Opposition Brief — Estate of Josephine T. Thompson v. Commissioner of Internal Revenue (No. 07-1061)

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No. 07-1061

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In the Supreme Court of the Gnited States

ESTATE OF JOSEPHINE T. THOMPSON, DECEASED,

ET AL., PETITIONERS

Vv.

COMMISSIONER OF INTERNAL REVENUE

ON PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

BRIEF FOR THE RESPONDENT IN OPPOSITION

PAUL D. CLEMENT

Solicitor General

Counsel of Record

NATHAN J. HOCHMAN

Assistant Attorney General

RICHARD FARBER

STEVEN W. PARKS

Attorneys

Department of Justice

Washington, D.C. 20530-0001

(202) 514-2217

QUESTION PRESENTED

Whether, after concluding that the Commissioner

bears the burden of proof under 26 U.S.C. 7491, and

rejecting the valuation of property proposed by the

Commissioner, the Tax Court is required to accept the

valuation proposed by the taxpayer’s expert even if the

court concludes that the valuation is contradicted by

other record evidence. ;

TABLE OF CONTENTS

Page

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TABLE OF AUTHORITIES

Cases:

Caracci v. Commissioner, 456 F.3d 444 (5th Cir.

NE es cr co SCEN Le bo ANWR Re Ne be oe kane 12

Estate of Fitts v. Commissioner, 237 F.2d 729

aN ne el Sodan os 8

Estate of Simplot v. Commissioner, 249 F.3d.1191

SR RS hk sshd oad Redes bapa cua kwa ss 13, 14

Fidelity & Cas. Co. v. Driver, 79 F.2d 713 (5th Cir.

SS do Sani S wks Gh ke EM as ade eae knee 9

Forste v. Commissioner, 85 T.C.M. (CCH) 1146

SN Saas ba alee ead eeu ahha ss anxs 14

Griffin v. Commissioner, 315 F.3d 1017 (8th Cir.

HE ea 6k ARES ERS AR ea eae ewe 13

Helvering v. National Grocery Co., 304 U.S. 282

CRE Bis howe badwkwhd aed cee ek we ee kee kauks 8

JPMorgan Chase & Co. v. Commissioner, 458 F.3d

ee a I 9s \ ia yn wks dl be eke ere ces 14

Kohler v. Commissioner, 92 T.C.M. 48 (2006),

OOS. TO ETE. BBD «oo ccc ce eiesecess 14, 15

(IIT)

IV

Cases—Continued: Page

Morrissey v. Commissioner, 243 F.3d 1145 (9th Cir.

RE EA RS Gi yee a PALO NOD Oe a eRe eh ae a 13

Orth v. Commissioner, 813 F.2d 837 (7th Cir. 1987) ..... 9

Silverman v. Commissioner, 538 F.2d 927 (2d Cir.

er a a ele ld ky Wi paed ne GR Kad 7,8,9

Statutes, regulation and rule:

Internal Revenue Code (26 U.S.C.):

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Miscellancous:

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7th Cir. Fed. Civil Jury Instruction 1.08 ............... 8

22 Thomas Register of American Manufacturers

EN NE Goes is GS ee he ec eon ek aad oe weak 2

In the Supreme Court of the Gnited States

No. 07-1061

ESTATE OF JOSEPHINE T. THOMPSON, DECEASED,

ET AL., PETITIONERS

Vv.

COMMISSIONER OF INTERNAL REVENUE

ON PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

BRIEF FOR THE RESPONDENT IN OPPOSITION

OPINIONS BELOW

The opinion of the court of appeals (Pet. App. Al-

A18) is reported at 499 F.3d 129. The opinion of the Tax

Court (Pet. App. Al17-A79) is unreported.

JURISDICTION

The judgment of the court of appeals was entered on

August 23, 2007. A petition for rehearing was denied on

November 14, 2007 (Pet. App. A81-A82). The petition

for a writ of certiorari was filed on February 12, 2008.

