Any deficiency attributable to any error or delay by an officer or employee of the Internal Revenue Service (acting in his official capacity) in performing a ministerial act, or (2) any payment of any tax described in section 6212(a) to the extent that any error or delay in such payment is attributable to such officer or employee being erroneous or dilatory in performing a ministerial act.8

Section 6211 defines a deficiency as the amount by which the tax imposed by subtitle A or B, or chapter 41, 42, 43, or 44 of the Code exceeds the amount of such tax shown on the taxpayer's return and the amount of such tax previously assessed. Section 6212(a) also refers to deficiencies with respect to taxes imposed by subtitle A or B, or chapter 41, 42, 43, or 44 of the Code. These subtitles and chapters of the Code cover taxes on: Income; estates, gifts, and certain generation-skipping transfers; public charities; private foundations and certain other tax-exempt organizations; qualified pension, etc., plans; and qualified investment entities. See Speers v. United States, 38 Fed. Cl. 197, 201 (1997). The Code contains the provisions related to employment taxes in subtitle C, and subtitle C is not mentioned in section 6211 or section 6212(a).

Based on our review of section 6404(e) and the Code sections it references, we hold that the Commissioner lacks the authority to abate assessments of interest on employment taxes under section 6404(e). As the Commissioner has no authority to abate assessments of interest on employment taxes under section 6404(e), the Commissioner could not have committed an abuse of discretion-a person with no discretion simply cannot abuse it.

In 1996, sec. 6404(e) was amended under sec. 301 of the Taxpayer Bill of Rights 2, Pub. L. 104-168, 110 Stat. 1452, 1457 (1996), to permit respondent to abate interest with respect to an "unreasonable" error or delay resulting from “managerial” and ministerial acts. The new provision applies to interest accruing with respect to deficiencies or payments for tax years beginning after July 30, 1996; therefore, it is not applicable to the case at bar.

To reflect the foregoing,

Decision will be entered for respondent.

ESTATE OF HARRIETT R. MELLINGER, DECEASED, HUGH V. HUNTER AND WELLS FARGO BANK, CO-EXECUTORS, PETITIONER v. COMMISSIONER OF INTERNAL

REVENUE, RESPONDENT

Docket No. 6663–97.

Filed January 26, 1999.

P died owning 2,460,580 shares of stock that were held in her revocable trust. The stock was included in her estate pursuant to sec. 2033, I.R.C. Also included in her estate, pursuant to sec. 2044, I.R.C., were 2,460,580 shares of the same stock held in a QTIP trust established by decedent's predeceased spouse. Held, the shares of stock should not merge or be aggregated for Federal estate tax valuation purposes.

Robert B. Martin, Jr., for petitioner.

Donna F. Herbert and Mark A. Weiner, for respondent.

COHEN, Chief Judge: Respondent determined a deficiency of $10,574,983 in the Federal estate tax of the estate of Harriett R. Mellinger (decedent). After concessions by the parties, the issues remaining for decision are:

(1) Whether section 2044 requires aggregation, for valuation purposes, of the stock held in a trust established by decedent's predeceased spouse under section 2056(b)(7) with stock held in decedent's revocable trust and with stock held outright by decedent; and

(2) if section 2044 does not require aggregation, the fair market value of the stock at decedent's death.

Unless otherwise indicated, all section references are to the Internal Revenue Code in effect as of the date of decedent's death, and all Rule references are to the Tax Court Rules of Practice and Procedure.

FINDINGS OF FACT

Some of the facts have been stipulated, and the facts set forth in the stipulation are incorporated in our findings by this reference. Decedent died testate on April 18, 1993 (the valuation date), a resident of Los Angeles, California.

Decedent was the widow of Frederick N. Mellinger (Mr. Mellinger), founder of Frederick's of Hollywood, Inc. (FOH).

Stock Ownership and Valuations

Prior to Mr. Mellinger's death, decedent and Mr. Mellinger were husband and wife and owned as community property 4,921,160 shares of the common stock of FOH. Such shares were held under the terms of a revocable inter vivos trust known as the Frederick N. Mellinger Family Trust (the family trust).

On the death of Mr. Mellinger, under the terms of the family trust, Mr. Mellinger left his community property interest of 2,460,580 shares of FOH stock in an irrevocable marital trust (the QTIP trust) for the benefit of decedent during her lifetime. Property in the QTIP trust was treated in Mr. Mellinger's estate as "qualified terminable interest property" (QTIP property) for which a marital deduction was claimed pursuant to section 2056(b)(7). Hugh V. Hunter (Hunter) and Wells Fargo Bank (referred to collectively as cotrustees and coexecutors herein) were the cotrustees of the QTIP trust after decedent's death. Under the terms of the QTIP trust, decedent received a qualified income interest for her lifetime. Upon decedent's death, the QTIP trust provided for the payment of certain periodic and lump sums to the adult children of Mr. Mellinger and decedent, until they attained the age of 65, in addition to certain periodic lump-sum payments to the grandchildren of Mr. Mellinger and decedent, until they attained the age of 30. Upon the final payment to the children and grandchildren, the QTIP trust property was to be distributed equally to certain tax-exempt charitable organizations. On the valuation date, the QTIP trust held 2,460,580 shares of FOH stock, which then constituted 27.8671 percent of the issued and outstanding stock of FOH.

