April 1, 2014
In what is being called one of the biggest valuation decisions of 2014, the Tax Court had to determine which of four substantially different valuations of an estate interest in an investment holding company was the closest to the true value.
The court also had to determine whether a 20-percent tax penalty imposed by the IRS was valid.
The case involved the estate of Helen Richmond, who died in December 2005 owning 23.44 percent of her family-owned investment holding company, PHC, whose assets consisted primarily of publicly traded stock. (Estate of Helen P. Richmond, deceased, Amanda Zerbey, Executrix, Petitioner v. Commissioner, T.C. Memo 2014-26, Feb. 11, 2014)
The total assets were found to be worth $52.16 million, of which $45 million was unrealized appreciation with a built-in capital gains (BICG) tax of $18.1 million.
Her estate’s tax return was prepared by a CPA who had done a number of valuation reports, but was not a certified appraiser. Using a capitalization-of-dividends method to determine the value of her holdings, he arrived at a fair market value of $3.15 million.
The IRS auditor, on the other hand, found the value of the estate for tax purposes to be nearly three times that much, $9.2 million.
Both sides hired experts for the Tax Court case. Using a net asset value (NAV) method, the IRS expert came up with a $7.3 million valuation.
The estate’s expert this time was a certified appraiser who used the capitalization-of-dividends method and arrived at a value of $5 million.
The Tax Court found the estate’s contention that PHC’s value should be discounted by 100 percent of the $18,113,083 BICG liability “plainly wrong in a case like this one.” The court decided a $7,817,106 BICG discount was reasonable.
The court determined the discount for lack of control to be 7.75 percent and decided on a marketability discount of 32.1 percent, an average of the discounts of the experts that ranged from 26.4 to 35.6 percent.
In the end, the Tax Court found the value of the decedent’s interest to be $6.5 million, less than the IRS expert’s but substantially more than the estate’s.
The court determined the value of the estate’s interest as follows: