T.C. Memo. 2019-144



                        UNITED STATES TAX COURT



    WILLIAM CAVALLARO, DONOR, Petitioner v. COMMISSIONER OF
                INTERNAL REVENUE, Respondent*

  PATRICIA A. CAVALLARO, DONOR, Petitioner v. COMMISSIONER OF
                 INTERNAL REVENUE, Respondent



      Docket Nos. 3300-11, 3354-11.                Filed October 24, 2019.



             Ps owned KT Corp., and their three sons owned CS Corp. Ps
      and their sons merged the two in 1995, and CS Corp. was the
      surviving entity. In valuing the two companies for purposes of the
      merger, they incorrectly assumed that CS Corp. owned intangibles
      that instead KT Corp. owned. Ps therefore accepted a dispropor-
      tionately low number of shares in the new company, and their sons
      received a disproportionately high number of shares. Ps thereby
      made disguised gifts to their sons consisting of portions of the value
      of KT Corp.



      *
       This opinion supplements our previously filed opinion Cavallaro v.
Commissioner, T.C. Memo. 2014-189, aff’d in part, rev’d in part and remanded,

(1st Cir. 2016).
                                         -2-

[*2]          R issued notices of deficiency to Ps determining for each a gift
       tax liability. In Cavallaro v. Commissioner, T.C. Memo. 2014-189,
       we held that Ps had failed to meet their burden to prove the respective
       values of KT Corp. and CS Corp. On the basis of that failure, and by
       treating R’s valuation of CS Corp. as a concession (compared to the
       zero value in the notice of deficiency), we held that Ps made gifts to
       their sons in 1995 totaling $29.7 million. Ps appealed. The Court of
       Appeals affirmed our factual findings and our holding that Ps had the
       burden of proof; but the court held that we erred in our statement of
       the content of Ps’ burden of proof and concluded that we should have
       considered Ps’ arguments rebutting R’s expert witness testimony on
       the subject of valuation, in order to determine whether the resulting
       determination was arbitrary and excessive. On remand we now
       consider Ps’ arguments concerning R’s expert’s report.

             Held: R’s valuation expert’s error caused him to overvalue the
       disguised gifts by $6.9 million and rendered R’s valuation arbitrary
       and excessive.

             Held, further, after correcting for that error, we determine that
       Ps gave their sons gifts valued at a total of $22.8 million.



       Matthew D. Lerner, for petitioners.

       Carina J. Campobasso and Derek W. Kelley, for respondent.



  SUPPLEMENTAL MEMORANDUM FINDINGS OF FACT AND OPINION


       GUSTAFSON, Judge: These cases are before us on remand from the Court

of Appeals for the First Circuit for reconsideration on the issue of valuation.
                                        -3-

[*3] See Cavallaro v. Commissioner (“Cavallaro III”), 

(1st Cir. 2016),

aff’g in part, rev’g in part and remanding Cavallaro v. Commissioner (“Cavallaro

II”), T.C. Memo. 2014-189.1 At the trial of these cases the Commissioner

presented the report of an expert witness to assert, for purposes of sections 2501

and 2502,2 the proposed value of disguised gifts that William Cavallaro and

Patricia Cavallaro had made to their sons. The question before us on this remand

is whether the Commissioner’s expert’s valuation is “arbitrary and excessive”. If

it is, then we are tasked with determining the proper amounts of the Cavallaros’

tax liabilities.

                               FINDINGS OF FACT

       Many of the relevant facts underlying these cases are set forth in

Cavallaro II and Cavallaro III, and we assume familiarity with those opinions. We

restate and summarize certain relevant facts below.




       1
        Before petitioning this Court for redetermination of their gift tax
deficiencies, petitioners were involved in litigation related to the examination by
the Internal Revenue Service (“IRS”), which resulted in Cavallaro v. United
States, 

(1st Cir. 2002) (affirming the denial of petitioners’ motion to
quash a third-party recordkeeper summons).
       2
       Unless otherwise indicated, all section references are to the Internal
Revenue Code (26 U.S.C.), as amended and in effect for the relevant year, and all
references to Rules are to the Tax Court Rules of Practice and Procedure.
                                        -4-

[*4] The Cavallaro family, Knight and Camelot, and the merger

      In 1979 the Cavallaros incorporated Knight Tool Co., Inc. (“Knight”), a

machine shop and contract manufacturer. Mrs. Cavallaro owned 51% of Knight’s

stock, and Mr. Cavallaro owned 49%. The Cavallaros’ three sons (Ken, Paul, and

James) worked in the family business at various times. Mr. Cavallaro and his son

Ken worked with Knight engineers and employees to develop a liquid-adhesive

dispensing machine prototype, which came to be known as the “CAM/A LOT”

machine. Ken, Paul, and James incorporated Camelot Systems, Inc. (“Camelot”).

Knight manufactured the CAM/A LOT machines, and Camelot sold them.

      In 1994 the Cavallaros’ accountants at Ernst & Young (“E&Y”) reviewed

the situations of the Cavallaros, Knight, and Camelot. E&Y accountant Lawrence

Goodman signed a letter dated December 15, 1994,3 recommending the merger of

the two companies. He projected that in such a merger “the majority of the shares

(possibly as high as 85%) [will] go[] to Bill and Patti.” E&Y valued the merged

company as being worth between $70 and $75 million. However, attorneys at

      3
        Mr. Goodman’s letter of December 15, 1994, is useful. It was
commissioned by the Cavallaros and was written by their own accountant, who
was knowledgeable about their affairs and had no bias against them; on the
contrary, he came to his conclusions while pursuing their interests. He wrote his
letter before becoming aware of the attempt (described below) by the Cavallaros’
attorneys at Hale & Dorr to concoct a transfer of intangibles and before the current
controversy arose. In these respects it is very good evidence.
                                       -5-

[*5] Hale & Dorr later advised the Cavallaros to assume (incorrectly) that

Camelot, not Knight, owned the significant intangible assets. The accountants did

not agree with that view, and one of them wrote Mr. Hamel a letter concerning

errors he perceived in the affidavits that were prepared by Hale & Dorr; but

Mr. Hamel responded: “History does not formulate itself, the historian has to give

it form without being discouraged by having to squeeze a few embarrassing facts

into the suitcase by force.” As a result the accountants acquiesced, and E&Y

eventually attributed to Mr. and Mrs. Cavallaro considerably less than 85% of the

stock in the merged company. See Cavallaro II, at *28-*31.

