Piercing the Partition Fiction for Fractional Interest Valuation Schiller Law Group, A Professional Law Corporation Attorneys Orinda California

Using Compensation Planning to Achieve
Estate Planning Goals for Closely-Held Business Owners:
Opportunities for Accountants, Appraisers and Other Professionals[1]

The Service recently announced an initiative to increase audits of excessive compensation for business owners and executives. News of this initiative will likely prompt practitioners to review compensation planning with their clients who own closely-held businesses. Such a review could present practitioners, closely-held business owners and their planning team with new opportunities to apply wealth transfer and preservation strategies to the owner's tax and business succession planning.

In November 2003, the Service announced its intention to increase the audit efforts of its Large and Mid-Size Business Division (LMSB) with regard to excessive executive compensation. [2] THE LMSB covers 200,000 companies with greater than $10 million in assets. The purpose of this article is to consider effective tax and business planning strategies to minimize or avoid the likelihood of an audit on this issue, to highlight the payment of dividends (particularly extraordinary and non-recurring dividends) for closely-held corporations as a planning opportunity and to adapt significant elements of the reasonable compensation analysis to support the business owner's estate planning. The value-added potential for the business owner through the exploitation of these strategies provides attorneys, accountants, life insurance agents and appraisers with expanded service opportunities for their clients.

Owners of closely-held businesses may be upset with the possibility of an audit for, and challenge to, the owner's compensation given that the news if filled with articles about the multi-tens of millions of dollars, or more, of compensation and perks paid to executives of publicly traded corporations (some of which are not all that successful) without noticeable challenge by the Service. However, publicly traded corporations and those corporations that utilize compensation committees and board review, particularly those with substantial outside guidance, theoretically establish reasonable compensation, which apparently allows the Service to be less concerned with those corporations.[3] In contrast, it is the closely-held nature of closely-held business that makes such corporations targets of the Service's scrutiny. The concern of the Service and courts, whether justified or not, is that there is greater opportunity for potential gamesmanship in the closely-held context.[4]

How can the closely-held business arm itself for a reasonable compensation challenge? And then, how can the elements of the reasonable compensation analysis be used not only for the justification of the owner's compensation, but for the betterment of his or her estate plan, business succession plan, and overall tax savings? First, we need to examine the factors considered in a reasonable compensation audit.

There is no legislative or regulatory authority that fixes reasonable compensation at a specific dollar amount. The inquiry is entirely factual. Internal Revenue Manual Section 4.35.2.5.2.2 (3-1-02) lists several factors that Service personnel are directed to take into account in determining the reasonableness of an executive's compensation. These factors include: (1) the nature of the employee's duties; (2) the employee's background and experience; (3) the employee's knowledge of the business; (4) the size of the business; (5) the employee's contribution to the profit making; (6) the amount of time the employee devoted to the business; (7) the economic conditions in general and locally; (8) the character and amount of responsibility given to the employee; (9) the time of year when compensation is determined; (10) whether alleged compensation is in reality, in whole or in part, payment for a business or assets acquired; and (11) the amount paid by similar size businesses in the same area to equally qualified employees for similar services.

Treasury Regulation §1.162-7(b)(3) provides that "[t]he circumstances to be taken into consideration are those existing at the date when the contract for services was made, not those existing at the date when the contract is questioned."[5] This admonition reveals the trap that befalls many closely-held business owners; namely, setting compensation, in particular bonuses, at the end of the year when profits are known and cash-flow needs can be determined. The obvious solution to avoiding this trap is to set compensation, including bonus criteria, early in the year, preferably at the beginning of the year, before the services are rendered.

