Tax Court Examines Discount on Restricted Shares in Massad Estate Case

Tax Court Examines Discount on Restricted Shares in Massad Estate Case

Estate of David G. Massad, Deceased, Pamela A. Massad, Personal Representative, Petitioner(s) v. Commissioner of Internal Revenue, Respondent

June 20, 2024

The case was heard in April of 2024 in front of Judge Kathleen Kerrigan, with the primary issue being the lack of marketability discount applicable to a large block of public stock in a bank called Berkshire Hills Bancorp, Inc. (BHLB). The shares traded on the New York Stock Exchange. In addition to being a large block, the shares were further subject to insider trading restrictions and blackout windows.

The decedent had built his wealth by owning car dealerships before changing industries and purchasing a struggling bank called Commerce Bank in 1993. After a successful turnaround, the bank was acquired by BHLB. At his death on December 28, 2018, the decedent held an 11.6% interest (5,400,558 shares) in BHLB shares, which were subject to selling and voting restrictions under a shareholder agreement and the Securities Act of 1933.

The IRS argued for a large deficiency based on an adjusted value that valued the restricted shares at an almost identical value to the non-restricted shares. The IRS value was arrived at by simply taking the high/low average trading price for the day, with the application of a 1.7% discount for lack of liquidity. The estate argued that the IRS’ upward adjustment of $19.4 million was “based on erroneous factual and legal premises and conclusions, as well as incomplete information.” Instead, the estate argued for a 15% discount for lack of marketability as supported with a valuation from a professional appraisal firm.

The Decision

In a June 5 order, Judge Kerrigan entered a stipulated decision stating the taxpayer owed a deficiency of $1.14 million rather than the $7.77 million originally sought by the IRS. The conclusion reached was very close to the discount determined by the estate’s expert.

Since this was a stipulated decision, the full narrative of the case is not readily available. Nevertheless, the brief analysis that is in the public domain demonstrates that the IRS drastically understated the appropriate discount applicable to the illiquid shares, while the taxpayer put forth a professionally done analysis considering all applicable factors and using data to support its conclusion.