When valuation experts use discounts, they must be substantiated. That goes for the Tax Court as well.
New case: A decedent owned fractional interests in valuable paintings. His estate took a fractional ownership discount for lack of control and marketability and offered valuation reports and testimony of three expert witnesses as proof. The IRS took the position that no discount was allowable but offered no evidence. The Tax Court concluded that a nominal discount of 10% should apply but also offered no evidence to back up that percentage.
The case was appealed to the 5th Circuit. In its ruling, the appellate court rejected both the IRS’s and the Tax Court’s findings on the discount. The court said that the discounts determined by the estate’s experts “are not just the only ones proved in court; they are eminently correct.” The estate was therefore entitled to a refund of more than $14 million.
It’s interesting that the IRS did not prepare any evidence just in case the Tax Court decided that some discount was appropriate (which it did).
Estate of Elkins v. Commissioner, 2014 U.S. App. LEXIS 17882 (5th Cir, Sept. 15, 2014)(overturning Estate of Elkins v. Commissioner, 2013 U.S. Tax Ct. LEXIS 6 (2013))
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