This regulation also creates the presumption that reasonable compensation "is only such an amount that would ordinarily be paid for like services by like enterprises under like circumstances." The other significant consideration set forth in Treasury Regulation §1.162-7(b)(3) is the comparability of the executive's compensation to that which would ordinarily be paid to an employee of similar businesses providing similar services. Similarity of businesses is a matter of judgment that involves the balancing of unique characteristics. However, the availability of reasonably priced studies of compensation of employees of similarly sized and purposed corporations can provide some guidance for amounts paid in similar job classifications within a geographic area. The Service will generally accept that compensation that falls below the 98^th percentile in a particular study are within the Service's informal guideline for reasonable compensation. From the author's experience, the Service uses the same compensation studies, and arrives at the same, or similar, maximum reasonable compensation amounts, as those concluded by private compensation firms. Baker, Thomsen Associates, a compensation consulting firm, provide a basic report of this nature for about $300. Such a report creates a helpful framework to determine whether or not additional considerations are required to support an executive's compensation. It is important to realize that, while such studies are important, they should not be the end of the evaluation.

The compensation studies used by the Service and executive compensation consultants may leave a substantial gap between the compensation desired by the successful closely-held business owner and reasonable compensation as shown in the study, even at the 98^th percentile. It is in these circumstances that forward planning and consistency offer the best possibility of sustaining compensation as reasonable. Planning ahead and developing as much support as possible for the various factors applied by courts in determining reasonable compensation is essential to winning the case for the closely-held business owner, executive or other employee whose compensation exceeds the statistical guidelines.

What factors do courts use in determining reasonable compensation? Depending upon the Circuit and the court, anywhere from five to fourteen factors are cited in the reasonable compensation analysis.

For example, Herold Marketing Associates, Inc. v. Comr.[6] is just one case that cites fourteen factors in determining whether compensation is reasonable: (1) the employee's qualifications; (2) the nature, extent and scope of the employee's work; (3) the size and complexities of the employer's business; (4) the comparison of salaries paid with employer's net and gross income; (5) the prevailing general economic conditions; (6) the comparison of salaries with distributions and retained earnings; (7) the prevailing rates of compensation for comparable positions in comparable concerns; (8) the employer's salary policy as to all employees; (9) the amount of compensation paid to the particular employee in previous years; (10) the employer's financial condition; (11) whether the employer and the employee dealt at arm's length; (12) whether the employee guaranteed the employer's debt; (13) whether the employer offered a pension plan or profit-sharing plan to its employees; and (14) whether the employee was reimbursed by the employer for business expenses that the employee paid personally.

Although there is considerable overlap with the factors listed in the Internal Revenue Manual, the Herold Marketing list is not identical. For example, the Herold Marketing list includes consideration of guarantees, expense reimbursements, previous years compensation (considered not only from a consistency standpoint but also whether the corporation is attempting to make up for the executive's under-compensation in prior years), business complexity and the financial condition of the company. The Internal Revenue Manual places greater immediate attention to the procedures of determining compensation, such as timing and whether the compensation was determined at arm's length, although courts also consider these factors.

These same factors, with varying degrees of emphasis, are synthesized into five general elements by Elliotts, Inc. v. Comr:[7]: (1) the employee's role in the company; (2) a comparison of the employee's salary with those paid by similar companies for similar services; (3) the character and condition of the company; (4) potential conflicts of interest (i.e., is the employee also the controlling shareholder of the company) and (5) evidence of an internal inconsistency in a company's treatment of payments to employees.

The Circuit Courts do not all use identical criteria. From an audit-through-litigation perspective, the practitioner should be mindful of the particular standards applied by the Circuit Court with jurisdiction over a given client's tax controversy.

Courts Becoming Less Likely to Substitute Business Judgment Exercised by the Owner

Several recent cases have reflected a lessening of the tendency to substitute the court's judgment for the business judgment exercised by the business owner. However, this general observation, of course, has various exceptions as the courts struggle with the particular facts of a case.

In Alpha Medical, Inc. v. Comr.[8], the taxpayer prevailed because of the employee's extraordinary time commitment, his crucial role in developing the sales and growth of the company, the need to remedy his under-compensation in prior years and his leadership in helping the company adapt to change. The evidence of the employee's contributions supported the deductibility of his compensation despite the fact that the employee was the sole owner of the corporation and his compensation was several times greater than the maximum in the compensation study.

