Kress appeal still a possibility

BVWireIssue #201-2
June 12, 2019

estate and gift taxation
expert testimony, tax affecting, discount for lack of marketability (DLOM), fair market value, DLOM, s corporation, estate planning

As the valuation community ponders the reach of the recent Kress decision, many eyes are trained on the government’s next move.

To date, the government has not appealed the federal district court’s ruling in favor of the taxpayers. But, as we recently learned, it still has time to file an appeal and may still do so. Although the Eastern District of Wisconsin decided the case on March 26, the court did not issue its judgment until April 30. Typically, if the government is a party to the case, notice of appeal must be filed within 60 days from entry of the judgment (not the court’s decision, as our earlier reporting suggested). For now, the district court’s ruling is precedent in the district it was issued.

In the unlikely event that a valuation analyst out there has not heard of the Kress case, the case is important because, in valuing the minority shares of a family-owned S corporation, experts for both the taxpayers and the government applied a C corp tax rate to the company’s earnings. In addition, the government’s expert applied an S corp premium to account for the tax advantages related to S corp status. The taxpayers’ expert did not make a specific S corp adjustment. The court, with a minor modification, adopted the latter’s value determinations.

Valuators welcome the collective recognition, by the experts and the court, that the tax consequences for pass-through entities must be accounted for in some measure. Accordingly, valuators may use the Kress case to push back against the Internal Revenue Service’s longtime rejection of S corp tax affecting.

A digest of Kress v. United States, 2019 U.S. Dist. LEXIS 49850, 2019 WL 1352944, and the district court’s opinion are available at BVLaw.

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