      On December 31, 1995, the Cavallaros and their sons merged Knight and

Camelot. In that merger Mrs. Cavallaro received 20 shares of the new company,

Mr. Cavallaro received 18 shares, and 54 shares each were distributed to Ken,

Paul, and James. Thus, Mr. and Mrs. Cavallaro received 19% of the shares, not

the “the majority of the shares (possibly as high as 85%)” that E&Y had foreseen.

Rather, it was the Cavallaros’ sons who received the majority of the shares of the

new company--i.e., 81% in the aggregate--which allegedly represented the pre-

merger value of Camelot.
                                         -6-

[*6] Examination and notices of deficiency

      The IRS conducted a gift tax examination relating to the Cavallaros, and on

November 18, 2010, the IRS issued statutory notices of deficiency to Mr.

Cavallaro and Mrs. Cavallaro for the tax year 1995, determining that, by means of

the merger, each of the parents had made a taxable gift of $23,085,000 to their

sons, resulting in gift tax liabilities. The Cavallaros timely petitioned this Court

for redetermination of their gift tax deficiencies.

Valuations in Cavallaro II

      During trial Mr. and Mrs. Cavallaro entered into evidence two reports on

the issue of valuation--the E&Y valuation performed by Timothy Maio in 1996

(valuing the combined companies as of October 31, 1995), on which the post-

merger share distribution had been based, and the valuation prepared for trial in

Cavallaro II by John Murphy of Atlantic Management Co. Mr. Maio had valued

the combined company at $70 to $75 million, and Mr. Murphy valued the

combined company at $72.8 million. Both assumed (contrary to our factual

findings in Cavallaro II) that Camelot had owned the CAM/A LOT technology

and that Knight had been a contractor for Camelot.

      The Commissioner retained Marc Bello of Edelstein & Co. to determine the

1995 fair market values of Knight and Camelot. His report assumed (correctly,
                                        -7-

[*7] per our findings in Cavallaro II) that Knight had owned the significant

intangible assets. Mr. Bello adjusted for the non-arm’s-length nature of the two

companies and then valued the combined entities using a discounted cashflow

(“DCF”) method. Mr. Bello concluded that the total value of the merged entity

was $64.5 million (i.e., less than the value as reckoned by Mr. Maio and

Mr. Murphy), that Knight’s value was $41.9 million (i.e., 65% of the total), and

that Camelot’s value was $22.6 million (i.e., 35% of the total). On the basis of

Mr. Bello’s analysis, the Commissioner argued that the December 31, 1995,

merger of Knight and Camelot and the disproportionate distribution of shares

resulted in a gift to the Cavallaros’ sons totaling $29.7 million. The Cavallaros

cross-examined Mr. Bello, challenged his methodology, and alleged that his

valuation was flawed for a number of reasons.

Holding in Cavallaro II

      In Cavallaro II we found that Mr. and Mrs. Cavallaro’s corporation Knight,

rather than their sons’ corporation Camelot, owned the technology; that “the 1995

merger transaction was notably lacking in arm’s length character”; that the merger

of the two companies with the issuance of 81% of the stock of the new combined

entity to the sons reflected a presumption that Camelot had owned the technology;

that the 81%-19% allocation of the stock was therefore not in accord with the
                                          -8-

[*8] actual relative values of the two companies; and that the transaction therefore

resulted in disguised gifts to the sons. See Cavallaro II, at *33-*34, *54-*56, *60-

*61.

       In Cavallaro II we held in favor of the Commissioner on the basis of the

Cavallaros’ failure to meet their burden of proof. (They put on no evidence as to

the relative values of the two corporations under the correct assumption that

Knight, not Camelot, owned the intangibles.) Consequently, we did not rule on

the merits of the Cavallaros’ arguments concerning the Bello valuation. 

*60-*61 (citing Graham v. Commissioner, 

, 308 (1984), aff’d, 

(3d Cir. 1985)). We held that on December 31, 1995, Mr. and Mrs.

Cavallaro made gifts to their sons totaling $29.7 million4 (i.e., the gift tax liability

that was based on the Bello valuation). 

The First Circuit’s opinion in Cavallaro III

       The Cavallaros appealed Cavallaro II to the U.S. Court of Appeals for the

First Circuit, alleging that this Court erred in three respects: (1) not shifting the

burden of proof to the Commissioner; (2) concluding Knight owned the




       4
       Our prior opinion rounded down the valuation of $29,670,000 to
“$29.6 million”. However, the closer rounded value is $29.7 million, which we
employ in this opinion.
                                         -9-

[*9] intangibles; and (3) misstating the Cavallaros’ burden of proof and failing to

consider flaws in the Bello valuation. See generally Cavallaro III.

      The Court of Appeals held that we were correct in not shifting the burden of

proof to the Commissioner, see Cavallaro 

, and affirmed our

findings concerning the property ownership issue, 

The Court of

Appeals then considered the Cavallaros’ argument that we had erred in our

statement that they had “the burden of proof to show the proper amount of their

tax liability”. 

Cavallaro II, at *60. The Cavallaros alleged that this

“‘legal error’ * * * led to another: the court refused to consider their evidence that

the Bello valuation was ‘fatally flawed.’” Cavallaro 

. On this

issue the Court of Appeals agreed with the Cavallaros and found that we misstated

the content of their burden. 

The Court of Appeals stated:

      [W]e remand so that the Tax Court can evaluate the Cavallaros’
      arguments that the Bello valuation had methodological flaws that
      made it arbitrary and excessive. If the Tax Court determines that the
      Commissioner’s assessment was arbitrary, then it must determine the
      proper amount of tax liability for itself. * * * The court is free to
      accept in whole or in part, or reject entirely, the expert opinions
      presented by the parties on the subject. * * *

                    *     *      *      *      *     *      *

      The extent of any further briefing, hearings, or evidence is left to the
      Tax Court’s sound discretion. [

; fn. ref. omitted.]
                                         - 10 -

[*10] The Cavallaros’ arguments regarding the Bello valuation

         In accordance with the directive of the Court of Appeals, we ordered further

briefing from the parties on whether the Commissioner’s valuation was “arbitrary

and excessive” and explained that only after resolving that issue would we order

proceedings as to the second issue (the “proper amount of tax liability”). The

Cavallaros took this remand as an occasion not only to renew arguments that we

had not previously addressed but also to renew arguments that we had previously

rejected and to raise new arguments that they had not previously made before this

Court.

                                       OPINION

         In accordance with the directive of the Court of Appeals, we evaluate “the

Cavallaros’ arguments that the Bello valuation had methodological flaws that

made it arbitrary and excessive.” 

so, we ask first whether the

$29.7 million value that the Bello report ascribed to the disguised gift is arbitrary

and excessive; and we find that it is, on account of one error described below in

part II.B.4. That being so, the directive of the Court of Appeals is that we then

“must determine the proper amount of tax liability”; and in making that

determination we are “free to accept in whole or in part, or reject entirely, the

expert opinions presented by the parties on the subject.” 

that, after
                                        - 11 -

[*11] we correct the error mentioned above, the Bello report establishes that the

value is $22.8 million.

I.    Burden of proof

      In general, the IRS’s notice of deficiency is presumed correct, “and the

petitioner has the burden of proving it to be wrong.” Welch v. Helvering, 

, 115 (1933); see also Rule 142(a). The Court of Appeals held that this

Court did not misallocate the burden of proof in Cavallaro II, but it held that we

misstated the content of that burden. Cavallaro 

. Accordingly,

on remand the burden of proof remains with the Cavallaros to prove that the Bello

valuation had methodological flaws that made it arbitrary and excessive. See

Helvering v. Taylor, 

, 515 (1935) (“Unquestionably the burden of

proof is on the taxpayer to show that the Commissioner’s determination is

invalid”). If the Cavallaros show the Commissioner’s determination to be

arbitrary and excessive, then we cannot sustain that determination and we will

determine the correct amounts of tax. See 

Cavallaro 

-27.

      We therefore turn to the details of the Cavallaros’ critique. The Cavallaros

allege that the Bello valuation is arbitrary for a variety of reasons. In reviewing

their criticisms, we divide the arguments into two groups: arguments raised
                                         - 12 -

[*12] during the trial of Cavallaro II (discussed below in part II), and arguments

not raised during that trial (discussed below in part III).

II.   Arguments raised during the Cavallaro II trial

      In their briefs on remand the Cavallaros renewed and expanded upon

several arguments that they advanced during the trial in Cavallaro II. The renewed

arguments that they raised during trial can be subdivided according to whether

they are consistent with our factual findings in Cavallaro II.

      A.     Arguments inconsistent with the Court’s findings of fact

      Some of the Cavallaros’ arguments on remand are implicitly or explicitly

contrary to our findings of fact in Cavallaro II. For example, on remand the

Cavallaros argue that the Bello valuation erred by not taking into consideration the

1995 “confirmatory” bill of sale that attested to a 1987 transfer between Knight

and Camelot, which the Cavallaros contend on remand is a “cloud on the title”,

and that the Bello valuation therefore erred by not discounting the value of Knight,

because a “buyer considering the acquisition of Knight without Camelot would

have to take into account the risk that Camelot might claim rights to the IP.”

      This argument is based on premises that are explicitly contrary to our

factual finding that “the [1995] ‘confirmatory’ bill of sale confirmed a fiction”,

and “[i]f an unrelated party had purchased Camelot before the merger and had then
                                        - 13 -

[*13] sued Knight to confirm its supposed acquisition of the CAM/A LOT

technology, without doubt that suit would fail.” Cavallaro II, at *55-*56

(emphasis added). The Court of Appeals explicitly affirmed this finding, stating

that the Cavallaros “advanced no argument that would warrant overturning the

Tax Court’s finding that Knight owned all of the CAM/A LOT technology at the

time of the merger.” Cavallaro 

; see also 

record

shows that the Tax Court carefully considered the gravitas of the Camelot name

stamp and other proprietary claims from the viewpoint of an unrelated

purchaser”).

      The consideration and affirmance of our findings on this issue by the Court

of Appeals forecloses all such arguments under the “law of the case” doctrine.

“The law of the case doctrine ‘posits that when a court decides upon a rule of law,

that decision should continue to govern the same issues in subsequent stages in the

same case.’” United States v. Moran, 

, 7 (1st Cir. 2004) (quoting

Arizona v. California, 

, 618 (1983)); see also Field v. Mans, 

, 40 (1st Cir. 1998) (“The law of the case doctrine is a prudential principle that

‘precludes relitigation of the legal issues presented in successive stages of a single

case once those issues have been decided’” (quoting Cohen v. Brown Univ., 

, 167 (1st Cir. 1996))). Under the “mandate rule” (a branch of the law of
                                        - 14 -

[*14] the case doctrine), when the reviewing court prescribes in its mandate that a

court shall proceed in accordance with the opinion of the reviewing court, it

incorporates its opinion into its mandate. Commercial Union Ins. Co. v. Walbrook

Ins. Co., 

, 770 (1st Cir. 1994). “When a case is appealed and

remanded, the decision of the appellate court establishes the law of the case and it

must be followed by the trial court on remand.” United States v. Rivera-Martinez,

, 150 (1st Cir.1991) (quoting 1B J. Moore, J. Lucas, & T. Currier,

Moore’s Federal Practice, para. 0.404[1] (2d ed. 1991)).5

      In Cavallaro III the Court of Appeals did not disturb this Court’s factual

findings in Cavallaro II, and it found we erred only in one respect. We correct that

error in this opinion. Accordingly, on remand we will not allow the Cavallaros to

relitigate the ownership of the CAM/A LOT technology by arguing that there was

a “cloud on the title”,6 nor will we undertake the chore of considering their other


      5
       The law of the case doctrine is not completely inflexible, and may “tolerate
a ‘modicum of residual flexibility’ in exceptional circumstances.” United States v.
Bell, 

, 251 (1st Cir. 1993) (quoting United States v. Rivera-Martinez,

, 151 (1st Cir. 1991)). However, the Cavallaros, who would be the
proponents of reopening these already decided matters, do not argue any of the
exceptions for doing so; and even if they did, none of the exceptions applies to this
case. See 

; 

.
      6
        If the Cavallaros are arguing not that Camelot owned the intangibles but
that prospective buyers of Knight might have supposed that Camelot owned them,
                                                                      (continued...)
                                        - 15 -

[*15] similarly flawed arguments that are contrary to our undisturbed, post-trial

legal conclusions and undisturbed factual findings.

      B.     Arguments raised at trial that are not inconsistent with
             the findings of fact

      Some of the arguments that the Cavallaros advance on remand constitute

arguments (and variations of arguments) that they raised at trial and that do not

contradict our explicit findings. We summarize those arguments here and find that

only one (discussed below in part II.B.4) has merit.

