“There were many important details in Kohler, including the fact that between the date of death and the alternate valuation date (six months later), the company issued a prospectus to shareholders and executed a reorganization,” says Robert Schweihs (Willamette Management Associates), who served as one of the taxpayer’s original appraisers. “Shareholders decided whether to accept, in exchange for their original shares, either 1) cash or 2) new shares which had different characteristics than the original shares. This exchange of shares qualified as a tax-free exchange under IRC Section 368. Whether an exchange of shares qualifies as a tax-free exchange is a legal question,” Schweihs adds, “and not a valuation question.”
However, Schweihs makes the following observations:
- The IRS nonacquiescence in Kohler means that the IRS will not automatically accept discounts that are attributable to characteristics of new shares held on the alternate date that are different than the characteristics of shares (for which the new shares were exchanged) that were held on the date of death.
- If the IRS were to acquiesce to automatically accept such a discount, then tax planners might encourage, for example, provisions for such in wills and corporate governance documents.
- In situations where the characteristics of shares have changed between the date of death and the alternate valuation date, analysts should be careful if they are concluding a different discount on the two dates; and if the analyst does conclude a different discount, then he/she should not cite Kohler as authority.
“The results of Kohler that were favorable to the taxpayer were the result of the many important details of the situation,” Schweihs says, including “the effective presentation of those details by the client, the attorneys and the appraiser, particularly when the analysis was 1) completed contemporaneously with the two valuation dates (which sandwiched the reorganization); and 2) at the time of the trial.”
Please let us know
if you have any comments about this article or enhancements you would like to see.