More on Bergquist: Red flags ‘waving wildly in the wind’

BVWireIssue #71-2
August 13, 2008

As mentioned in last week’s BVWire™, the IRS recently advocated—and convinced the Tax Court to adopt—combined discounts for lack of marketability and lack of control amounting to nearly 65% in determining the fair market value for a medical service corporation.  In Bergquist v. Commissioner (July 28, 2008), several doctors took charitable deductions for donating their stock in the medical corporation, which was slated for conversion to a tax-exempt organization.  They relied on an appraisal that used the going concern premise to value the stock at nearly $402 per share—but under the same facts, the IRS assumed a liquidation value for the company, and determined the stock was worth approximately $37 per share, including the substantial discounts.  According to Judge Swift’s opinion, the taxpayers’ appraisers neglected to explain “how or why they selected a going concern premise of value, and they conveniently and incredibly make no mention of the scheduled . . . consolidation.”

Commentators are already taking about Bergquists’ potential impact on estate planners and appraisers alike.  “Estate planners who work with valuation discounts will be encouraged by the valuation analysis employed by the government’s expert and the adoption of that analysis by the [Tax Court],” according to Steve Leimberg’s Estate Planning Newsletter (#1329, August 8, 2008).  Notably—although the published opinion does not name the IRS expert, a current press release reveals that it was Texas-based HSSK healthcare expert (and frequent BVResources contributor) Don Barbo.

At the same time, appraisers could be discouraged by the hefty, 40% accuracy-related penalties that the Tax Court assessed on the taxpayers.  A recent e-report from the McIntyre School of Commerce Foundation, for example, notes that “each of the six doctors was promised a ‘150K’ benefit.  Instead. . . the doctors ended up paying taxes, penalties and interest of over $100,000 each.  When they were told not to involve their personal tax advisors in the meeting, the red flags were waving wildly in the wind.  While the appraisal firm also bears some responsibility for an assumption the court deemed highly unreasonable, the doctors and their advisors should also have been forewarned of future problems.” 

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