             1.     Mr. Bello’s supposed bias

      The Cavallaros allege that Mr. Bello impermissibly followed the Commis-

sioner’s instructions and that this bias caused him to fail to interview the

principals of Knight and Camelot in his process of valuing them and caused him to

fail to do a site visit. The Cavallaros suggest that these failures caused Mr. Bello

to misunderstand the nature of Knight and Camelot’s businesses, which caused

him to overvalue Knight and undervalue Camelot. The Cavallaros say that Mr.

      6
        (...continued)
and that this supposition would have diminished Knight’s fair market value, then
we reject that argument as well. Such a diminution would have been possible only
if the Cavallaros had publicized the fiction of Camelot’s ownership of the
intangibles. There is no evidence that they did publicize that fiction, and we do
not think that a donor should be able to reduce his gift tax liability by arguing the
hypothetical possibility that the value of his gift was lower because he could have
slandered his own title to the donated assets.
                                         - 16 -

[*16] Bello “acted like a member of Respondent’s trial team, not an expert useful

to this Court in making technical determinations”. They argue that his bias is

further shown by errors in his report.

      We do not agree. The determination of whether expert testimony is helpful

to the trier of fact is a matter within our sound discretion. See Laureys v.

Commissioner, 

, 127 (1989). It is true that an expert is not helpful to

the Court and loses credibility when giving testimony tainted by overzealous

advocacy. Transupport, Inc. v. Commissioner, T.C. Memo. 2016-216, at *17-*18

(collecting cases), aff’d, 

(1st Cir. 2018). An expert who is merely an

advocate of a party’s position does not assist the trier of fact in understanding the

evidence or in determining a fact in issue. 

(citing Sunoco, Inc. v.

Commissioner, 

, 183 (2002), and Snap-Drape, Inc. v. Commissioner,

, 20 (1995), aff’d, 

(5th Cir. 1996)). But Mr. Bello’s

opinion was not tainted by these flaws, and we found his opinion helpful.

      With respect to Mr. Bello’s decisions not to not interview the Cavallaros7

and not to visit Knight and Camelot, he testified credibly that he had enough




      7
         Similarly, Mr. Maio did not rely on interviews with the Cavallaros--but he
still testified that his report was reliable, using information that he received from
financial statements and marketing materials and from meeting with management.
                                       - 17 -

[*17] information to understand the companies,8 so it was not necessary for him to

interview the owners of the business nor to make a site visit many years after the

merger at issue. We conclude that any errors in his report were the result of

mistake and not bias. We are satisfied that Mr. Bello considered the objective and

relevant facts, and we conclude that his valuation was not tainted by overzealous

advocacy. Mr. Bello’s value for the two combined companies (i.e., $64.5 million)

was significantly lower than the corresponding values put forth in both of the

valuations that the Cavallaros relied upon (i.e., $70-75 million and $72.8 million);

and the proportion of that value that Mr. Bello allocated to Knight (i.e., 65%) was

well within (and was not at the top of) the range of values that the Cavallaros’

accountant postulated in 1994 (i.e., 51% to 85%). See Cavallaro II, at *59-*60.

His valuation prompted the Commissioner to make a substantial partial concession

before trial (i.e., his valuation caused the Commissioner to change his position in

      8
       In determining whether a site visit and interviews are necessary, a
“determining factor is the degree to which the analyst was able to gather and
interpret” written material. Shannon P. Pratt & Alina V. Niculita, Valuing a
Business: The Analysis and Appraisal of Closely Held Companies 92 (5th ed.
2008). “The need for the valuation analyst to visit the company facilities and have
personal contact with the company personnel and other related people varies
greatly from one valuation to another. The extent of necessary fieldwork depends
on many things”. 

instance, Mr. Bello did not err in his decision, more
than a decade after the merger, not to visit the companies’ facilities and have
personal contact with their personnel, and that decision was not indicative of any
bias.
                                         - 18 -

[*18] the Cavallaros’ favor). 

not find any merit in the Cavallaros’

arguments to the effect that Mr. Bello was biased.

             2.     The profit reallocation calculation

      On remand the Cavallaros renew their criticisms of the profit reallocation

calculation that Mr. Bello performed before valuing the two companies. They

argue that the profit reallocation was generally unnecessary, and they also criticize

various aspects of it (i.e., his reasons for performing the reallocation, the

reallocation calculation’s methodology, the industry classifications, and the inputs

that he used, such as the Robert Morris Associates (“RMA”) data discussed

below).

      The Cavallaros’ general argument that the profit reallocation was

unnecessary is contrary to our finding that “Knight received less income than it

should have as the manufacturer of the machines, while Camelot received more

than it should have as the mere seller”, 

and to our finding that the

allocation of stock in the merger was not done at arm’s length, 

Mr.

Bello’s profit reallocation corrected for the distortions that we found. According

to an authority cited in both parties’ briefs, such adjustments to the financial

statements “require both analytical judgment and an understanding of accounting

principles. * * * [And an] analyst should be guided by common sense, experience,
                                         - 19 -

[*19] and understanding of the compan[ies] in determining what adjustments

should be made to present the statements in the manner most appropriate for

valuation purposes.” Shannon P. Pratt & Alina V. Niculita, Valuing a Business:

The Analysis and Appraisal of Closely Held Companies 150 (5th ed. 2008).

Mr. Bello’s profit reallocation adjustment reflected such judgment and

understanding--the correct view, as adopted by this Court, that Knight and

Camelot were not dealing with each other at arm’s length, that Knight was

effectively subsidizing Camelot’s operations, and that Knight, rather than

Camelot, owned the CAM/A LOT technology. We conclude not only that this part

of the valuation was not arbitrary but also, in light of our factual findings in

Cavallaro II, that this reallocation (or another similar type of profit normalization

between the two companies) was entirely necessary to yield an accurate valuation

of the two companies. See Cavallaro II, at *16-*19.

      As to the details of Mr. Bello’s profit reallocation adjustment, we are not

persuaded by the Cavallaros’ critique. Mr. Bello sufficiently described the logic

and reasoning underlying the steps he performed in the profit reallocation. His

selection of the industry classification for the companies was well reasoned, and it

was based in part on the industries that the Cavallaros had self-reported. See 

His decision to use the RMA data--a composite source of privately
                                        - 20 -

[*20] owned company data--is supported by the treatise cited by both parties,

which describes the RMA data as “the most popular source of composite company

data, including privately owned company data”. Pratt & 

.

Thus, we conclude that the individual steps undertaken by Mr. Bello as part of the

profit reallocation, the selection of the comparable industries, and the inputs he

used in performing the profit reallocation were not “arbitrary” (except for the

calculation discussed below in part II.A.4).

             3.    The discounted cashflow calculation

      After performing the profit reallocation between Knight and Camelot,

Mr. Bello then valued Camelot and Knight using the DCF method. The

Cavallaros argue that even if the profit reallocation adjustment was justified, and

even if there were no errors in the profit reallocation, Mr. Bello’s use of the DCF

method was arbitrary. As with their arguments concerning the profit reallocation,

the Cavallaros advance criticisms concerning Mr. Bello’s use of the DCF method

generally and also advance specific criticisms of the inputs underlying the DCF

calculation (e.g., the growth rate, the risk premium, and the discount rate).

      With respect to their general arguments about the use of the DCF method to

value Knight and Camelot--two closely held companies--this argument is not

convincing, because this Court has used this methodology to value similar
                                        - 21 -

[*21] property. See, e.g., Estate of Magnin v. Commissioner, T.C. Memo. 2001-

31, 

, 1141 (2001), supplementing T.C. Memo. 1996-25,

rev’d and remanded on other grounds, 

(9th Cir. 1999). Mr. Bello

explained why he considered and rejected alternative methodologies--the asset

accumulation method/going concern; the market approach; the guideline publicly

traded company method; the guideline transaction method; the prior sales method;

and the dividend payout method--and in doing so he was appropriately guided by,

and considered a number of factors set forth in, Rev. Rul. 59-60, 1959-1 C.B. 237.

Mr. Bello explained convincingly why the DCF methodology that he ultimately

selected to determine Knight’s and Camelot’s values was the best valuation

method for this case.

      With respect to the Cavallaros’ arguments concerning the details of

Mr. Bello’s inputs for his DCF analysis, such as the risk premiums, working

capital, depreciation, capital expenditures, and growth rates, we find that these

arguments are also unpersuasive. Keeping in mind the fact that “[a] determination

of fair market value, being a question of fact, will depend upon the circumstances

in each case * * * [and] the fact that valuation is not an exact science”, Rev. Rul.

59-60, sec. 3.01, 1959-1 C.B. at 238, we think that Mr. Bello adequately explained

his rationale behind his selection and use of inputs in his DCF model. His
                                         - 22 -

[*22] explanations demonstrate that he used “the elements of common sense,

informed judgment, and reasonableness” to value Knight and Camelot. Id.; see

26 C.F.R. sec. 25.2512-2(a), (f), Gift Tax Regs.

      In summary, the Cavallaros’ criticisms of and arguments concerning the

Bello valuation generally lack merit. Mr. Bello’s valuation was not arbitrary and

excessive, except in the one respect to which we now turn.

             4.     The 90th percentile profit margin calculation

      When Mr. Bello performed the profit reallocation to normalize the profits

between Knight and Camelot, he “calculated the returns available to Camelot

based on the expected 4.1% return from the RMA [data] and added a [3.4%9]

premium to reflect the strategy of premium pricing and higher profitability

[totaling 7.5%] as of the valuation date which would put Camelot in the top 90%

for all distributors.” The result of this profit allocation calculation is that “both

Camelot and Knight were in the top 10% (90th percentile) with regards to

profitability within their respective industries.”

      On remand, however, the Cavallaros pointed out an error in Mr. Bello’s

attempt to calculate a profit margin that would place each company in the 90th

      9
        The Bello report purported to state this premium as 3.65%, but that was a
typographical error, and the actual intended premium was 3.4%. Thus, the total
for the return that he used in his calculation was 7.5%.
                                        - 23 -

[*23] percentile of its industry. The Cavallaros demonstrated (and the

Commissioner acknowledged) that “[t]he RMA data on which he purports to rely

reflect that a profit margin of 7.5% would place Camelot in the 88.3rd percentile”,

not the 90th. The Cavallaros and the Commissioner subsequently corresponded

about how Mr. Bello had arrived at the 7.5% value, and it became clear that Mr.

Bello had attempted to extrapolate the 90th percentile through a method that was

not statistically reliable. Mr. Bello apparently believed that the underlying data

was unavailable, so in his attempt to arrive at the 90th percentile, he employed a

method that was not statistically correct. He knew only the mean profit margin

from the RMA data, 4.1%. He assumed that the mean profit margin would not be

that far off from the median or 50th percentile, so he inferred that the theoretical

100th percentile would be 8.2% and that the 90th percentile would be 7.38%

(making the 7.5% figure that he employed in the profit reallocation calculation

greater than his inferred 90th percentile).

      The Cavallaros characterize this as Mr. “Bello’s deceptive and erroneous

profit allocation adjustment” and argue that the Court should disregard Mr. Bello’s

expert report and testimony.10 Despite this error, the Commissioner defends

      10
         We agree that the allocation was erroneous, but we do not at all conclude
that it was deceptive. We reject the Cavallaros’ contention that this error rendered
                                                                       (continued...)
                                        - 24 -

[*24] Mr. Bello’s 7.5% profit margin on the grounds that he had intended only to

make Camelot a “top performer” (not specifically in the 90th percentile) and that

even the 88.3rd percentile used in Mr. Bello’s analysis, which allocated 35% of

the overall value to Camelot, was “generous”. But this defense falls flat. At trial

and in his report Mr. Bello was very explicit about his intent to place Camelot in

the 90th percentile; and even on remand, the Commissioner initially reiterated Mr.

Bello’s intention to place Camelot in the 90th percentile.11 But we now know (and

the Commissioner admits) that his method did not do so.

      Using a profit margin in the 88.3rd percentile versus the 90th percentile

makes a substantial difference in the valuation, and therefore a substantial

difference in the value of the disguised gift. Using the correct percentage for the

actual 90th percentile of net income before tax--9.66%, rather than the 7.5% Mr.

