January 12, 2016

The Stout Trust & Estate Practice has a long and rich history when it comes to the public trial of tax controversies. In this regard, most often these matters are tried in U.S. Tax Court but other venues for resolving these disputes include U.S. Federal Districts courts, U.S. Court of Claims and even the U.S. Bankruptcy courts. In addition, these matters, once tried, may find their way to one of the U.S. Circuit Court of Appeals. The current Stout team has experience in all of these courts.

In all, Stout experts have testified in about 20 Tax Court trials dating back to the 1970s. Not all of these cases established any valuation precedent, but many did. Alex Howard, (Managing Director-Houston) is the longest tenured valuation expert in the group. Alex testified in Estate of Harrison v. Commission, 52 TCM (CCH) 1306 (1987). In Harrison, a decedent's partnership interest was valued at a lower value because the decedent's estate did not have the liquidation or dissolution rights that the decedent had prior to death as a general partner. This Tax Court decision gave rise to the so-called “anti-Harrison amendment” now found in Chapter 14 Section 2704 of the IRC.

While Alex testified (or provided an expert report used by the Court) in a number of cases, two of the most notable are Estate of Artemus D. Davis, v. Commissioner, 1998 U.S. Tax Ct. Lexis 35 and Kerr v. Commissioner, 113 TC 449 - 1999. Perhaps the most important issue in Davis was the Tax Court’s allowance of a (modest) reduction in value for the built-in capital gains tax liability of this C corp. The importance of the hypothetical willing buyer and seller was also a central theme of this case.

In Kerr, the taxpayers challenged noticed gift tax deficiencies based on the Commissioner's position that Code § 2704(b) barred them from applying a marketability discount to the values of the interests they transferred. The Tax Court ruled summarily for the taxpayers, holding that the special rule in § 2704(b) did not bar their marketability discounts.  The IRS appealed the decision but the Fifth Circuit upheld it.

Following on the ground work laid by Davis, William H. Frazier (Managing Director-Dallas) testified in Estate of Dunn [301 F.3d 339 (2002), rev. 79 TCM 1337 (2000)] Re: T.C. Memo 2000-12, United States Court of Appeals for the Fifth Circuit. Besides the built-in capital gains tax liability issue, this case was also notable for its length. The decedent died in 1991. The Tax Court trial was held in 1996 and the Court’s decision, not rendered until 2000, allowed only a token recognition of the built-in gain liability. The taxpayers appealed to the Fifth Circuit which reversed the trial court and allowed a complete recognition for this liability when the Asset Approach to value was used. Following on the heels of Dunn, Frazier testified in the Estate of Frazier Jelke, III, Deceased, v. Commissioner of Internal Revenue, United States Tax Court (T.C. Memo 2005-131). The trial court allowed a significant discount for the built-in capital gains tax liability of this C corp but far less than the dollar-for-dollar result of Dunn. The taxpayers appealed to the Eleventh Circuit, which, following Dunn, reversed the trial court and allowed a dollar-for-dollar reduction in value for this liability. (Estate of Frazier Jelke III vs. Commissioner, U.S. Court of Appeals for the 11th Circuit No. 05-15549 filed Nov. 15, 2007 [reversing in part T.C. Memo 2005-131 filed May 31, 2005], United States Court of Appeals for the Eleventh Circuit.)

In 2003, Will testified in McCord v. Commissioner 120 T.C. 358 (2003). This has become one of the most cited cases with respect to valuation discounts in a family limited partnership. In a split-the-baby decision, the Tax Court arrived at a combined discount of 32% for this partnership, which held multiple asset classes. The taxpayer’s combined discount was 42% and the IRS’ expert’s combined discount was 24%. The taxpayer appealed the decision to the Fifth Circuit which reversed the trial court’s ruling and reinstated the original values and discounts. (McCord v. Commissioner, [F. 3rd . No. 03-60700 (5th Cir. August 22, 2006)] Re: McCord v. Commissioner 120 T.C. 358 (2003), United States Court of Appeals for the Fifth Circuit.)  While the appeal was not technically on the valuation discounts, the Fifth Circuit’s opinion disregarded the IRS expert’s report and the IRS arguments regarding valuation. The Frazier report was the only one left standing.

Besides its valuation discount implications, McCord was important for at least two other reasons. First, it set a precedent for the future usage of the defined value clause. A number of other Tax Court cases on this issue have followed, including Hendrix (Hendrix v. Commissioner, T.C. Memo 2011-133.) in which Will Frazier was the taxpayer’s expert. While not testifying at trial, Will’s valuation report was a key factor.

The estate planning found in the McCord case also contained a provision whereby the donees accepted both the gift tax and, more importantly, the Section 2035 (b) estate tax liability (the “net, net gift”). Will Frazier determined the present value of this probability-adjusted liability in his valuation report. The Tax Court opined that the value of this liability could not be ascertained with reasonable certainty and disallowed this reduction in value. The Fifth Circuit disagreed, however, reinstating the value determined.

In 2007, Frazier was asked to determine the net, net gift liability in a gift by Ms. Jean Steinberg to her four daughters. The IRS contested this aspect of the gift transaction and the matter was resolved in the taxpayer’s favor in Tax Court. Steinberg v. Commissioner, 145 T.C. No. 7 (October, 2014).

Stout’s Jeff Risius was the taxpayer’s primary expert witness in the Estate of Franklin Z. Adell v. Commissioner, T.C. Memo. 2014-89. The primary issues were: 1) the valuation implications of the personal goodwill of a key employee of two related companies and 2) the interpretation and valuation implications of a management services agreement between the two companies. There was a wide variance in values determined by the IRS and Risius. The Court ultimately decided upon the original value determined by Stout.

 

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