Bogdanski says BV cases took ‘back seat’ in Tax Court this year

BVWireIssue #135-3
December 17, 2013

The big news, says Prof. Jack Bogdanski (Lewis & Clark Law School) in his seventh annual symposium on developments in federal tax valuation, is that there were hardly any business entity valuation cases. Unlike last year, when cases involving family limited partnerships (FLPs) were aplenty, this year the Internal Revenue Service seems to have poured its resources into challenging taxpayer claims for charitable contribution deductions related to conservation and facade easements. The latter, in particular, have become a mass-marketing tax shelter tool in areas such as New York City and have triggered a vigorous response from the IRS. Litigation typically focuses on whether the appraisal is qualified, whether the expert testimony was admissible under Daubert, and finally—assuming the case is still alive—what the value of the restriction is.

Notable case: This year's notable business valuation case centering on the discount for lack of marketability (DLOM) was Estate of Koons v. Commissioner, 2013 Tax Ct. Memo LEXIS 98 (available at BVLaw). At issue was the fair market value for estate tax inclusion purposes of a 50.5% interest in an FLP that held more than $320 million in cash and only two operating businesses, worth less than $30 million. Just before the decedent's death, his four children had signed off on the LLC's offer to redeem their shares of the company for cash. The transactions closed a few months later.

This fact was critical for purposes of determining the DLOM. While the petitioners' expert argued for a 31.7% rate, the IRS's expert claimed a 7.5% DLOM was appropriate considering the almost certain redemptions would make the decedent’s interest a controlling one, increasing it to approximately 70%. As Prof. Bogdanski explained, this meant that a willing buyer would "get its hands on large amounts of available cash." The court adopted the IRS expert's DLOM and valuation. The takeaway is that experts look at assets inside the company when determining discounts, Prof. Bogdanski noted.

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