Bello used--results in Camelot’s having a value of $29.14 million, or 45% of the

total value of the combined entities (rather than the $22.6 million value that



      10
         (...continued)
his entire valuation arbitrary and excessive, or otherwise unreliable.
      11
         The Commissioner’s brief on remand insisted: “The selection of the 3.4%
premium was not ‘randomly chosen’ * * * as petitioners claim. Rather, as
Mr. Bello explains in his report, it was explicitly chosen to put Camelot in the 90th
percentile of its wholesaler category peers in terms of profitability, giving it a net
profit of 7.5%.” (Emphasis added.)
                                        - 25 -

[*25] represented 35% of the combined entities’ valuation, as Mr. Bello had

computed); and although the Commissioner continues to insist that correction of

this error is not necessary or appropriate, he admits that if one does correct for this

error, the correction reduces the value of the disguised gift by $6.9 million.12

       We find that this one error in this subcalculation was arbitrary, and we

conclude that it did result in an excessive gift tax determination, which must be

corrected.

III.   Arguments made on remand that were not raised at trial

       On remand, the Cavallaros advance a number of arguments that they did not

make during trial in Cavallaro II. We reject these arguments both (a) as untimely

and (b) on their merits.

       A.    The untimeliness of the new arguments on remand

       On appeal the Cavallaros attempted to advance new arguments that they had

not made before this Court. The Court of Appeals refused to consider those




       12
         The parties agree that the substitution of the correct 90th percentile value
for the incorrect value (while simultaneously holding all other aspects of
Mr. Bello’s valuation constant) results in a decrease in the gift’s value by
$6,879,640. In this and subsequent discussions, we do not correct for the
arithmetical discrepancies that result from rounding.
                                         - 26 -

[*26] arguments.13 We see in the same light the Cavallaros’ attempt, now on

remand, to assail the Bello valuation by fact-intensive arguments they did not raise

at trial, and we conclude that they waived those arguments.

      The Court of Appeals for the First Circuit has explained that whether a party

has waived an argument by its failure to raise that argument during an earlier

proceeding depends on whether the party had sufficient incentive to raise the

issue. United States v. Ticchiarelli, 

, 32-33 (1st Cir. 1999) (holding

that in the criminal context, a defendant may not raise a new argument on remand

for resentencing if he or she had reason to raise it initially (citing United States v.


      13
         In particular, the Cavallaros attempted to contend on appeal “that the Tax
Court should have ruled that Camelot owned two crucial property rights at the
time of the merger: the trade secrets embodied in Camelot’s mechanical drawings
and the copyrighted CAM/A LOT operating software.” Cavallaro 

. But in the First Circuit the law “is crystalline: a litigant’s failure to
explicitly raise an issue before the district court forecloses that party from raising
the issue for the first time on appeal.” CMM Cable Rep, Inc. v. Ocean Coast
Props., Inc., 

, 1525-1526 (1st Cir. 1996) (quoting Bos. Beer Co. Ltd.
P’ship v. Slesar Bros. Brewing Co., 

, 180 (1st Cir. 1993)). The Court of
Appeals observed that at trial in Cavallaro II the Tax Court “suggested that
assessing potentially discrete proprietary components of CAM/A LOT might be a
better approach * * * [and] invited the parties to consider such an approach only
insofar as it was helpful to framing the case[s] and clearly warned that such an
approach might not ‘survive the expert testimony.’” Cavallaro 

.
But the Cavallaros ignored our invitation and continued to press their views--only
to later “complain [on appeal] that the Tax Court erroneously treated CAM/ALOT
as a ‘monolithic property interest,’ rather than seeing it for its discrete proprietary
components.” 

                                       - 27 -

[*27] de la Cruz-Paulino, 

, 994 n.5 (1st Cir. 1995) (noting, in the

context of Fed. R. Crim. P. 12, that “government violations of Rule 12(d)(2)

should excuse a defendant’s failure to move to suppress evidence prior to trial

* * * since defendants have no incentive to move to suppress evidence that the

government will not be introducing”))). In 

, the Court

of Appeals explained that “[t]his approach requires a fact-intensive, case-by-case

analysis”, so we examine the facts of the instant case:

      Before and during trial in Cavallaro II, the Cavallaros had every reason (and

every opportunity) to thoroughly analyze and criticize the Bello valuation. Even

though the Commissioner’s case was based on the Bello valuation, the Cavallaros

did not advance several of the criticisms that they now allege on remand. Rather,

during their cross-examination of Mr. Bello, the Cavallaros chose to focus almost

exclusively on criticizing the “foundational premise” of the Bello valuation: that

Knight owned the intangible assets. That is, the Cavallaros put all their chips on

that factual issue, but on that issue we found in favor of the Commissioner. See

Cavallaro 

; Cavallaro II, at *22-*25. Knight did own the

intangible assets. 

remand, the Cavallaros are attempting to avoid the consequence of

their litigation strategy by advancing new criticisms and arguments. Whether the
                                         - 28 -

[*28] Cavallaros omitted certain arguments because they overlooked them or

whether instead such omissions were the result of deliberate choices, the outcome

is the same. The Cavallaros had every opportunity and every incentive to advance

all possible criticisms of the Bello valuation during the trial in Cavallaro II. We

therefore treat the Cavallaros as having waived all arguments that they advance

now for the first time on remand.

      However, the outcome is the same--i.e., we do not sustain these arguments--

even if we consider them on their merits, which we now do.

      B.     The lack of merit of the new arguments on remand

             1.     Discounts

      The most significant of these new arguments that the Cavallaros direct

against the Bello report are its failure to make three discounts, i.e.--

      •      failing to discount the value of Knight because of the risk of losing its
             “key man”, Mr. Cavallaro14 (i.e., failing to apply a “key man”
             discount);

      •      valuing Knight and Camelot without applying a discount for lack of
             control; and


      14
       In Cavallaro II the Cavallaros argued to the contrary: In their post-trial
opening brief in Cavallaro II, they argued that “Knight did not have a key leader,
comparable to Kenneth Cavallaro”; and in their reply brief they argued that
“Kenneth, not William Cavallaro, was the key man in the success of the
dispensing machines”.
                                       - 29 -

[*29] •      valuing Knight and Camelot without applying a discount for lack of
             marketability.

Our caselaw does show that these three discounts are properly used in some

instances, but the Cavallaros’ current argument fails for complete lack of evidence

that those discounts would be necessary, or even appropriate, in this particular

case.15 On the contrary, the only possible inference to be drawn from the record in

this case is that those discounts would not be appropriate here, because neither of

the Cavallaros’ own appraisers, Mr. Maio and Mr. Murphy, made a key man

discount or discounts for lack of control or lack of marketability. The Cavallaros

represented that their appraisers’ valuations were accurate and that they used

“Legally Prescribed and Widely Accepted Methodology”, yet those valuations

made the same omissions for which the Cavallaros now criticize the Bello report.

