The IRS Says “Nice Try.” Case Illustrations of Unsuccessful Valuation Efforts
In the context of valuation, legal professionals have at times utilized creative efforts to shield clients from tax exposure. It is perhaps unsurprising therefore that whether the focus involves art, a business, or a charitable donation, some of the most common valuation disputes intersect with taxing authorities. As the cases below illustrate, the IRS is not easily impressed.
In Estate of Kollsman v. Commissioner, the decedent owned two 17th-century Old-Master paintings. The estate’s expert cumulatively valued the paintings at $600,000 while the IRS’s expert cumulatively valued the paintings at $2,600,000. The discrepancy in price resulted from a discount the estate’s expert applied due to the paintings’ dirtiness and the risk involved in cleaning them. In the battle of appraisers, the IRS expert came out on top. The Tax Court agreed with the IRS expert’s valuation and valued the paintings at the price at which property would change hands between a willing buyer and a willing seller. The Court rejected the estate expert’s valuation for several reasons, including the expert’s failure to obtain “reasonable knowledge of the relevant facts” that the dirt was not embedded and that the risk of cleaning the paintings was minimal. The Ninth Circuit affirmed. Estate of Kollsman v. Commissioner of Internal Revenue, 777 Fed. App’x 870 (June 21, 2019).
In Streightoff v. Commissioner, the estate of Frank Streightoff argued against a deficiency determination based on an allegedly undervalued limited liability partnership formed during his lifetime and funded by decedent’s assets. The decedent owned 88.99% of the LLP. On the same day the decedent formed the LLP, he established the Frank D. Streighoff Revocable Trust and assigned all his interest in the LLP to the revocable trust. An assignment of interest was executed. The decedent’s daughter was the manager of the LLP’s general partner, trustee, and executor of the estate. His estate valued his LLP interest by applying discounts for lack of marketability, lack of control, and lack of liquidity. The Tax Court upheld the IRS determination and found that the purported assignment of interest was in name only and the decedent transferred a limited partnership interest solely for estate tax and valuation purposes. The Fifth Circuit affirmed. Estate of Streightoff v. Commissioner of Internal Revenue, 954 F.3d 713 (5th Cir. 2020).
In Dieringer v. Commissioner of Internal Revenue, the decedent’s family owned a closely held corporation. The decedent was vice president and chair of the board and a shareholder. Before the decedent died, the corporation discussed purchasing the decedent’s shares and appraised her shares at $14 million. The decedent died before she sold her shares. After her death, the value of the decedent’s shares was appraised at a lower value than the first appraisal. The second appraiser appraised the shares as if she were a minority interest holder (even though she was a majority interest holder) and included discounts for lack of control and lack of marketability (at a son’s instructions). The corporation decided not to purchase the decedent’s shares, which were then transferred to the family’s foundation pursuant to the decedent’s estate plan. The foundation reported in its tax return that it received a contribution of $1.4 million in shares (based on the second appraisal), but the estate claimed a date-of-death charitable deduction of $18 million (based upon the first appraisal). The court held that the value of the charitable deduction is limited to the value actually received by the foundation and reduced the value that the estate could claim for the charitable deduction. The Ninth Circuit affirmed. Dieringer v. Commissioner of Internal Revenue, 917 F.3d 1135 (9th Cir. 2019).
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