formula contained in their respective transfer documents. Specifically, the Gift Tax Returns stated as follows:

Based on the summary report on the valuation of one non-voting share in Firehouse Restaurant Group, Inc. as of December 31, 2014, attached and marked as Exhibit II (the 'Valuation Report'), the value of one non-voting share of Firehouse stock as of the date of the gift was determined to be $532.79. Therefore based on the formula set forth above and the value as determined by the Valuation Report, the donor transferred 9,385 non-voting shares in Firehouse stock [. . .] with a value equal to $5,000,000, and the precise number of shares transferred cannot be finally determined until the value of such shares are finally determined for federal gift tax purposes.

After the gifts and completion of DHG's appraisal, the shareholders of Firehouse stock were as follows:

Shareholder	Voting	Non-voting	Total	% Interest
Robin's Living Trust	3,200	19,415	22,615	25.13%
Robin's Family Trust	0	9,385	9,385	10.43%
Chris's Living Trust	3,200	19,415	22,615	25.13%
Chris's Family Trust	0	9,385	9,385	10.43%
Other Shareholders	2,600	23,400	26,000	28.88%
Total	9,000	81,000	90,000	100.00%

The Sorensen Brothers ultimately decided to part with up to 50% of their interests in Firehouse and, after using their exemptions in 2014 to make gifts, they decided to transfer the balance (up to 50% of their interests) by sale.

On March 31, 2015, Robin and Chris each sold 5,365 Firehouse non-voting shares to the trustees of their respective Family Trusts in exchange for $2,858,418 from each trustee. Because the sales occurred just 3 months after the Sorensen Brothers' prior gifts, the purchase price was based on the DHG valuation report as of December 31, 2014. The purchase price was satisfied with the issuance of promissory notes from Robin's Family Trust and Chris's Family Trust, secured by stock pledge agreements.

After the 2015 sales to the Family Trusts, the shareholders of Firehouse stock were as follows:

Shareholder	Voting	Non-voting	Total	% Interest
Robin's Living Trust	3,200	14,050	17,250	19.17%
Robin's Family Trust	0	14,750	14,750	16.39%
Chris's Living Trust	3,200	14,050	17,250	19.17%
Chris's Family Trust	0	14,750	14,750	16.39%
Other Shareholders	2,600	23,400	26,000	28.88%
Total	9,000	81,000	90,000	100.00%

Tabitha as Robin's Family Trust made the following payments on its Note, with a final payoff on October 27, 2021: 

Date	Amount
03/30/2016	$42,018.74
03/30/2017	$42,018.74
04/02/2018	$42,018.74
03/29/2019	$42,018.74
03/23/2020	$42,018.74
03/30/2021	$42,018.74
10/27/2021	$2,882,708.29

Kirsten as Chris's Family Trust made the following payments on its Note, with a final payoff on March 23, 2022:

Date	Amount
03/30/2016	$42,018.74
04/03/2017	$42,018.74
03/29/2018	$42,018.74
12/20/2019	$2,888,924.76
03/23/2022	$46,107.53

Although Kirsten, as trustee of Chris's Family Trust, owed a payment on March 30, 2019, Kirsten was suffering from a severe paralytic illness, and was relearning to walk, at the time that the March 2019 payment was due. Understandably, Kirsten did not make the payment timely due to her severe illness. On March 23, 2022, Kirsten paid the missing payment, along with interest and late fees as required by the terms of the Note, in the amount of $46,107.53.

BRIEF SYNOPSIS OF LEGAL AUTHORITIES

I. ISSUES 1 and 2: Respondent erred in determining the number and value of non-voting shares transferred in 2014 and erred in determining the value of the non-voting shares transferred and 2015.

Respondent's Expert's Report Does Not Reflect Fair Market Value of the Non-Voting Firehouse Shares at Issue.

I.R.C. Section 2512 provides that “[i]f the gift is made in property, the value thereof at the date of the gift shall be considered the amount of the gift.” I.R.C. § 2512. Fair market value has long been defined as “the price at which property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts.” Treas. Reg. § 25.2512-1.

The determination of fair market value is a mixed question of fact and law. Estate of Jelke v. Commissioner, 507 F.3d 1317, 1321 (11th Cir. 2007), vacating T.C. Memo. 2005-131. The mathematical computation of fair market value is an issue of fact, but the determination of the appropriate valuation method is an issue of law. Id.

On the 2014 Gift Tax Returns, Petitioners reported the fair market value of 9,385 non-voting shares³ of Firehouse at $532.79 per share based on DHG's independent appraisal. DHG arrived at its value using both the Discounted Future Benefits (“DFB”) Method under the Income Approach and the Guideline Public Company (“GPC”) Method under the Market Approach. Petitioners have designated Alex Rey of DHG as Petitioners' valuation expert and Mr. Rey has produced a report reflecting his opinions accordingly.

In the 2014 Notices of Deficiency, Respondent asserted a value of $1,923.56 per share. Respondent subsequently asserted a value of $2,076.86 per share in its Amended Answers based on the report of Jeff Anderson of Consor IP Experts. Respondent has designated Mr. Anderson as Respondent's valuation expert.

The Court has broad discretion to evaluate the cogency of an expert's analysis. Neonatology Assocs., P.A. v. Comm'r, 115 T.C. 43, 85 (2000), aff'd 299 F.3d 221. The Court weighs an expert's testimony in light of his or her qualifications and with due regard to all other credible evidence in the record. Id. In weighing an expert's testimony in light of his or her qualifications, the Court may give less weight to an expert who lacks experience in appraising the assets at issue. See Estate of Dougherty v. Commissioner, T.C. Memo 1990-274, 59 T.C.M. (CCH) (finding that although one expert was generally a qualified appraiser, the expert's report was less reliable than an opposing expert's report because of the lack of experience in appraising real estate in the specific state at issue).

Petitioners' expert, Mr. Rey, is a Managing Director at DHG and “specializes in business valuations and economic damage calculations.”

In contrast, Respondent's chosen expert, Mr. Anderson, is a “managing director of CONSOR, an intellectual asset consulting firm specializing in trademark, patent, copyright and right of publicity valuation, licensing, and expert testimony.” None of the areas of expertise identified by Mr. Anderson as specialties are at issue in this case.

Although both Mr. Rey and Mr. Anderson use the Income Approach and the Market Approach in reaching their conclusions of value, the expert reports and testimony at trial will show that the application of these approaches differs in several key areas.

Mr. Anderson's and Mr. Rey's approaches also differ in their treatment of company-specific risk premiums in the build-up model used to estimate Firehouse's present value discount rate. The build-up approach starts with the risk-free rate of return for the year in issue, and three adjustments are made: (1) an equity risk adjustment, (2) a size adjustment, and (3) a company-specific risk adjustment. Miller & Sons Drywall, Inc. v. Commissioner, T.C. Memo. 2005-114, 89 T.C.M. (CCH) 1279. Despite the requisite components of the build-up model, Mr. Anderson's report does not include a company-specific risk premium and overstates value as a result.

In addition to differences in applying the Income Approach, Mr. Anderson and Mr. Rey apply the Market Approach differently as well. As the reports and trial testimony will further detail, Mr. Anderson selected “guideline” publicly traded companies that are too dissimilar to Firehouse to accurately state value using the Guideline Public Company (“GPC”) Method. For example, Mr. Anderson considered and applied valuation pricing multiples of full-service restaurants such as Ruth's Hospitality Group, Inc., a high-end luxury steakhouse. See Rebuttal R., C. Kimball at p. 23.

The selection of guideline companies is critical to proper application of the GPC Method. See e.g., Estate of Gallagher v. Commissioner, T.C. Memo. 2011-148, 101 T.C.M. (CCH) 1702 (finding improper reliance on GPC method because selected guideline companies alone were not similar enough to warrant application); Estate of Hall v. Commissioner, 92 T.C. 312, 341 (1989) (finding taxpayer's experts “acted reasonably in selecting” six comparable companies involved in similar businesses and occupying similar positions within industries as subject company); Estate of Zaiger v. Commissioner, 64 T.C. 927, 945 (1975) (finding that comparable companies used by Commissioner's expert were not sufficiently comparable because of differences in product mix and size of operations).

In addition to conclusions of value for the December 31, 2014 valuation date, Mr. Anderson's and Mr. Rey's reports reflect conclusions of value for the March 31, 2015 valuation date related to the Sorensen Brothers' sales of 5,365 non-voting Firehouse shares. In light of the fact that the second valuation date is only 3 months from the first, Mr. Anderson and Mr. Rey each used methodologies similar to the methodologies each used for their conclusions of value for the December 31, 2014 valuation date. As with the conclusion of value for the December 31, 2014 valuation date, Mr. Anderson's conclusion of value for the March 31, 2015 valuation date ($2,228.62 per share) overstates value as compared to Mr. Rey's conclusion for the March 31, 2015 valuation date ($557.33).

Petitioners' December 31, 2014 Gifts Were Intentionally Limited to the Number of Shares Worth $5,000,000.00, Based on the Language of the Irrevocable Stock Powers.

In the Irrevocable Stock Powers governing the 2014 Gifts, Petitioners each specified that their gifts to their respective Family Trusts of non-voting shares in Firehouse were limited to the number equal in fair market value to $5,000,000, as finally determined for federal transfer tax purposes. The transaction was intentionally structured so that Petitioners had certainty — so that they limited the value of the gifts for the benefit of their children and so that they knew exactly how much of their exemptions they were using, without exceeding the amount that would incur gift tax liability.

Federal courts have held that similar formula clauses limiting the value of a completed transfer are valid. See, e.g., Estate of Christiansen v. Commissioner, 130 T.C. 1 (2008), aff'd, 586 F.3d 1061 (8th Cir. 2009) (validating clause disclaiming beneficiary's rights to value of mother's estate in excess of $6,350,000, with disclaimed amounts going to charitable organizations); Estate of Petter v. Commissioner, 97 T.C.M. (CCH) 534, aff'd 653 F.3d 1012 (9^th Cir. 2011); Succession of McCord v. Commissioner, 461 F.3d 614, 636 (5th Cir. 2006), rev'g 120 T.C. 358 (2003) (holding that gift is valued on date of gift and subsequent events are not to be considered, Fifth Circuit respected plain language of clause transferring partnership interests to taxpayers' children having fair market value of $6,910,933 with excess to charities ).

Specifically, in Wandry v. Commissioner, Judge Haines held that language in taxpayers' gift transfer documents was effective to limit the taxpayers' gifts of LLC membership units to dollar amounts equal to their federal gift tax exclusions. Wandry v. Commissioner, 103 T.C.M. (CCH) 1472, appeal dismissed (10^th Cir. 2012), non-acq., 2012-46 I.R.B. 543 (Nov. 13, 2012) In Wandry, the gift transfer documents provided (1) the dollar amount of LLC membership units intended to be transferred (equal to the taxpayers' federal gift tax exclusions); (2) a statement that  the taxpayers intended to rely on a third-party appraiser's valuation to determine the number of membership units equivalent to the dollar amount intended to be transferred; and (3) a statement providing for the correction of the number of membership units equivalent to the chosen dollar amount if the Internal Revenue Service (“the IRS”) challenged “such valuation and a final determination of a different value is made by the IRS or a court of law.” Id.

Similar to the taxpayers in Wandry, Petitioners intended to give a number of non-voting shares of Firehouse with a value below their federal gift tax exclusion amounts. Accordingly, Petitioners' estate planning attorney drafted the language of the Irrevocable Stock Powers to track the language used in the gift transfer documents in Wandry. Consistent with Wandry, the Irrevocable Stock Powers provided (1) the dollar amount of non-voting shares intended to be transferred ($5,000,000.00 — an amount under Petitioners' remaining gift tax exclusions at the time); (2) a statement that Petitioners intended to rely on a third-party appraiser to determine the number of non-voting shares of Firehouse equal to $5,000,000.00; and (3) a statement providing for the correction of the number of shares equivalent to $5,000,000 if the IRS challenged "the valuation and a final determination of a different fair market value is made by the IRS or a court of law.”

Based on the advice of estate planning counsel, Petitioners followed the language in Wandry in order to effectuate gifts limited to $5,000,000 each. Notably, Wandry was issued as a memorandum opinion indicating that the case, including the validity of the defined-value clause in the gift transfer documents, did not involve a novel legal issue and/or the law on the issues is settled. Accordingly, Petitioners reasonably relied on the Wandry decision in the Irrevocable Stock Powers to limit the 2014 Gifts to $5,000,000.00 for each Petitioner.

Respondent has indicated that the Commissioner plans to rely on Nelson v. Commissioner, 17 F.4th 556 (5^th Cir. 2021) for the proposition that the Wandry clause in the Irrevocable Stock Powers is not effective to limit Petitioners' 2014 Gifts to $5,000,000.00. Yet in contrast to Respondent's contention, Nelson instead supports the application of Wandry in this case.

In Nelson, the taxpayers attempted to transfer limited partnership interests equal to a certain dollar amount. The relevant transfer agreement provided as follows: (1) the dollar amount of limited partnership interests intended to be transferred; and (2) a statement that taxpayers intended to rely on a qualified appraiser to determine the percentage of limited partnership interest equal to the dollar amount intended to be transferred. Id. at 559. Importantly, the Nelson transfer agreement did not include language requiring the determination of fair market value as finally determined for federal transfer tax purposes found in both Wandry and the case at hand. Id. at 560-61. After the Nelson limited partnership transfers, the IRS challenged the taxpayers' valuation. Id. at 558-59. Ultimately, the appellate court found that because the Nelson transfer agreement lacked reallocation language regarding “as finally determined for federal transfer tax purposes” found in Wandry clauses, the transfer agreement was not effective to limit the taxpayers' gift amount after the IRS's successful valuation challenge. Id. at 560-61.

Unlike the governing agreements in Nelson, the Irrevocable Stock Powers in this case include the “as finally determined for federal transfer tax purposes” language and, as such, the finding in Nelson is inapposite in this case.

Further, Respondent has indicated that it intends to rely on Nelson to support its position that a subsequent sale of all Firehouse stock by all shareholders somehow invalidates the Wandry provision in the Irrevocable Stock Powers that governs the 2014 Gifts. In contrast to Respondent's indicated position, the Nelson decision actually supports Petitioners' position that the transfer document alone governs the nature of the transfer. See Nelson, at 559.

In Nelson, the taxpayers attempted to point to subsequent events to support their position that their gifts of limited partnership interests should be limited to the dollar amounts originally intended. Id. at 561-62. The appellate court held that “[w]hen determining that amount of gift tax, if any, that applies to a transfer, the nature of that transfer is ascertained by looking to the transfer document and its language, rather than subsequent events.” Id. at 559 (citing Succession of McCord, 461 F.3d at 626-27; Estate of Petter, 97 T.C.M. (CCH) at 534 (citing Ithaca Tr. Co. v. United States, 279 U.S. 151, 155 (1929)). Accordingly, Respondent's reliance on Nelson is misplaced; subsequent events involving Firehouse stock (such as its sale by all shareholders 7 years later) are not relevant and should not impact the nature of the interests transferred by Petitioners on December 31, 2014.

II. ISSUE 3: Accuracy Related Penalties Do Not Apply Because Petitioners had Reasonable Cause and Acted in Good Faith At The Time of The 2014 Gifts and 2014 Sales.

Petitioners had reasonable cause and acted in good faith with respect to any underpayment of tax for which this Court may determine Petitioners are liable.

Generally, Section 6662 imposes accuracy-related penalties on the underpayment attributable to negligence, a substantial understatement, or a gross understatement of value on a United States Gift (and Generation-Skipping Transfer) Tax Return (“Form 709”). See generally I.R.C. § 6662. Specifically, Section 6662 (b)(5) imposes a 20 percent penalty on that portion of an underpayment of tax required to be shown on a Form 709 that is attributable to any substantial gift tax valuation understatement. Section 6662(g) provides that a substantial gift tax valuation understatement arises when “the value of any property claimed on any return of tax imposed by Subtitle B is 65 percent or less of the amount determined to be the correct amount of such valuation.” I.R.C. § 6662(g). Under Section 6662(b)(1), the same accuracy-related penalty applies when the underpayment is attributable to negligence or disregard of rules or regulations.

And while, Section 6662(h) increases the amount of the accuracy-related penalty to 40 percent, it only applies if the portion of the underpayment “is attributable to one or more gross valuation misstatements.” I.R.C. § 6662(h). In short, a gross valuation misstatement occurs, absent a Section 6664 defense, as discussed below, only when “the value of any property claimed on any return of tax imposed by Subtitle B is 40 percent or less of the amount determined to be the correct amount of such valuation.” I.R.C. § 6662(g)(1).

Specifically, accuracy-related penalties do not apply “if it is shown that there was a reasonable cause for such portion and that the taxpayer acted in good faith with respect to such portion.” I.R.C. § 6664(c)(1); see also Treas. Reg. § 1.6664-4(a). Generally, “[t]he determination of whether a taxpayer acted with reasonable cause and in good faith is made on a case-by-case basis, taking into account all pertinent facts and circumstances.” Treas. Reg § 1.6664-4(b)(1). “Reasonable cause requires that the taxpayer have exercised ordinary business care and prudence as to the disputed item.” Neonatology Assocs., 115 T.C. at 99 (citing United States v. Boyle, 469 U.S. 241 (1985) and Estate of Young v. Commissioner, 110 T.C. 297, 317 (1998)). Reasonable cause is measured by a three-prong test, detailed by Neonatology Assoc.: (1) the adviser was a professional with expertise to justify reliance; (2) the taxpayer provided accurate and necessary information to the adviser; and (3) the taxpayer actually relied on the adviser's judgment in good faith. Id. (citing Ellwest Stereo Theatres, Inc. v. Commissioner, T.C. Memo. 1995-610, 70 T.C.M (CCH) 1655; TAX CT Rule 142(a); and Welch v. Helvering, 290 U.S.111, 115 (1933)).

Specifically, whether a taxpayer's reliance on an appraisal constitutes reasonable cause requires inquiry into the taxpayer's state of mind; the analysis does not hinge on the conclusions of the appraiser. See Litman v. United States, 78 Fed. Cl. 90 (Fed. Cl. 2007), amended and supplemented by 81 Fed. Cl. 315 (Fed. Cl. 2008) (holding taxpayer's good faith reliance on qualified appraisal met reasonable cause exception despite appraiser's application of 80% discount); but see Estate of Richmond v. Commissioner, T.C. Memo. 2014-26, 107 T.C. M. (CCH) 1135 (holding reasonable cause exception did not apply when taxpayer relied on unsigned appraisal with handwritten edits). And to meet the reasonable cause and good faith exception, the taxpayer “does not have to challenge the advisor's conclusions, seek a second opinion, or try to check the advice by reviewing the tax code himself or herself.” Montgomery v. Commissioner, 127 T.C. 43, 67 (2003).

Finally, with respect to a property appraisal, factors that should be considered when determining reasonable cause and good faith include: (1) the assumptions and methods applied in the appraisal; (2) the appraised value; (3) the relevant facts and circumstances surrounding when the taxpayer obtained the appraisal; and (4) the relationship between the taxpayer and the appraiser. See Estate of Richmond, 107 T.C. M. (CCH) 1135 (citing Treas. Reg. § 1.6664-4(b)(i)).

The 2014 Gifts

Petitioners accurately reported their December 31, 2014, gifts of non-voting Firehouse shares to the Family Trusts. When Petitioners reported the December 31, 2014 gifts, each had reasonable cause to believe that the value reported was accurate, they relied on the advice of counsel and the opinion of a qualified valuation professional. Petitioners' reliance on their estate planning attorney and an independent valuation professional was in good faith; Petitioners lacked any reason to question the advice of their estate planning attorney regarding the defined value approach to the 2014 Gifts or the third-party professional's opinion of value of the 2014 Gifted Shares. Therefore, under Section 6664(c)(1), the Service erred in its determination of accuracy related penalties under Section 6662.

Petitioners in this case acted in good faith and had reasonable cause; consequently, no accuracy-related penalty should be imposed. The Sorenson Brothers are firefighters and sandwich makers. Neither Chris nor Robin had a background in business or finance, but both (thanks to their time at the firehouse) knew how to make a delicious sandwich. In 1994, when the Sorenson Brothers founded Firehouse, Chris was 34 years old and Robin was 26 years old. Neither had any intention of going to college. Acknowledging their lack of business acumen, as Firehouse grew, the Sorenson Brothers' team of professional advisors grew.

For example, the Sorenson Brothers hired an accountant to prepare and file their personal income tax returns, as well as Firehouse's federal tax filings. They hired an estate planning attorney to assist them with sophisticated estate planning when it became clear that simple wills would not suffice. They relied on their estate planning attorney and their accountant when it came time to make substantial gifts and report those gifts on their 2014 Gift Tax Returns. And, consistent with their life-long approach of surrounding themselves with savvy advisors, they relied on the advice of counsel and of their tax return preparer when selecting an appraiser to value the 2014 Gifted Shares. Having hired Mr. Smith to prepare the 2014 Gift Tax Returns, they relied on Mr. Smith's recommendations to hire DHG to opine as to value.

Further the Sorenson Brothers have met each element of the three-prong test outlined in Neonatology Assocs., as detailed in turn below:

(i) Alex Rey of DHG is a competent professional who has sufficient expertise to justify reliance.

DHG is a well-respected valuation advisory firm that has rendered opinions of value for thousands of closely held entities. Mr. Rey holds the certifications: CVA (Certified Valuation Analyst, from National Association of Certified Valuators and Analysts), MAFF (Master Analyst in Financial Forensics, also from NACVA), and CFE (Certified Fraud Examiner from Association of Certified Fraud Examiners). Mr. Rey has more than 35 years of public accounting experience. In that time, he has been involved in over 300 business valuation and litigation matters and is and was qualified to issue an opinion of value.

Jim Ewart served as the analyst who worked with Mr. Rey on the 2014 Firehouse appraisal. He holds the following designations/certifications: CPA (Certified Public Accountant), ABV (Accredited in Business Valuation by the American Institute of Certified Public Accountants), CFF (Certified in Financial Forensics, also from AICPA), and CVA. Mr. Ewart has more than 30 years' experience working with closely held businesses across the country. He worked at a national tax advisory and accounting firm prior to joining DHG, where he gave advice regarding valuations of large closely-held companies.

(ii) The Sorenson Brothers provided all necessary and accurate information to DHG

The Sorenson Brothers provided DHG with four years of Firehouse's financial statements and tax returns covering December 31, 2014 through December 31, 2017. Petitioners also provided Firehouse's financial projections through December 31, 2017. Finally, the Sorenson Brother's made themselves and Firehouse management available to DHG for interviews and questions. DHG was in regular contact with the Sorenson Brothers, largely by phone, during its preparation of its appraisal.

(iii) The Sorenson Brothers actually relied in good faith on DHG's Judgment

For several years before the 2014 Gifts and for many years after, the Sorensen Brothers, including Firehouse, relied on DHG for all of their accounting needs. Petitioners had no reason to question Mr. Smith's recommendation of Mr. Rey at DHG or to question Mr. Rey's opinion of value of Firehouse. Petitioners did not blindly follow DHGs opinion, however. Prior to DHG finalizing its opinion of value, the Sorenson Brothers diligently reviewed the factual portions of the appraisal to ensure that the accuracy of the information on which DHG's opinion was based. The Sorenson Brothers reviewed sections such as “organizational structure,” “suppliers,” and “marketing and promotions,” areas of the appraisal with which the sandwich makers were well familiar.

On the other hand, the Sorenson Brothers, in good faith, relied on DHG's analysis of Firehouse's financial statements, its judgment as to what valuation method to apply, and its consideration of economic conditions and outlook, among other areas of analysis in the DHG report

The Sorenson Brothers reliance on DHG's appraisal for tax reporting purpose was not only in good faith; it was also reasonable. Examining the totality of the facts and circumstances, it is clear that the Sorenson Brothers acted with reasonable cause and in good faith when reporting the 2014 Gifts.

The 2015 Sales

With regard to the March 31, 2015 Sale, the Sorenson Brothers relied on DHG's 2014 appraisal as of December 31, 2014, as it was valued only 90 days prior. The Sorenson Brothers did not report the sale on their 2015 Gift Tax Returns, as they reasonably believed that full and adequate consideration was had for the transaction, meaning that no transfer for gift tax purposes occurred. The Sorensen Brothers acted in good faith and had reasonable cause in omitting the sale details from the 2015 Gift Tax Returns because the Sorensen Brothers never intended for there to be any gift component to the sales. Further, because the Sorenson Brothers had no experience with appraising companies, they relied in good faith on DHG's professional opinion as to the value of the Firehouse non-voting stock.

Any argument that the Sorenson Brothers should have gotten a new appraisal or an updated appraisal is unfounded. No material changes occurred from a business or economic standpoint from the time of the 2014 Gifts to the time of the 2015 Sales.

III. ISSUE 4: Respondent Failed to Properly Raise Accuracy-Related Penalties on the Basis of Negligence

Respondent failed to properly assert negligence accuracy-related penalties in the Notice of Deficiency, the Answer, and the Amended Answer, all of which refer to Section 6662(c). Section 6662(c) does not impose penalties, instead it defines negligence. Respondent simply failed to ever assert Section 6662(b)(1), which is the imposition of negligence. Therefore, Respondent did not properly negligence accuracy-related penalties with respect to the 2014 Gifts and the 2015 Sales.

IV. ISSUE 5: Under I.R.C. § 7491, Respondent Should Bear the Burden of Proof for Factual Issues in this Case.

Respondent should bear the burden of proof under Section 7491 with respect to the factual issues in this case because, during the Commissioner's audit, Petitioners complied with the requirement to “substantiate any item” as that phrase is used in Section 7491(a)(2)(A). See I.R.C. § 7491(a)(2)(A). Further, during the Commissioner's audit, Petitioners “maintained all records required under this title” and “cooperated with reasonable requests [. . .] for witnesses, information, documents, meetings, and interviews” as those phrases are used in I.R.C. Section 7491(a)(2)(B). See I.R.C. § 7491(a)(2)(B). Finally, neither of Petitioners is a partnership, corporation, or trust. Because Petitioners meet the requirements of Section 7491, the burden of proof should shift to Respondent with regard to the factual issues before the Court in this case.

V. ISSUE 6: Respondent Bears the Burden of Proof With Respect to the Value of Non-Voting Shares of Firehouse in 2014 and 2015 Under Tax Court Rule 142(a)(1).

While generally, petitioners bear the burden of proof in cases asking the Tax Court to hold that Respondent erred in its tax determinations, the burden of proof shifts to Respondent when Respondent asserts any increase in deficiency in its Answer (or Amended Answer). Specifically, Respondent bears the burden of proving, by a preponderance of the evidence, that its determinations are correct “in respect of any new matter, increases in deficiency, and affirmative defenses, pleaded in the answer.” Tax Ct. R. Pract. & Proc. 142(a)(1).

On September 19, 2018, Sheila B. Korth, South Atlantic Technical Services Territory Manager for the Internal Revenue Service, issued Notices of Deficiency to each of the Sorensen Brothers determining “that the value per [non-voting] share of Firehouse Restaurant Group, Inc. is $1,923.56 per share.” And on July 20, 2021, Respondent lodged its First Amendment to Answer in Dockets 24797-18 and 24798-18, claiming, “After filing of the petition, respondent contracted with a valuation expert with respect to this case. Respondent's expert valued one non-voting share of FRG at $2,076.86 as of December 31, 2014.” The Court accepted the filing of Respondent's First Amendment to Answer on August 31, 2021.

On October 17, 2019, Brian J. Atkinson, Technical Services Territory Manager Midstates for the Internal Revenue Service, issued Notices of Deficiency to each of the Sorensen Brothers determining “that the value per [non-voting] share of Firehouse Restaurant Group, Inc., is $1,923.56 per share.” And on July 21, 2021, Respondent lodged its First Amendment to Answer in Dockets 20284-19 and 20285-19, claiming, “Respondent contracted with a valuation expert with respect to this case. After petitioner provided the information claiming 5,365 shares were transferred on March 31, 2015, respondent asked the expert to perform a valuation as of March 31, 2015. Respondent's expert valued one non-voting share of FRG at $2,228.79 as of March 31, 2015.” The Court accepted the filing of Respondent's First Amendment to Answer on August 31, 2021.

Respondent increased its deficiency determinations from $1,923.56 per share as of December 31, 2014 in the Notices of Deficiency issued on September 19, 2018 to $2,076.86 per share in its Amended Answers filed on August 31, 2021. Therefore, Respondent bears the burden of proof, under Rule 142(a)(1), to show by a preponderance of the evidence that its increased determinations are correct.

Further, Respondent increased its deficiency determinations from $1,923.56 per share as of March 31, 2015 in the Notices of Deficiency issued on October 17, 2019, to $2,228.79 per share in its Amended Answers filed on August 31, 2021. Therefore, Respondent bears the burden of proof, under Rule 142(a)(1), to show by a preponderance of the evidence that its increased determinations are correct.

VI. EVIDENTIARY PROBLEMS

None, other than those raised in motions filed by the Motion in Limine deadline.

Date: June 24, 2022

Respectfully submitted,

By: Stephanie Loomis-Price
Tax Court Bar No. LS0435
sloomisprice@winstead.com

Briana Loughlin
Tax Court Bar No. LB0254
bloughlin@winstead.com

Abigail Earthman
Tax Court Bar No. RA0434
aearthman@winstead.com

WINSTEAD PC
600 Travis Street
Suite 5200
Houston, Texas 77002
(713) 650-2750
(713) 650-2400 (Fax)

COUNSEL FOR PETITIONERS
ROBIN O. SORENSEN AND CHRIS R. SORENSEN

Trial Judge:
Judge Gustafson
United States Tax Court
400 Second Street, N.W.
Washington, D.C. 20217
202.521.0850