Estate of Richmond, 2014 Tax Ct. Memo LEXIS 26 (Feb. 11, 2014)
The Tax Court recently made big news in the business valuation community when it reviewed the estate's challenge to an IRS deficiency action in connection with the decedent's minority interest in a family-owned investment holding company. The business's assets mostly were publicly traded securities. The story took off when the estate used a draft report from an accountant who was not a certified appraiser to declare that the interest was worth only $3.15 million and the IRS auditor claimed that its value was $9 million. At trial, both parties presented different valuators whose methodologies critically diverged, with the government's expert using an NAV approach and the estate's expert applying the capitalization-of-dividends method. The latter also provided an alternative NAV-based valuation that essentially modified elements of the IRS expert’s valuation. What stands out is the use of a 100% BICG discount instead of the 15% rate the IRS expert proposed.
The Tax Court provided detailed reasons why this case demanded the NAV approach and why a dollar-for-dollar BICG reduction was inappropriate. It also explained what constitutes "reasonable cause" for underpayment and thus avoidance of an accuracy-related penalty and why the estate in this case was unable to make a convincing case for it (hint: failure to engage a certified appraiser).