Likewise, Damron Auto Parts Inc. v. Comr.[9] upheld an executive's compensation that included a 10% bonus on wholesale sales because the executive had been underpaid in prior years.

The Tax Court, in Mad Auto Wrecking, Inc. v. Comr.[10] made the following astute observation of the contribution made by the business founder:

What is reasonable to the entrepreneur/employee often may not be to the tax collector. * * * The term "reasonable", however, must reflect the intrinsic value of employees in the broadest and most comprehensive sense.

The dynamic nature of business, the entrepreneurial spirit, and the dedication of purpose all play a role in the composition of reasonable compensation. We must not rigidly apply form over substance when we measure one's contribution to the success of his or her business.

As the cases above, as well as many others, indicate, the courts respect the multi-tasked nature of jobs performed by the closely-held business owner.[11]

However, the Service has occasionally prevailed, notwithstanding the extraordinary efforts of the multi-tasked entrepreneur, his loan guarantees, his value-added service, etc., when the courts found that the facts did not support the compensation paid.[12]

Because owners of closely-held businesses often seek compensation greatly in excess of that which executives of publicly traded companies with the similar job titles are typically paid, it may be necessary to look beyond the factors typically considered by courts in order to justify a closely-held business owner's compensation. In some cases, the profitability of a company, particularly if the company retains a reasonable amount of net income, may justify the compensation paid even if that compensation is significantly greater than amounts that would normally be viewed as reasonable under the traditional reasonable compensation salary approach.

The author recently concluded an income tax audit involving a situation in which the founder of the business received compensation greater than four times the maximum indicated by the Service's compensation studies. The founder was the company's President, its primary sales force and the overseer of complex technical systems with greater than 120 employees. This fabrication company retained net income of 9% of sales and experienced tremendous growth over several recent years. The company did not pay dividends. This increase in value as a result of its retained earnings enabled the corporation to complete the audit on a no-change basis. Two experienced auditors, as well as local District Counsel and IRS Counsel in Washington, reviewed the taxpayer's brief and appraisals. The key to the audit success was(i) the logic of the financial statement and balance sheet, (ii) the fact that the corporation provided a fair return to the investors through reasonable retained earnings and (iii) the determination that an adjustment to compensation would necessitate revisions to the company's financial statements (particularly to net income) that would have been seriously out of line with reasonable investment expectations.

This example and the cases cited in the discussion following provide examples of useful and innovative applications of fair market value appraisals. Not only can this use of appraisals be of great value to business owners, their accountants and their attorneys, this application may be particularly appealing to appraisers considering that the declining significance of the estate tax threatens to cause a constriction of the appraisal industry.

Several important cases and courts have considered the financial return to the investor as a key element in the compensation controversy. As stated in Elliotts, Inc. v. Comr.[13] and followed in Alpha Medical[14]:

If the company's earnings on equity remain at a level that would satisfy an independent investor, there is a strong indication that management is providing compensable services and that profits are not being siphoned out of the company disguised as salary.

This factor raises the following key question, "Would the objective investor be satisfied with the return (in either dividends or growth) experienced by the company?" As will be noted, some courts have considered this to be the most important factor, even going so far as to give its affirmative reply a presumption of reasonableness.

In Dexsil Corporation v. IRS[15], the Second Circuit reversed the Tax Court decision because of its failure to apply the objective investor test. Citing the Ninth Circuit decision in Elliotts, Inc., the Court stated:

Under the hypothetical or independent investor test, courts assess the reasonableness of compensation in terms of "[w]hether an inactive, independent investor would be willing to compensate the employee as he was compensated. The nature and quality of the services should be considered, as well as the effect of those services on the return the investor is seeing on his investment."

In Exacto Spring Corp. v. IRS,[16] the Seventh Circuit declared the supremacy of the independent investor test. It applied the independent investor test as the presumed method of determination of the reasonableness of compensation. After referencing the trend rooted in the Ninth Circuit's decision in Elliotts, Inc., the Seventh Circuit stated:

There is, fortunately, an indirect market test, as recognized by the Internal Revenue Service's expert witness. A corporation can be conceptualized as a contract in which the owner of assets hires a person to manage them. The owner pays the manager a salary and in exchange the manager works to increase the value of the assets that have been entrusted to his management; that increase can be expressed as a rate of return to the owner's investment. The higher the rate of return (adjusted for risk) that a manager can generate, the greater the salary he can command. If the rate of return is extremely high, it will be difficult to prove that the manager is being overpaid, for it will be implausible that if he quit if his salary was cut, and he was replaced by a lower-paid manager, the owner would be better off; it would be killing the goose that lays the golden egg. The Service's expert believed that investors in a firm like Exacto would expect a 13 percent return on their investment. Presumably they would be delighted with more. They would be OVERJOYED to receive a return more than 50 percent greater than they expected -- and 20 percent, the return that the Tax Court found that investors in Exacto had obtained, is more than 50 percent greater than the benchmark return of 13 percent.

When, notwithstanding the CEO's "exorbitant" salary (as it might appear to a judge or other modestly paid official), the investors in his company are obtaining a far higher return than they had any reason to expect, his salary is presumptively reasonable. We say "presumptively" because we can imagine cases in which the return, though very high, is not due to the CEO's exertions. Suppose Exacto had been an unprofitable company that suddenly learned that its factory was sitting on an oil field, and when oil revenues started to pour in its owner raised his salary from $50,000 a year to $1.3 million. The presumption of reasonableness would be rebutted. There is no suggestion of anything of that sort here and likewise no suggestion that Mr. Heitz was merely the titular chief executive and the company was actually run by someone else, which would be another basis for rebuttal.

However, in Eberl's Claim Service, Inc. v. Comr., [17] a case in which the corporation retained few earnings, the Tenth Circuit considered the objective investor and multi-element tests, but nevertheless reduced the executive's compensation below that actually paid. However, Nevertheless, the financial success of the company for its investors still contributed to allowed compensation in excess of the reasonable compensation as determined by the Service's expert.

The Service has ruled that the lack of dividends does not compel a determination of a disguised divided.[18] Yet, the lack of retained earnings coupled with a lack of dividends would be an adverse factor under the Eberl's Claim criteria.

The following is a checklist of practical steps that owners of a closely-held business and/or their advisors may take if the owner/employee wishes to receive compensation in excess of the compensation study indicators:

Because the net income of an S corporation is taxed to the shareholders, the mistaken belief exists that excess compensation issues cannot arise with S corporations.

In fact, an S election will be terminated if the facts and circumstances indicate that the compensation arrangement is a scheme to circumvent the rule allowing only one class of stock.[21] If such a scheme is not found to exist, excessive compensation will be treated as a non-deductible payment, but will not create a second class of stock.[22] However, the nondeductible payment could create taxable compensation to the employee without a corresponding deduction for the S corporation. Yet, if the payment is treated as a distribution, it would likely not be taxable to the recipient. The corporation would then likely be required to pay a "make-up" distribution to the other shareholders in order to protect the one class of stock rule. In Private Letter Ruling 200125091 (June 25, 2001, the Service ruled that disproportionate distributions would not terminate S corporation status if the corporation's governing documents conferred identical rights to all shareholders and if remedial distributions were used to correct the disproportionate distributions. This private letter ruling and Treasury Regulation §1.1361-1(l)(2)(vi) establish the requirement for a make-up distributions once excess compensation is determined. The foregoing adjustment should not be relevant when the overpaid executive is the sole shareholder.

