Tax Court's Koons decision withstands appeal: DLOM ruling anchors valuation

Estate of Koons v. Commissioner (Koons II), 2017 U.S. App. LEXIS 7415 (April 27, 2017)

The 11th Circuit recently affirmed a four-year-old Tax Court valuation of a revocable trust’s interest in a limited partnership. The linchpin in the valuation was the marketability discount. The parties’ veteran appraisers took significantly different paths to arrive at their DLOM. Concerned with the bigger picture rather than details of methodology, the Tax Court found, and the Court of Appeals agreed, only the IRS expert’s analytical approach and value conclusion made sense.

Contemplating a major asset sale, the decedent, in 2004, formed a limited liability company (LLC) and made a will under which he left the residue of his estate to a revocable trust. At the time of death, the trust owned a 50.5% total interest in the LLC. The decedent’s children who were shareholders in the company conditioned the deal on the LLC’s redemption of their shares. Each child accepted the LLC’s redemption offer before the decedent died. The offers closed shortly after his death. With the redemptions, the trust’s interest increased to almost 71%.

The Internal Revenue Service claimed an estate tax and a generation-skipping transfer deficiency.

In valuing the trust’s interest, the estate’s expert applied a 31.7% DLOM based on a regression analysis. The IRS’s expert claimed that methodology was flawed in this instance. His analysis focused on the characteristics of the LLC and led him to conclude a 7.5% DLOM was appropriate. A key assumption underlying his analysis was that the redemptions would occur and would have the effect of making the revocable trust a majority owner in the LLC. The Tax Court agreed with the proposition that a hypothetical seller would expect to be able to force a distribution of most of the LLC’s assets. The majority interest holder would receive about $140 million in a distribution. Since the estate’s expert assigned a lower value to the interest, the IRS expert’s valuation, which slightly exceeded $140 million, was more credible.

In appealing the case, the estate claimed the Tax Court erred in adopting the IRS expert’s defective valuation. The Court of Appeals saw it differently.

For more on the 11th Circuit’s analysis, click here.

Readers also can find a digest of the Tax Court decision, Estate of Koons v. Commissioner, 2013 Tax Ct. Memo LEXIS 98 (T.C., 2013), as well as the court’s opinion, at BVLaw.