The jurisdiction of this Court is invoked under 28 U.S.C.

1254(1).

STATEMENT

1. When Josephine T. Thompson died on May 2,

1998, she owned approximately 20% (487,440 shares) of

(1)

2

the stock of Thompson Publishing Company, Inc. (TPC).

TPC, which was privately owned and closely held, pub-

lished and sold business-to-business directories. TPC’s

stock had never been publicly traded, and there were no

sales of the stock in the 10 years before Thompson’s

death. Pet. App. A2-A3, A17.

TPC described itself as “the acknowledged leader” in

its field, having “by far the most complete and. helpful

specifying and buying guide published today.” Pet. App.

A21-A22 (quoting 22 Thomas Register of American

Manufacturers 3573 (86th ed. 1996)). When Thompson

died, TPC was regarded by some as holding an effective

monopoly in the United States on business-to-business

industrial and manufacturing print publications. Jd. at

A20-A21.

In 1993, TPC began offering business-to-business

directories on CD-ROM. In 1995, TPC began making its

directories available on the Internet. Pet. App. A3.

TPC’s management stated that its objective was “to

secur{e] * * * a dominant position in the electronic

interchange of information among industrial buyers and

sellers comparable to that which it has enjoyed in the

hard copy realm.” Jd. at A24; C.A. E.A. E648.’ In 1997,

TPC’s president described its Internet activities as a

“substantial success.” Jd. at E1087. By early 1998,

TPC’s web site was ranked sixth among business-to-

business web sites in the United States. /d. at E975;

Pet. App. A3.

Because of TPC’s increasing focus on technology,

between 1993 and 1997, the number of subscribers to its

print products declined from 73,500 to 67,500, but the

number of subscribers to its electronic products soared

' The exhibit appendix in the court of appeals is cited as “C.A. E.A.”

3

from 1000 to 575,000. Pet. App. A25-A26; C.A. E.A.

E925. Similarly, between 1993 and 1998, TPC’s sub-

scription revenues fell from $14.9 million to approxi-

mately $14.1 million, but its advertising revenue, which

was its primary revenue source, increased from $165

million to $258 million. Pet. App. A26-A27; C.A. E.A.

E370, E407, £451, £519, E917-E918.

TPC had no long-term debt, and its net book value at

the end of 1997 was approximately $150 million, almost

all of which consisted of current assets, including a large

portfolio of liquid short-term investments. Pet. App.

A35, C.A. E.A. E108, E1285. TPC had a long history of

paying substantial dividends, which TPC’s management

regarded as “sacrosanct” (id. at E1083) and planned to

continue to pay. Pet. App. A37-A38; C.A. B.A. E1083,

£1161. In the six years before Thompson’s death, TCP

paid dividends of more than $8 per share. Pet. App.

A37; C.A. E.A. £203, E232, £249, E280, E313, £346,

E384, E426, E471, E495. In the four years after her

death, dividend payments totaled more than $4 per

share. Pet. App. A37-A38.

2. On its federal estate tax return, Thompson’s es-

tate valued her shares of TPC at $1.75 million, or $3.59

per share, based on an appraisal by George E. Goerig, a

tax lawyer who lived in Alaska. The estate hired Goerig

to appraise the TPC stock and to represent the estate as

administrator in order to shift the location of the tax

audit from New York City to Anchorage, Alaska, where

Goerig represented he would be able to obtain a more

favorable valuation for the estate. Goerig retained, as

his assistant, Paul M. Wichorek, an Alaskan accountant

with limited valuation experience and no experience val-

uing companies involved in the Internet. Pet. App. A3,

4

A38-A39; C.A App. A118, A160-A161, A169-A170, A201-

A202, A283-A284; C.A. E.A. E540.