No expert in this case used those discounts, and no expert testimony criticized the

absence of those discounts. Consequently, one can hardly say, on this record, that

the omission of these discounts from the Bello valuation was an error.




      15
         There are other discounts that appraisers sometimes apply--e.g., discounts
for illiquidity, trapped-in capital gains taxes, “portfolio” (nonhomogeneous
assets), contingent liabilities, voting versus non-voting stock, and blockages, see
generally Pratt & 

--but we would not assume, without
evidence, that the absence of any of them would necessarily invalidate a valuation.
                                         - 30 -

[*30] The Cavallaros’ general argument that prompted the Court of Appeals to

remand this case for further consideration was that the Tax Court “refused to

consider their evidence that the Bello valuation was ‘fatally flawed.’”

Cavallaro 

(emphasis added). Of course, the Court of Appeals

did not insist that, on remand, the Tax Court should sustain arguments about

discounts for which there is no evidence.

      The Court of Appeals did order that, on remand, we “may take new

evidence, including a new expert valuation”. 

(emphasis added). But it

stated that “[t]he extent of any further briefing, hearings, or evidence is left to the

Tax Court’s sound discretion.” 

exercise that discretion not to conduct

a new trial. As we stated in our order directing proceedings on remand--

              Long before the time of the trial of this case, petitioners had
      clear notice of the factual and valuation issues at stake (including
      whether Knight owned the technology, and what the values of the
      companies were if it did). By receipt of Mr. Bello’s report * * *
      [six16] months before trial and the taking of his deposition one month
      before trial, petitioners had every opportunity to develop their
      contention that Mr. Bello’s conclusions were arbitrary and excessive.

             At trial, petitioners had every opportunity to put on evidence on
      all the valuation issues and on all the defects in Mr. Bello’s

      16
         Our order incorrectly stated that the Cavallaros received the Bello report
“three months before trial”, but in fact they received it on February 17, 2012, and
the first day of trial in Cavallaro II was more than six months later on August 27,
2012.
                                        - 31 -

[*31] conclusions. This Court’s legal error that the Court of Appeals
      identified (“the Tax Court did not misallocate the burden of proof at
      trial” but “misstated the content of that burden”, Ct. App. slip op.
      at 21) occurred after trial in the Tax Court’s opinion, not in any ruling
      before or during trial that could have limited petitioners’ ability to put
      on evidence. Anything omitted [at trial] from petitioners’ critique of
      Mr. Bello was the result of their own choices. * * *

      We therefore look to the evidence admitted at the trial already conducted to

determine whether and to what extent the Bello valuation erred by not making the

discounts for key man, lack of control, or lack of marketability, and we find that

there is no evidence of any error in this regard.

               2.   Transfer pricing allocation

      Another new argument on remand that the Cavallaros direct against the

Bello report is that it reallocated profits between Knight and Camelot in a manner

that was inconsistent with transfer pricing regulations. See 26 C.F.R. secs. 1.482-

1(c), 1.482-9(h), 1.6662-6(d), Income Tax Regs.17 But as with the discounts

discussed above in part III.B.1, neither of the Cavallaros’ own appraisers, Mr.

Maio and Mr. Murphy, made adjustments pursuant to the transfer pricing

regulations.




      17
       The Cavallaros argue: “If a taxpayer presented the Bello Report as
evidence to support its transfer pricing, the taxpayer would face penalties for
improper transfer pricing under Treas. Reg. § 1.6662-6.”
                                        - 32 -

[*32] Mr. Maio made no adjustment at all to the allocation of profits between

Knight and Camelot--a serious flaw, already discussed in Cavallaro II, at *34.

Mr. Murphy’s valuation attempted a profit reallocation between the companies by

postulating a “royalty” that Camelot would owe to Knight; but in so doing he

made no showing of compliance with the selection-of-pricing-method principles

of section 482, which the Cavallaros belatedly allege is a standard that should be

applied to valuations in this case. In fact, Mr. Murphy’s valuation violated that

standard, since he argued that no adjustment was necessary but then performed

such an adjustment anyway. This approach contradicts the requirement that a

taxpayer evaluate the potential applicability of specified methods in a manner

consistent with the principles of the best method rule, and reasonably conclude

that the method employed is the “most reliable”. See 26 C.F.R. sec.

1.6662-6(d)(2)(ii)(A), (3)(ii)(B) and (C), Income Tax Regs.

      Section 482 is an income tax provision. It gives the IRS discretion to

allocate income and deductions among taxpayers that are owned or controlled by

the same interests, for purposes of preventing the evasion of taxes or to clearly

reflect income. Broadly speaking, “[t]he purpose of section 482 is to prevent the

artificial shifting of the net incomes of controlled taxpayers by placing controlled

taxpayers on a parity with uncontrolled, unrelated taxpayers”. Sundstrand Corp. &
                                        - 33 -

[*33] Subs. v. Commissioner, 

, 353 (1991). Section 482 is expressly

applicable when the issue in dispute is the income tax of the subject companies,

not the gift tax of their shareholders. This generality does not mean that principles

and authorities under section 482 may never be considered in analogous contexts,

see Crown v. Commissioner, 

, 1064-1065 (1977) (alluded to section

482 principles in a gift tax case involving an interest-free loan), aff’d, 

(7th Cir. 1978); but neither is section 482 the governing authority every time a

gift tax valuation requires allocating profits between two companies--and the

Cavallaros acknowledge that there is no “legal requirement that one purporting to

value a company must always apply transfer pricing principles.” Consequently,

we disagree with the Cavallaros’ argument that “Bello must identify specific

transactions that were conducted off-market and analyze and adjust them” under

section 1.482-1(b)(1), Income Tax Regs.

      However, even if we were to review Mr. Bello’s adjustment under the

section 482 standard, we would hold that it satisfies that standard. “In reviewing

the reasonableness of * * * [the Commissioner’s] allocation under section 482, we

focus on the reasonableness of the result, not the details of the methodology

employed.” Bausch & Lomb, Inc. v. Commissioner, 

, 582 (1989)

(citing Eli Lilly & Co. v. United States, 

, 997 (Ct. Cl. 1967)), aff’d,
                                        - 34 -

[*34] 

(2d Cir. 1991). For the reasons set forth in this opinion (and

especially in the comparison below), we find that Mr. Bello’s result was

reasonable by any standard.

