Business Valuation Cases in Brief

Abstract

In the Estate of Doris F. Kahn v. CIR, 125 T.C. No. 11 (17 November 2005), the full Tax Court concluded that a discount was not applicable to individual retirement accounts (IRAs) to account for the built-in gains that would be taxable to estate or beneficiaries upon their distribution. It rejected various analogies to lottery payments and closely held stock on the basis of transferability of the underlying assets of the IRA even though the IRA itself was not marketable. In Rayford L. Keller et al. v. United States of America, No. V-02–62 (S.D. Tex., 30 September 2005), the U.S. District Court for the Southern District of Texas denied the government’s motion for summary judgment on the issue of the applicability of sec. 2036 to look through a family limited partnership (FLP). It determined that Kimbell and Strangi require a case-by-case analysis of the facts to determine if the sec. 2036 exception for bona fide sale for adequate and full consideration is satisfied. In Sydney E. Smith, III v. United States of America, No. 02–264 ERIE (W.D. PA, 22 July 2005), a Magistrate for the U.S. District Court of the Western District of Pennsylvania granted a motion for summary judgment applying of sec. 2703 to disregard a buy-sell provision in an FLP agreement, and thus, disregard the valuation decrement occasioned by that provision, where the decedent held the power to unilaterally alter or amend the provision in life. In the Estate of Webster E. Kelley v. CIR, T.C. Memo. 2005–235, the U.S. Tax Court determined the appropriate lack of marketability and minority interest discounts to apply to an interest in a family-limited liability partnership holding cash and certificates of deposit. The minority discount was based on the arithmetic mean of closed-end funds, while the lack of marketability discount was determined based on the Bajaj private placement study as utilized in McCord v. CIR, T.C. 358 (2003) and adjusted 3% for company-specific characteristics. In the Estate of Nora Kolczynski v. CIR, T.C. Memo. 2005–217, the U.S. Tax Court considered the valuation of several parcels of real property. The estate valued the property collectively as a sole proprietorship on its tax return. The Tax Court rejected the valuation of the property as a business and the valuation of the property under the summation method as proposed by the IRS. The Court valued the property based on a comparable sale of property occurring two years prior to the valuation date and made adjustments for time, standing timber, and waterfrontage. In the Estate of George C. Blount v. CIR, No. 04– 15013 (11th Cir., 31 October 2005), the U.S. Court of Appeals for the Eleventh Circuit considered issues involving the use of buy-sell agreements, funded by life insurance, in the computation of fair market value. It affirmed the finding that the buy-sell agreement did not fix the value of the stock for estate tax purposes because it was not comparable with similar arm’s length agreements entered into by third parties and was not binding in life and death. However, it reversed the decision to include the insurance proceeds received as a result of the decedent’s death for the purposes of funding the buy-sell agreement in determining that the fair market value of the stock, without considering the corresponding liability generated by that buy-sell agreement, regardless of whether the agreement provides a basis for the estate tax value or not. In United States of America v. Gordon E. Davenport, No. G-03–923 (S.D. Tex., 18 October 2005), the U.S. District Court for the Southern District of Texas excluded an expert’s valuation because it failed to take into account the fact that the donor of the gifted stock did not have clear title to that stock because the stock was the subject of estate tax litigation from the donor’s grantor.