## Facts

- Ringgold Telephone Company, a Georgia telecommunications corporation, was taxed as a C corporation and made a valid S corporation election effective January 1, 2000.
- On the S-election effective date, Ringgold owned a 25% partnership interest in Cellular Radio of Chattanooga (CRC).
- CRC’s principal asset was a 29.54% limited partnership interest in a wireless telecommunications partnership; the interests were not publicly traded and lacked an active market.
- On November 27, 2000, Ringgold sold its 25% CRC interest to BellSouth Mobility, Inc. for $5,220,423.
- For purposes of the corporate-level built-in gains tax under I.R.C. § 1374, Ringgold was required to determine the fair market value (FMV) of its CRC interest as of January 1, 2000.
- Ringgold reported an FMV of $2,980,000, relying primarily on a professional appraisal.
- The IRS determined the January 1, 2000 FMV was $5,220,423 (matching the later sale price), asserted a tax deficiency for 2000, and imposed an accuracy-related penalty under I.R.C. § 6662(a).
- The parties presented competing expert valuations with materially different results; evidence suggested the buyer’s price could reflect strategic motivations and a control-related premium.

## Issues

1. What was the FMV of Ringgold’s 25% CRC partnership interest on January 1, 2000 for purposes of computing built-in gain under I.R.C. § 1374?
2. Whether Ringgold was liable for the I.R.C. § 6662(a) accuracy-related penalty on any resulting underpayment.

## Decision

- The Tax Court rejected both parties’ proposed FMVs and found the January 1, 2000 FMV to be $3,727,142.
- In determining FMV, the court treated the later sale price as probative but discounted it due to buyer-specific considerations, and it gave significant weight to appraisal evidence.
- The court did not sustain the § 6662(a) accuracy-related penalty.

## Legal Principles

- For I.R.C. § 1374 built-in gains tax, FMV is determined as of the first day of the corporation’s first taxable year as an S corporation.
- FMV is the price at which property would change hands between willing buyers and willing sellers, with neither under compulsion and both having reasonable knowledge of relevant facts.
- A subsequent sale close in time to the valuation date is relevant evidence of FMV but is not conclusive where the sale may reflect buyer-specific strategic value or control-related pricing rather than market pricing to a hypothetical buyer.
- The Tax Court may weigh and synthesize competing valuation evidence rather than adopt an expert’s conclusion in full.
- An accuracy-related penalty under § 6662(a) is not imposed where the taxpayer shows reasonable cause and good faith, including reliance on a qualified professional appraisal in a difficult valuation setting.

## Conclusion

The Tax Court determined the S-election date FMV of Ringgold’s partnership interest for § 1374 purposes by weighting appraisal and later-sale evidence, set FMV at $3,727,142, and found no § 6662(a) penalty due to reasonable-cause reliance on professional valuation assistance.


Ringgold Tel. Co. v. Comm’r of Internal Revenue, T.C. Memo. 2010-103, 99 T.C.M. (CCH) 1416 (2010)