IV.   Determining the proper amounts of tax liabilities

      As is noted above, we explained to the parties, after the Court of Appeals

issued its remand, that we would first determine whether the Bello valuation was

“arbitrary and excessive”, and that thereafter we would “order proceedings as to

the second issue, if appropriate”--i.e., the issue of the correct amounts of the

liabilities. Our proceedings to date have identified the sole error in the Bello

report (i.e., the 90th percentile profit margin calculation); and the parties agree on

the effect of that error (i.e., that the 7.5% profit margin figure places Camelot in

the 88.3rd, rather than the 90th, percentile), and they agree on the effect that the

error had on the amount of the disguised gifts (i.e., that using the correct 90th

percentile profit margin of 9.66% would, in Mr. Bello’s calculation, reduce the

gifts’ total value by $6,879,640). We are therefore able to say now that further

proceedings are not necessary.

      Because of that error, the Commissioner’s valuation was “arbitrary and

excessive”. Under the remand, we therefore may not let that valuation stand but

must determine the proper amounts of the tax liabilities. See Cavallaro III, 842
                                         - 35 -

[*35] F.3d at 27 n.14 (citing Estate of Elkins v. Commissioner, 

(5th

Cir. 2014), aff’g in part, rev’g in part 

(2013)); Taylor v.

Commissioner, 

, 460 (1st Cir. 1971), aff’g T.C. Memo. 1966-29 and

Moss v. Commissioner, T.C. Memo. 1969-213. In making this determination we

are “free to accept in whole or in part, or reject entirely, the expert opinions

presented by the parties on the subject.” See Cavallaro 

(citing

Helvering v. Nat’l Grocery Co., 

, 295 (1938), and Silverman v.

Commissioner, 

, 933 (2d Cir. 1976), aff’g T.C. Memo. 1974-285).

      This one error does not make us unable to use Mr. Bello’s valuation, and it

does not require a new trial or necessitate receiving additional evidence. Rather,

we “accept * * * in part * * * the expert opinion[] presented by * * * [the

Commissioner] on the subject.” Cavallaro 

. On the basis of the

trial record, the Cavallaros’ identification of the error and proposal of a correction,

and the Commissioner’s acceptance of the Cavallaros’ calculation, we are able to

correct for this error and determine the proper amount of the Cavallaros’ gift. The

parties agree that if Mr. Bello had used the correct 90th percentile figure, 9.66%

rather than the 7.5% incorrect value, the value of the disguised gifts would be

reduced from approximately $29.7 million to $22.8 million, a difference of about
                                       - 36 -

[*36] $6.9 million. We conclude that the $22.8 million value is the correct value

of the disguised gifts made by the Cavallaros to their sons.

      As a check on the reliability of the Bello report, as thus corrected, we make

the following simple comparison of the Bello valuation to the valuations relied on

by the Cavallaros:

      First, any such valuation must begin with the value of the combined pre-

merger companies, and a higher value for the combined companies is

disadvantageous to the Cavallaros. Nonetheless, Mr. Bello’s combined value

($64.5 million) is lower than the combined value as reckoned by Mr. Maio in 1996

($70 to $75 million) and by Mr. Murphy in this litigation ($72.8 million). See

Cavallaro II, at *32-*33, *37-*39. In comparison to the Cavallaros’ valuations,

Mr. Bello’s $64.5 million valuation is not at all excessive but is more favorable to

the Cavallaros.

      Second, the valuation must determine what portion of that combined value

is attributable to Knight. Mr. Bello’s conclusion that Knight accounts for 65% of

the combined value is easily within the range that the Cavallaros’ own accountant

(Mr. Goodman from E&Y) estimated in 1994 (before the Cavallaros’ lawyers

postulated a fictitious transfer of the intangibles): Mr. Goodman said that in a

merger “the majority of the shares (possibly as high as 85%) [will] go[] to” the
                                        - 37 -

[*37] owners of Knight (Mr. and Mrs. Cavallaro). Mr. Bello’s 65% represents a

fairly conservative valuation within Mr. Goodman’s range of a “majority” (i.e.,

greater than 50%) to “possibly as high as 85%”.

      Third, numbers derived from the Cavallaros’ personnel suggest a gift

amount not too far off Mr. Bello’s. Where a range of possible values is given, we

take for this purpose the value within that range that is most favorable to the

Cavallaros, as follows: First, to value the combined companies, we use the lower

combined value ($70 million) of Mr. Maio’s range ($70 to $75 million). Next, for

the proportion attributable to Knight, we use the lowest number--51%--from

Mr. Goodman’s range (“majority” to 85%). Since the owners of Knight received

not 51% but only 19% of that value in stock from the merger, we determine that

the Cavallaros forfeited in favor of their sons 32% (i.e., 51% minus 19%) of that

combined value to which they were entitled. We therefore conclude, under this

alternative approach, that they made disguised gifts totaling 32% of

the $70 million combined company, or $22.4 million.18 This amount is reasonably

close to the $22.8 amount of the disguised gifts, as calculated after correcting


      18
         Thus, if we were persuaded that the Bello report was irreparably flawed
(we are not), then we could well find on the basis of other evidence in the existing
trial record (i.e., Mr. Maio and Mr. Goodman’s valuations) that the total value of
the disguised gift was at least $22.4 million.
                                       - 38 -

[*38] Mr. Bello’s computation for the one error that rendered its conclusion

arbitrary and excessive, as we explained above in part II.B.4. The corrected

$22.8 million value of the disguised gift that is yielded by Mr. Bello’s

methodology is less than 2% higher than the $22.4 million amount suggested by

our rough-and-ready use of the numbers derived from the Cavallaros’ own

personnel. We think this further validates our conclusion.

                                  CONCLUSION

      We have considered all of the Cavallaros’ criticisms of the Bello valuation

and, except for their objection to Mr. Bello’s flawed 90th percentile profit

calculation, we find that they are without merit. For the reasons set forth above

and argued by the Commissioner, we find now that, aside from the one previously

discussed exception (which rendered the Commissioner’s valuation “arbitrary and

excessive”), Mr. Bello’s inputs and methodology were reasonable; and we

conclude that his valuation reasonably determined Knight and Camelot’s total

combined fair market value. After correcting for the one error in Mr. Bello’s

allocation of that total value between Knight and Camelot, we conclude that Mr.

and Mrs. Cavallaro made gifts totaling $22.8 million on December 31, 1995.
                                       - 39 -

[*39] So that Mr. and Mrs. Cavallaro’s separate gift tax liabilities can be

recomputed,


                                                     Decisions will be entered under

                                                Rule 155.