Kress gift tax case signifies approval of tax affecting—at least in federal district court

Kress v. United States, 2019 U.S. Dist. LEXIS 49850; 2019 WL 1352944 (March 26, 2019)

One aspect that has valuators excited about the Kress v. United States gift tax case is that the federal court that ruled on the taxpayers’ challenge to the IRS’s gift tax assessment accepted valuations from both parties’ experts that applied a C corporation tax rate to value minority shares in an S corporation. In a rare moment of unity, the adjudicating court and both sides agreed that S corp tax affecting was an appropriate practice.

 At the same time, the parties’ experts disagreed on the question of whether there was any quantifiable advantage related to S corp status that added value to the minority shareholder’s stock as well as on a range of other valuation issues. 

The subject of the dispute was a successful, family-owned packaging company with headquarters in Wisconsin that was organized as an S corp. As part of their estate planning, the taxpayers gifted minority shares in the company to junior family members. The IRS claimed that, for three tax years, the taxpayers paid insufficient gift taxes. 

Rather than litigate the matter in U.S. Tax Court, the taxpayers, presumably for strategic reasons, opted to amend their tax returns, pay the IRS assessed deficiencies, and then sue the federal government in federal district court (Eastern District of Wisconsin) for a refund.

At trial, both parties presented testimony from highly qualified valuation experts. The taxpayer retained two experts: a primary expert, who used the market approach, and a second expert, who valued the company based on a combination of market and income approaches. The government ‘s expert also used a combination but gave most of the weight to the market approach.

Read more about the valuation testimony and the court’s assessment here.

Also, for a follow-up discussion of the scope of this federal district court decision, click here.