Goerig’s valuation was based on the capitalization of

income method. He first determined TPC’s average

earnings for the prior five years, as reduced by an addi-

tional $10 million of technology costs above and beyond

prior technology expenditures to reflect an anticipated

increase in such expenses in future years; next he capi-

talized the earnings at a capitalization rate of 30.5%

(12% of which reflected a special increase for risk pre-

sented by the Internet); and, finally, he calculated the

estate’s share of the resulting value and discounted it by

40% to account for the fact that the estate held a minor-

ity interest and by an additional 45% to account for the

lack of marketability of the estate’s shares. Goerig’s

- valuation did not include any of TPC’s “non-operating”

assets, which the Commissioner’s expert valued at more

than $100 million. Pet. App. A4, A46-A54, A69; C.A.

App. A124-A126, A614-A615.

The Commissioner valued the shares at $66.45 per

share, a total of approximately $32 million, based on an

appraisal prepared by Brian C. Becker, who appraised

the shares using a market multiple and discounted cash

flow approach. Because those methods inherently took

account of the minority nature of the estate’s interest,

Becker did not apply a minority interest discount. In

addition, Becker used only a 30% discount for lack of

marketability. Pet. App. A4, A39-A40, A54-A65.

3. As relevant here, the Tax Court concluded that

the estate’s appraisal evidence “was to be treated as

credible” (Pet. App. A46 n.6) under 26 U.S.C. 7491.

That statute provides that the burden of proof on a fac-

tual issue relevant to the taxpayer’s liability shifts from

the taxpayer to the Commissioner if the taxpayer,

5

among other things, “introduces credible evidence” on

the issue. 26 U.S.C. 7491(a). Accordingly, the court

imposed the burden of proof on the Commissioner. Pet.

App. A46 n.6.

Applying that burden of proof, the Tax Court con-

ducted a thorough examination of the record and found

that the appraisals of both the estate’s experts and the

Commissioner’s expert were “deficient and unpersua-

sive.” Pet. App. A65. The court noted that Goerig and

Wichorek were “too inexperienced, accommodating, and

biased in favor of the estate” (2d. at A46), and the court

found them “only marginally credible” and “barely quali-

fied” to value a successful, well-established company

with annual income in the millions of dollars (id. at A66).

The court, however, agreed with Goerig’s conclusion

that the TPC stock should be valued using a capital-

ization-of-income approach, rather than the discounted

cash flow approach or by comparison to the value of

other companies, as proposed by the Commissioner’s

expert. /d. at A72-A73; compare id. at A54-A65 (de-

scribing approach of Commissioner’s expert) with id. at

A46-A54 (describing approach of estate’s experts).

Accordingly, the Tax Court used the valuation pro-

posed by the estate’s experts as the starting point in

determining the value of the shares. See Pet. App. A65-

A77. The court then essentially made three adjustments

to that valuation. First, the court determined that

TPC’s adjusted income should be capitalized at 18.5%,

rather than 30.5%, because the record evidence did not

support the 12% increase in the capitalization rate

adopted by the estate’s experts to reflect alleged risk

posed by the Internet. /d. at A66-A68, A74. Second, the

court determined that $68 million of non-operating as-

sets should be included in determining TPC’s overall

6

value. Jd. at A69-A70, A74. Third, the court allowed

only a 15% minority-interest discount and a 30% dis-

count for lack of marketability, the percentage used by

the Commissioner’s expert. /d. at A74-A75. The court

therefore valued the estate’s stock in TPC at approxi-

mately $13.5 million, or $27.75 per share. /d. at A77.

4. The court of appeals upheld the Tax Court’s valu-

ation, except for one computational error acknowledged

by both parties, and the court of appeals remanded the

ease for correction of that error. Pet. App. Al-A13. In

so holding, the court of appeals rejected petitioners’ con-

tention that 26 U.S.C. 7491 required the Tax Court to

accept the estate’s valuation in full. Pet. App. A2, A6-

AT.

Petitioners argued that, because they had introduced

some credible evidence of value, thereby shifting the

burden of proof to the Commissioner, Section 7491 re-

quired the Tax Court to adopt, without any modification,

the valuation proposed by the estate’s experts, once the

court had rejected the Commissioner’s proposed valua-

tion. See Pet. App. A2. The court of appeals held that

Section 7491’s allocation of the burden of proof “does not

require the Tax Court to adopt the taxpayer’s valuation,

however erroneous, whenever the Court rejects the Com-

missioner’s proposed value.” /d. at A7. Instead, the

court stated, the Commissioner can satisfy his burden of

disproving the taxpayer’s valuation “by evidence in the

* Despite their contention that the Tax Court was required to accept

the valuation of the estate’s expert without modification, petitioners ex-

pressly stated in their brief to the court of appeals that they were not

contesting either the Tax Court’s allowance of a minority interest

discount of only 15%, rather than the 40% used by the estate's experts,

or the court’s allowance of a marketability discount of 30%, rather than

the 45% used by the estate’s experts. Pet. C.A. Br. 7 n.1.

7

record that impeaches, undermines, or indicates error in

[that] valuation.” /bid. That conclusion, the court rea-

soned, is consistent with the longstanding rule that the

“Tax Court is not bound by the formulas or opinions

proffered by expert witnesses” but “may reach a deter-

mination of value based upon its own analysis of all the

evidence in the record.” Jbid. (quoting Silverman v.

Commissioner, 538 F.2d 927, 933 (2d Cir. 1976)). . -

In this case, the court of appeals observed, the Com-

missioner “not only presented evidence in support of his

own valuation; he also cited record evidence to rebut the

Estate’s valuation, arguing that the Estate’s profit pro-

jections were overly pessimistic, that it failed to prop-

erly account for non-operating assets, and that its as-

sumptions about the Internet were inconsistent with the

company’s investments in Internet-related projects.”

Pet. App. A7. Accordingly, after concluding that the Tax

Court’s factual determination of the value of the stock

was not clearly erroneous, the court of appeals affirmed

the Tax Court’s valuation in all respects, except for the

computational error noted above. /d. at A8.

ARGUMENT

The decision of the court of appeals is correct and

does not conflict with any decision of this Court or of any

other court of appeals. The petition for a writ of certio-

rari should therefore be denied.

1. Petitioners renew their contention (Pet. 10-16)

that 26 U.S.C. 7491 required the Tax Court to accept,

without modification, the stock valuation proposed by

the estate’s experts once the court had concluded that

the Commissioner bore the burden of proof and the

court had rejected the Commissioner’s proposed valua-

8

tion. The court of appeals correctly rejected that con-

tention.

Section 7491 provides that, when a taxpayer intro-

duces “credible evidence” on a factual issue relating to

tax liability, and certain other requirements are met,

the Commissioner “shall have the burden of proof with

respect to such issue.” 26 U.S.C. 7491(a). As the court

of appeals correctly concluded, Section 7491’s reallo-

cation of the burden of proof “does not require the Tax

Court to adopt the taxpayer’s valuation, however erro-

neous, whenever the Court rejects the Commissioner’s

proposed value.” Pet. App. A7. Noshing in Section 7491

alters the longstanding rule that, in determining the

value of property for federal tax purposes, a court is not

bound to adopt the valuation of eitiser party’s experts.

See Helvering v. National Grocery Co., 304 U.S. 282,

295 (1938). On the contrary, the court “may reach a

determination of value based upon its own analysis of all

the evidence in the record.” Silverman v. Commis-

sioner, 588 F.2d 927, 9338 (2d Cir. 1976); accord, e.g.,

Estate of Fitts v. Commissioner, 237 F.2d 729, 732-733

(8th Cir. 1956).

As the court of appeals explained, although the Com-

missioner bore the burden of proving that the estate’s

proposed valuation was too high, he did not have to sat-

isfy his burden by proving that his own expert’s valua-

tion was correct; instead, he could satisfy his burden “by

evidence in the record that impeache[d], undermine[d]

or indicate[d] error in the taxpayer’s valuation.” Pet.

App. A7. That conclusion accords with the general rule

that, “[iJn determining whether any fact has been

proved,” the fact-finder must “consider all of the evi-

dence bearing on the question regardless of who intro-

duced it.” 7th Cir. Fed. Civil Jury Instruction 1.08; see,

9

e.g., Fidelity & Cas. Co. v. Driver, 79 F.2d 713, 714 (5th

Cir. 1935). It also accords with the traditional rule in

tax valuation cases that “(t]he fair market value of prop-

erty * * * is a question of fact for the tax court to re-

solve considering all relevant evidence in the record.”

Orth v. Commissioner, 813 F.2d 837, 842 (7th Cir. 1987)

(emphasis added); see Silverman, 5388 F.2d at 933

(court’s determination should be based on “all the evi-

dence in the record”) (emphasis added); 26 C.F.R.

20.2031-2(f) (“fair market value” depends on the “facts

of each case”); Rev. Rul. 59-60, 1959-1 C.B. 237, 238 (“A

sound valuation will be based upon all the relevant

facts.”).

As the court of appeals observed, the Commissioner

“cited record evidence to rebut the Estate’s valuation,

arguing that the Estate’s profit projections were overly

pessimistic, that it failed to properly account for non-

operating assets, and that its assumptions about the

Internet were inconsistent with [TPC’s] investments in

Internet-related projects.” Pet. App. A7. In light of

that evidence and argument, the Tax Court correctly

concluded that the Commissioner had proved that the

valuation proposed by the estate’s experts was “deficient

and unpersuasive” in several critical respects. Jd. at

A65.

The Tax Court found essentially three errors in the

estate’s experts’ valuation: first, the estate’s experts

had incorrectly added 12 percentage points to the rate

used to capitalize TPC’s income to reflect the risk posed

by the Internet; second, they had incorrectly failed to

include $68 million of non-operating assets in determin-

ing TPC’s value; and, third, they had incorrectly applied

a 40% minority-interest discount and a 45% lack-of-mar-

ketability discount. Pet. App. A65-A77. Contrary to pe-

10

titioners’ suggestions that there was no record evidence

to support those findings, there was ample evidence,

including evidence introduced by the Commissioner.

As the Tax Court explained, its rejection of the 12

percentage point adjustment for Internet risk was sup-

ported by extensive evidence showing that, “while the

Internet posed certain risks to TPC, the Internet also

provided significant new business and financial opportu-

nities.” Pet. App. A66. Indeed, at the time of Thomp-

son’s death, “TPC appeared to be well situated on the

Internet, and TPC’s future as to its Internet operations

appeared good.” Jd. at A66-A67. That view was repeat-

edly stated by TPC’s management and supported by the

testimony of the Commissioner’s expert. See id. at A24,

A66-A67; C.A. E.A. E648, E1087, E1212. It was also

supported by TPC’s operating results in the years pre-

ceding Thompson’s death, during which subscriptions to

TPC’s electronic products and TPC’s advertising reve-

nues from those products both increased substantially.

See Pet. App. A25-A27; C.A. E.A. E370, E407, E451,

E519, E917-E918, E925.

The Tax Court’s decision to reduce the capitalization

rate was also supported by TPC’s long history of paying

substantial cash dividends, which the evidence showed

was likely to continue. See Pet. App. A37-A38, A67; C.A.

B.A. E1083, E1161. Indeed, in the six years preceding

Thompson’s death, TPC paid dividends per share equal

to twice the per-share valuation proposed by the estate’s

experts. And, in the four years after Thompson’s death,

TPC again paid dividends per share that exceeded the

per-share valuation. See Pet. App. A37-A38; C.A. E.A.

F.203,E232, £249, F280, £313, E346, £384, £426, £471,

£495. Thus, the Tax Court was amply justified in con-

cluding that the capitalization rate used by the estate’s

11

experts was excessive and reflected their bias and lack

of experience in evaluating the effect of the Internet and

other technologies on the value of a company. Pet. App.

A46, A47, A66; see C.A. App. A169-A170, A201-A202.

The Tax Court’s decision to include $68 million in

non-operating assets in TPC’s valuation was also well

supported by the evidence, including the testimony of

the Commissioner’s expert. He testified that TPC’s non-

operating assets, 2.e., those that TPC was not using to

finance its “day-to-day operations,” amounted to over

$100 million, including cash-on-hand and short-term

investments. C.A. App. A614-A615. The Tax Court in-

cluded only the $68 million in short-term investments,

agreeing with petitioners that TPC’s cash-on-hand

should be treated as an operating asset because it was

needed to run the business. Pet. App. A69-A70. That

was an extremely conservative estimate of TPC’s non-

operating assets, amounting to only 37% of TPC’s cur-

rent assets. See C.A. E.A. A108, A1285.

The Tax Court’s rejection of the 40% minority inter-

est discount and 45% discount for lack of marketability

used by the estate’s experts was also well grounded in

the evidence. As the court explained, “[t]he experts for

the estate selected discount rates that were extreme and

highly favorable for the estate, without any credible sub-

stantive discussion of how the facts of this case

support{ed] such particular discounts.” Pet. App. A70.

The Tax Court settled on a 20% minority-interest dis-

count based on a review of the discounts used in other

cases and an analysis of the estate’s particular minority

interest. See id. at A73-A75. After a similarly careful

analysis of the facts, the court agreed with the Commis-

sioner’s expert that the discount for lack of marketabil-

ity should be no higher than 30%. See id. at A75. In

12

their opening brief in the court of appeals, petitioners

essentially conceded that the Tax Court was justified in

rejecting their proposed discounts, stating that “(t]he

Estate is not seeking review of those findings.” Pet.

C.A. Br. 7n.1. In light of that concession, petitioners’

contention that the Tax Court was nonetheless required

by Section 7491 to accept their experts’ valuation with-

out any modification is simply untenable.

2. Petitioners also err in contending (Pet. 16-19)

that the decision below conflicts with decisions of other

courts of appeals. Indeed, none of the cases cited by

petitioners even addressed whether Section 7491 re-

quires a court to accept the taxpayer’s valuation when

the court concludes that the Commissioner bears the

burden of proof and the court rejects the Commis-

sioner’s valuation.

Caracci v. Commissioner, 456 F.3d 444 (5th Cir.

2006), did not involve Section 7491 at all. Instead,

Caracci involved the entirely different rule, based on

case law, that the Commissioner bears the burden of

proving a taxpayer’s actual tax liability once the tax-

payer has established that the original assessment was

arbitrary and erroneous. See id. at 457. In Caracci, the

court of appeals held that the Tax Court committed er-

ror because it “did not place the burden of proof on the

Commissioner” but instead expressly declined to decide

which party had the burden. /bid. Here, in contrast,

the Tax Court expressly placed the burden of proof on

the Commissioner. Pet. App. A46 n.6. Moreover, in

Caracci, the court of appeals rendered judgment for the

taxpayer because the court concluded that “the record

[made] it clear that the Commissioner [could not] meet

his burden of proof.” 456 F.3d at 462. In contrast, in

this case, as the court below held, the Tax Court cor-

18

rectly found, based on all the evidence in the record,

that the Commissioner proved that the estate’s stock

had a value of $13.5 million, based on the valuation

methodology used by the estate’s experts, as corrected

to eliminate the effect of the experts’ errors, bias, and

inexperience.

Griffin v. Commissioner, 315 F.3d 1017 (8th Cir.

2003) (per curiam), involved Section 7491, but the court

of appeals did not address whether the Tax Court must

accept the taxpayer’s valuation without modification if

the court concludes that the Commissioner has the bur-

den of proof and the court rejects the Commissioner’s

valuation. Griffin held only that, under the facts of that

case, the taxpayers had introduced sufficient “credible

evidence” to shift the burden of proof. Jd. at 1022. To

the extent that Griffin is relevant to the question de-

cided by the court below, Griffin supports the court’s

decision. The court in Griffin emphasized that the de-

termination whether a taxpayer had provided “credible

evidence” should be made as “2f no contrary evidence

were submitted.” Id. at 1021. And, upon concluding that

the taxpayers had presented credible evidence, the court

of appeals remanded the case for the Tax Court to de-

termine, based on “all of the evidence properly before

it,” “whether the Commissioner has met his burden of

proof.” Jd. at 1022.

Morrissey v. Commissioner, 243 F.3d 1145 (9th Cir.

2001), and Estate of Simplot v. Commissioner, 249 F.3d

1191 (9th Cir. 2001), have virtually nothing to do with

the issue presented in this case. In Morrissey, the court

of appeals held that, on the evidence presented, actual

arm’s length sales of stock were more persuasive evi-

dence of value than the Commissioner’s estimate of the

stock’s value. 243 F.3d at 1147-1148. In Estate of Sim-

14

plot, the court of appeals rejected the Tax Court’s con-

clusion,ion the facts of the particular case, that the value

of an estate’s minority stock interest should be in-

creased to reflect its supposed voting power. 249 F.3d

at 1195-1196. The court of appeals did not cite Section

7491 in either case, much less address the issue decided

by the court below.

JPMorgan Chase & Co. v. Commissioner, 458 F.3d

564 (7th Cir. 2006) (JPMorgan), also did not involve

Section 7491. Instead, /PMorgan turned on a different

statute, 26 U.S.C. 446, which prescribes the method of

accounting for taxable income. Section 446 provides

that taxable income shall be computed using the method

of accounting that the taxpayer regularly uses to keep

his books, but, if that method does not “clearly reflect

income, then the computation of taxable income shall be

made under such method as, in the opinion of the [Com-

missioner,}] does clearly reflect income.” 26 U.S.C.

446(b). The court of appeals held that, once the Tax

Court determined that the taxpayer’s method of ac-

counting for interest swaps did not clearly reflect in-

come, Section 446(b) required the Tax Court to use the

method proposed by the Commissioner unless that

method was “clearly unlawful” or “plainly arbitrary.”

JPMorgan, 458 F.3d at 570 (citation omitted). The court

of appeals’ interpretation of Section 446 has little, if any,

bearing on how to interpret the entirely different stat-

ute at issue in this case.”

* Petitioners also mistakenly contend (Pet. 20-22) that this Court

should grant the petition for a writ of certiorari to resolve a conflict be-

tween the decision of the court below and two Tax Court decisions,

Kohler v. Commissioner, 92 T.C.M. (CCH) 48 (2006), nonaq., 2008-9

I.R.B. 482, and Forste v. Commissioner, 85 T.C.M. (CCH) 1146 (2003).

A purported conflict between the decision of a court of appeals and trial

15

_ ah CONCLUSION

The petition for a writ of certiorari should be denied.

Respectfully submitted.

PAUL D. CLEMENT

Solicitor General

NATHAN J. HOCHMAN

Assistant Attorney General

RICHARD FARBER

STEVEN W. PARKS

Attorneys

May 2008

court decisions is not a basis for review by this Court. See Sup. Ct. R.

10. In any event, neither Kohler nor Forste applied a rule that, when-

ever the Tax Court concludes that the Commissioner bears the burden

of proof on valuation of property under Section 7491, the court must

accept the taxpayer’s valuation, however erroneous, once the court has

rejected the valuation proposed by the Commissioner. In Kohler, for

example, the Tax Court carefully scrutinized the valuation of the tax-

payer's experts, whom it found “thoughtful and credible.” 92 T.C.M.

(CCH) at 56. The court accepted the taxpayer’s proposed valuation

only “{al]fter carefully reviewing and considering ail of the evidence.”

Ibid. (emphasis added).