Under Regulation §1.1361-1(b)(4), incentive compensation and other arrangements do not create a second class of stock if the following conditions exist with respect to the arrangement: (i) it does not convey the right to vote; (ii) it is an unfunded and unsecured promise to pay money or property in the future; (iii) it is issued to the employee or independent contractor in connection with the performance of services (whether or not performed for the corporation) and is not excessive by reference to the services performed; and (iv) it is issued pursuant to a plan with respect to which the employee or independent contractor is not taxed currently on income.

The estate tax is becoming virtually irrelevant to almost all taxpayers. By 2010, the Service predicts that a total of 18,200 estate tax returns will be filed (this amount is reduced from its original estimate of 20,000 in a projection published in 2003) as compared with the 121,000 returns filed for the year 2001.[23] The Service predicts that 38,300 estate tax returns will be filed in 2008, reflecting a 67.52% decrease in estate tax return filings between 2001 and 2008. At the same time, the Service anticipates an increase in gift tax returns from 279,000 filed in 2001 to 354,800 to be filed in 2008. The Service also expects that estate tax will be paid only in about 0.3% of all estates when the $3.5 million estate tax exclusion amount is fully phased in for decedents dying in 2009.

The author has extensively reviewed underlying IRS data evidencing the declining estate tax return filings and the impact of traditional estate planning strategies within this changing tax environment.[24] The declining significance of estate tax, even without considering full repeal, signals the increased importance of income tax planning.

For example, until December 31, 2008, shareholders of C Corporations have a unique planning opportunity, particularly with closely-held family businesses, to shield significant income from federal income, estate and gift taxation. The Jobs and Growth Tax Relief Reconciliation Act of 2003 ("2003 Tax Act") reduced the income tax rate on qualified dividends to 15% (even lower for taxpayers with very modest incomes) when paid to an individual or other non-corporate shareholders.

As outlined below, this reduction in dividend tax rates offers an additional opportunity to practitioners to apply effective income tax strategies for the closely-held business owner in the context of estate planning.

We have already noted two important estate planning benefits of the excessive compensation analysis. First, the opportunity to potentially increase the compensation of family members, to the extent prudent for business purposes, through the development of job descriptions and classifications that support increased compensation under the compensation studies. Second, valuation appraisals that may be used to support compensation in excess of that established by compensation studies, may also be used for planning gifts of minority ownership interests.

Now we note another potential benefit. The historically low dividend rate creates an additional opportunity to solve several potential problems, particularly for the successful C Corporation and its principal shareholders of a family business, such as: (1) the reduction of accumulated earnings in anticipation of the re-institution of the re-establishment of the oppressive accumulated earnings tax after 2008 and (2) the transfer of extensive value to children, grandchildren or other family members at a very low rate of taxation. The 15% income tax rate compares favorably to the 45%+ gift/estate tax rate on transfers to children and the combined gift/estate plus GST tax rate of 69.75% that applies on non-exempt transfers to grandchildren.

Consider the following example (which excludes state income tax elements): C Corporation is owned 60% by H and W (the parents), 30% by H and W's Child and 10% by a trust for the benefit of H and W's grandchildren. The corporation has earnings of $6 million a year before bonuses and a gross profit percentage of nearly 50%.

Approach 1: H and W receive very substantial compensation (which may cause issues of excessive compensation) from C Corporation, which has $1 million in taxable income after the payment of bonuses of $5 million to family members ($4.5 million to H and W) and $500,000 to Child. Other employees receive reasonable bonuses as well.

Result: Corporation receives a deduction of $5 million on the bonuses assuming the Service does not find them unreasonable. The shareholders pay income tax at the 35% rate, and the corporation pays income tax on its $1 million of taxable income at the 34% rate. The parent's estate is increased by $2,925,000 (the after tax net on the $4.5 million bonus) and the Child's estate is increased by $325,000 (the after tax net on the $500,000 bonus). The trust for grandchildren receives no immediate benefit, although the value of the corporation will likely be enhanced from the retention of $1 million of taxable income. Unless H and W do further estate planning, they will pay an estate tax of $1,316,250 on the net-after tax bonus, not including growth from investment of that bonus.

Approach 2: Corporation reduces the bonus payable to H and W from $4.5 million to $2.5 million (which lessens the likelihood of an excessive compensation audit). The taxable income of C Corporation increases to $3 million (as a result of the $2 million reduction in bonuses) after the payment of bonuses of $3 million to family members ($2.5 million to H and W and $500,000 to Child). Other employees continue to receive reasonable bonuses. C Corporation declares a $2 million dividend, which is allocated $1.2 million to H and W, $600,000 to Child and $200,000 to the trust for the grandchildren.

Result: There is no gift on the dividend to Child and the trust for the grandchildren. The corporation pays an additional $680,000 of tax (34% of $2 million) on its additional taxable income. Because of the 1% marginal rate difference between the corporate rate (34%) and individual rate (35%), a $30,000 income savings results. Additionally, the shareholders save $420,000 in income taxes (the 15% dividend rate versus the 35% income rate on the $2 million dividend), plus the $30,000 tax savings because of the corporate rate difference from element, for a total of $450,000 of income tax savings. This reduces the overall federal income tax cost to $230,000 ($680,000 less $450,000) on the $2 million dividend. Finally, there is an estate tax savings of $374,000 from the payment of the dividend to Child and the trust for grandchildren ($800,000 times .85 [net the dividend tax] = $680,000 times .45 = $374,000).

Corporations that do not historically pay dividends and that may not want to pay them as a matter of ongoing policy should consider language in the directors' resolution that addresses the unique and non-recurring nature of the dividend declaration and payment. Such a declaration may be of great benefit in later years when dividends are not again paid to help support lower estate and gift tax values. The payment of dividends, particularly on an ongoing basis, could result in a reduced marketability discount and potentially greater value for the ownership of a minority stock position, which could have a negative impact on a closely-held business owner's estate plan.[25]

Accordingly, the resolution should reference unique factors, such as unusually high sales for the year, an anticipated reduction in expenditures in the next year, the desire to experiment with a trial dividend program, consideration of balancing return for certain owners, unique appreciation, receipts of a non-recurring nature and reduced capital expenditure plans for upcoming years.

Actual savings will vary. For instance, a child or grandchild at reduced income rates may have some dividends taxed at the 10% rate. Additionally, cash that is retained in a corporation is not necessarily valued on a dollar-for-dollar basis because of discounts that can apply in the valuation of minority interests. This consideration would reduce the estate tax savings illustrated. Furthermore, the increase in the estates of the children or grandchildren provide some estate-planning "freeze" benefit to the parents and allow appreciation to be enjoyed earlier in the estates of the younger generation. This factor would increase the tax savings illustrated. Finally, state income tax and AMT considerations should be factored into any running of the numbers for a particular client.

In conclusion, now that the Service has announced its intention to increase audits of mid-size and larger closely-held corporations, practitioners should revisit compensation planning issues with their clients. Factors relevant to compensation issues may open new and, perhaps, unique opportunities in their estate plan and business succession plan. At the same, time, the financial-based elements of the compensation analysis may open up new opportunities for appraisers and other professionals to provide value-added benefit to the closely-held business owner. Finally, the next few years provide a unique window to utilize historically-low dividend rates to utilize wealth transfer planning to generate estate tax savings without incurring further gift tax liability. This can be accomplished by enabling the owner of a closely-held business to reduce his or her estate through the payment of dividends.

[1] Copyright. Keith Schiller. July, 2004. Keith Schiller, Esq., Schiller Law Group, a Professional Law Corporation. Orinda, CA.

[2] News Quarterly. ABA Section of Taxation, Spring, 2004; Tax Talk Today, Nov. 13, 2003, available at www.taxtalktoday.tv/.

