The Tax Court’s decision in Estate of Richmond set the appraisal community abuzz. Since then, many have commented on the two most obvious points: 1) the use of the net-asset-value method to determine the value of a holding company whose assets are mostly marketable securities; and 2) discounting for the built-in-capital-gains (BICG) tax by determining the present value of the future BICG tax liability.
But in his recent BVR webinar, Prof. Jack Bogdanski (Lewis & Clark Law School) a long-time observer of the Tax Court, offered a unique perspective beyond the technical details. He called the decision a significant win for the IRS—If not from a numbers point of view, then from a theoretical standpoint.
BICG discount: Even though the court agreed that a BICG liability discount was appropriate, it plainly rejected the estate’s proposed dollar-for-dollar approach, which was based on rulings in the Court of Appeals for the 5th and 11th circuits. The Tax Court could do so, Bogdanski explains, because it is not bound by those decisions. What matters is the law of the circuit in which the executor resides. Here it was Pennsylvania, which is in the 3rd Circuit. Since the 3rd Circuit has not yet ruled on the issue, the Tax Court was free to come up with its own method. Assuming the estate will appeal—which it still has time to do—the 3rd Circuit would weigh in. But, Bogdanski stresses, don’t count on its overturning the Tax Court on this issue, particularly since the 2nd and 6th Circuits have disagreed with the 5th Circuit.
Executor shopping? Bogdanski reminded listeners of the need to know the law of the circuit in which the case will be heard. But he goes further. What sounds like “crazy advice,” he says, nevertheless has a ring of truth, The estate may want to check whether there is a plausible executor in a “friendlier” jurisdiction.
Problematic judicial administration: Bogdanski finds one aspect of the court’s discussion of the accuracy-related penalty particularly troublesome. The estate, it said, never explained why it changed its tune, relying first on a valuation that claimed the decedent’s interest was worth a mere $3.1 million and later at trial relying on another valuation that stated a higher, $5 million, value. In other words, Bogdanski says, it held the estate’s concession making against it. This, he says, is bad judicial administration because it discourages reasonable behavior, in this case, moving toward the IRS as the facts developed.
Freelancing: The court’s approach does not make for a lot of precision, Bogdanski observes. When it came to establishing the BICG discount, it rejected the actual 70-year holding period of the stock, but relied on either a 20- or 30-year holding period without explaining where these numbers came from. It also used four discount rates, “employed in various contexts in this case,” it said, to arrive at a range of present values for the BICG. As Bogdanski puts it, the Tax Court at times “freelances” as valuator. Even when both sides offer expert appraisals, certain judges prefer to craft their own appraisals. This can be frustrating for litigants, Bogdanski acknowledges. In Richmond, he said, the court’s approach makes for a “wild and woolly opinion.”
Find a digest and the court’s opinion of Estate of Richmond, 2014 Tax Ct. Memo LEXIS 26 (Feb. 11, 2014), at BVLaw. A recording and transcript of this webinar can be pre-ordered here.