After Mr. Mellinger's death, decedent removed her share of the community property, 2,460,580 common shares of FOH, from the family trust and contributed it to the revocable trust that she established to be known as the Harriett R. Mellinger Revocable Trust (the Harriett trust). The stock that was held by the Harriett trust also constituted 27.8671 percent of the issued and outstanding stock of FOH. Hunter and Wells Fargo Bank were designated as cotrustees. Under

the terms of the Harriett trust, upon the death of decedent, the cotrustees were directed to make certain specific gifts and to sell decedent's personal residence and distribute the sales proceeds to decedent's children. The balance of the Harriett trust was to be held for distribution with certain annual and periodic cash amounts to be paid to the children and specified grandchildren. Upon the death of such children and grandchildren, the remaining trust estate was to be distributed equally to certain charitable organizations. At the valuation date, decedent also owned 50 shares of FOH outright.

Hunter and Wells Fargo Bank (coexecutors) filed a U.S. Estate (and Generation-Skipping Transfer) Tax Return, Form 706, for decedent's estate on January 18, 1994. On the return, the FOH shares in the Harriett trust were reported at a value of $11,786,178 or $4.79 per share, and the FOH shares in the QTIP trust, includable in decedent's estate pursuant to section 2044, were reported at a value of $11,786,178 or $4.79 per share. In valuing the shares of FOH, the coexecutors consulted legal counsel and obtained two appraisals. The appraisers that were employed by the coexecutors were the investment firm of Janney Montgomery Scott, Inc. (JMS), and the appraisal firm of Willamette Management Associates (WMA). Each appraisal valued the shares as separate 27.8671-percent interests in FOH. The appraisals concluded that, because of the size of the blocks under consideration in relation to the trading volume, petitioner would not be able to sell the holdings in the public market without incurring a blockage discount. The WMA appraisal valued the shares at $4.85 per share, after applying a 30-percent discount, and the JMS appraisal valued the shares at $4.79, after applying a 31-percent discount. Based on the appraisals, the estate valued the shares on its U.S. Estate Tax Return at $4.79 per share.

In October 1993, FOH filed an amendment to its certificate of incorporation (amendment) resulting in a redesignation of the existing capital stock as class A capital stock and the creation of a new class of nonvoting capital stock designated as class B capital stock. In connection with the amendment, the existing FOH capital stock was split at the rate of 1 share for every 3 shares outstanding. At the same time, FOH declared a distribution in the form of a dividend of 2 shares of class B capital stock for every 1 share of class A capital stock

outstanding on October 15, 1993. The effect of the amendment, split, and dividend was to convert each 3 existing shares of FOH capital stock into 1 share of class A capital stock and 2 shares of class B capital stock. As a consequence of the recapitalization of FOH, except as set forth below, all rights to vote were exclusively vested in the class A capital stock. The holders of class B capital stock were entitled to vote separately as a class only with respect to designated issues. In addition, the trusts were prohibited from selling any of the class B capital stock for a 2-year period at a price of less than $7.00 per share.

Subsequently, the coexecutors undertook efforts to sell the FOH stock that was held by the trusts in order to raise funds for the payment of Federal estate tax and to provide funds for the required distributions. Accordingly, pursuant to a stock purchase agreement dated January 12, 1994, the FOH Employee Stock Ownership Plan (FOH ESOP) purchased 357,143 shares of FOH class A capital stock from the Harriett trust for $4.20 per share, a 30-percent discount from the closing price of such stock on the New York Stock Exchange (NYSE) on January 10, 1994. In establishing the value of these shares, the FOH ESOP relied on an appraisal by JMS that expressed an opinion that the appropriate discount for the transaction was between 29 and 31 percent. Thereafter, on February 18, 1994, the Harriett trust sold, in a market transaction on the NYSE, in conformity with Securities and Exchange Commission (SEC) rule 144, 29,500 shares of FOH class B capital stock at a price of $4.875 per share. The aggregate gross proceeds of the sale received by the Harriett trust were $147,492.71.

On June 14, 1996, FOH, the Harriett trust, and the QTIP trust jointly announced their employment of JMS to sell the FOH stock owned by the trusts and possibly to sell all of the shares of FOH. After holding discussions with numerous prospective purchasers, Knightsbridge Capital Corp. (Knightsbridge) submitted a formal offer to purchase all of the outstanding shares of FOH for not less than $6 and not more than $6.25 per share and to merge with FOH. The offer was dated April 9, 1997. The board of directors of FOH determined that this merger was in the best interest of FOH and the stockholders and approved the transaction. Thereafter, the board of directors mailed consent agreements to all