[3] The deduction for remuneration of a "covered employee" of a publicly held corporation that would otherwise be deductible is limited to $1 million per year. The limit does not modify the general requirement that compensation be reasonable. Code §162(m). A corporation is publicly traded if it has a class of common stock that must be registered under the Securities Exchange Act of 1934. For any taxable year, an individual is a covered employee if: (1) he or she is the corporation's CEO (or acting in that capacity) as of the close of the taxable year; or (2) the employee's total compensation must be reported for the taxable year under the 1934 Act because he or she is one of the four highest compensated officers for that year (other than the CEO). Regs. §1.162-27(c)(2).

[4] Mayson Mfg. Co. v. Comr. 178 F.2d 115, 119 (6th Cir. 1949); see, O.S.C. & Assoc., Inc. v. Comr., 187 F.3d 1116 (9th Cir. 1999), cert. denied, 120 S. Ct. 1831 (2000). W.D. Haden Co. v. Comr. 37 T.C. 512 (1961); Martens v. Comr. 58 T.C.M. 1288 (1990)

[5] Treas. Reg. §1.162-7(b)(3).

[6]T.C. Memo. 1999-26.

[7] 716 F.2d 1241 (9^th Cir. 1983).

[8] 172 F.3d 942 (6th Cir. 1999), rev'g 74 T.C.M. 893 (1997).

[9] T.C. Memo. 2001-197.

[10] 69 T.C.M. 2330, 2334 (1995).

[11] See, e.g., Shaffstall v. U. S. (1986, DC IN) 86-2 USTC ¶9566; Comtec Systems, Inc. v. Comr., T.C. Memo. 1995-4; Home Interiors & Gifts v. Comr., 73 TC 1142, 1162.

[12] See, e.g, O.S.C. & Assoc., Inc. v. Comr., supra; Owensby & Kritikos, Inc. v. Comr., 50 T.C.M. 29, 42 (1985), aff'd, 819 F.2d 1315 (5th Cir. 1987); Eberl's Claim Service, Inc. v. Comr. 77 T.C.M. 2336 (1999), aff'd, 249 F.3d 994 (10th Cir. 2001).

[13] Supra, note 7.

[14] Supra, note 8.

[15] 147 F.3d 96 (2^nd Cir. 1998), rev'g T.C. Memo 1995-135.

[16] 196 F.3d 833 (7^th Cir. 1999), rev'g 75 T.C.M.2522 (1998).

[17] 249 F.3d 994 (10th Cir. 2001), aff'g T.C. Memo. 1999-211.

[18] Rev. Rul. 79-8, 1979-1 C.B. 2.

[19] Executives in community property states should be mindful that income from or growth of a separate property business may be community property if the executive's labor generates the income or supports the growth of the separate property business.

[20] See, Ledford Constr. Co. v. Comr. 36 T.C.M. 858 (1977); Rev. Rul. 58-90, 1958-1 C.B. 88; American Foundry v. Comr. 59 T.C. 231 (1972), aff'd in part and rev'd in part, 536 F.2d 289 (9th Cir. 1976).

[21] Code §1361.

[22] Regs. §1.1361-1(l)(2)(vi), Ex. 3.

[23] 2001 IRS Data Book¸ Excel ver. 4. March, 2002; Projections of Returns That Will Be Filed in Calendar Years 2004-2010: Article (PDF). Table (Excel ver. 4): 1. SOI Bulletin, Winter 2003-2004. April 2004.

[24] Schiller, IRS Studies Augur a New Age in Estate Planning: Change Your Practice or Become Obsolete, Tax Management Estates, Gifts and Trusts Journal (November 13, 2003).

[25] Rev. Rul. 59-60,1959-1 C.B. 237; Estate of Newhouse v. Comr.,94 T.C. 193 (1990) nonacq., 1991-2 C.B 1;Mandelbaum v. Comr., 69 T.C.M. 2852 (1995), aff'd, 91 F.3d 124 (3d Cir. 1996)(dividend policy as a factor in the determination of the marketability discount).