In Uncategorized on 02/11/2014 at 21:24

On the Return

So here I am in South Beach, thinking about a light supper to cap off a delightful sunny day, when it strikes me I need to put up a blogpost, lest my readership, few in number though they be, feel I’ve deserted them.

Scanning this day’s annals of Tax Court, rather like a deckhand extra in an episode of The Deadliest Catch inspecting a pot newly hauled from the depths, I spy a T. C. Memo., number 26 of that ilk, bearing the name of Judge David Gustafson.

But the catch shows none of Judge Gustafson’s obliging nature. It’s another battle of the appraisers, this time ascertaining the FMV of a PHC with BICG by means of NAV.

If any of this gibberish enthralls you, dear reader, my deepest condolences. Read for yourself the tale of Estate of Helen P. Richmond, Deceased, Amanda Zerbey, Executrix, 2014 T. C. Memo. 26, filed 2/11/14.

I shall not weary you with the minutiæ. I will, however, use this case to point out what I have heard (and doubtless many of you have heard) in any number of continuing education courses, classes and seminars. Win your case at the earliest possible moment: win at the pleadings stage, or at discovery, or with motion practice, or on your opening statement.

Here, win your case when you file the return. Amanda was not particularly hip as to estate taxes, so her now-deceased co-executor John W. Lyle, C. P. A., chose a colleague, Peter Winnington, C. P. A., to value the late Helen’s greatest asset, her 23.44% interest as shareholder in the family personal holding company, a C Corp. founded by Old Grand Dad in 1928. The PHC held publicly-traded, dividend-producing stock, distributed all dividends received, and, in the last words of many a patriarch “never sell nothing never.”

So the PHC had a ton of valuable stock with a ton of built-in gain. If the PHC liquidated its holdings, as it was a C Corp, it would get hit with a 39% combined Federal, State and local capital gains tax.

So the issue was whether to value the late Helen’s 23.44% piece based on the potential income stream from present investment strategy, or based on the net asset value of the portfolio of stocks, in either case with discounts for minority (lack of control), unmarketability, and built-in capital gain.

I’ll leave the battling experts to Judge Gustafson. The issue is Pete Winnington.

“Mr. Winnington graduated with a bachelor of science degree in accounting from the University of Delaware in 1971, and he received his master of science degree in taxation from Widener University in 1983. Mr. Winnington has been employed as an accountant with [the firm] since October 1986, and he currently chairs the firm’s corporate service department and sits on the firm’s executive committee. Mr. Winnington has experience in public accounting involving audits, management advisory, litigation support and tax planning, and preparation services. Mr. Winnington became a C.P.A. in the State of Delaware in 1975 and a certified financial planner in 1988, and is a member of the American Institute of Certified Public Accountants (AICPA), the Delaware Society of Certified Public Accountants (DSCPA), and the Wilmington Tax Group. Mr. Winnington has appraisal experience (i.e., having written 10-20 valuation reports and having testified in court), but he does not have any appraiser certifications.” 2014 T. C. Memo. 26, at pp. 12-13.

Nevertheless, Amanda and the late Lyle give Pete Winnington the brokerage statements and tell him to value the Late Helen’s piece.

As Pete Winnington’s firm did work for the late Helen, he had information about the hold-fast-forever investment philosophy of the PHC, so he valued the late Helen’s piece on the capitalization-of-dividends method, not net asset value, and did a draft report.

Judge Gustafson takes it from there: “He provided the unsigned draft of the valuation report to the executors and to the return preparer, and he was never asked to finalize his report. Without further consultation with Mr. Winnington, the estate reported the value of Ms. Richmond’s interest in PHC as $3,149,767 on the Federal estate tax return filed with the IRS.” 2014 T. C. Memo. 26, at p. 13.

You can guess the rest. When Amanda and the late Lyle locate an expert after they get the SNOD, and after their expert, IRS and Judge Gustafson get through with the 706, while Amanda avoids the 40% gross undervaluation penalty, the 20% chop is definitely in play because Pete Winnington’s numbers are about 3-plus million low.

“Although Mr. Winnington gave factual testimony about his valuation report, which formed the basis for the value reported on the estate tax return, the estate did not proffer Mr. Winnington as a valuation expert and instead requests that we adopt Mr. X’s appraised value.” 2014 T. C. Memo. 26, at p. 16. (Name omitted, but Mr. X is the estate’s expert pinch-hitter).

And that’s my point.

I’m not beating up on Pete Winnington; he prepared a draft report, doubtless expecting a review by the appraisers, and discussions with executors, attorneys, and, in T. S. Eliot’s immortal words “time yet for a hundred indecisions, And for a hundred visions and revisions, Before the taking of a toast and tea.”

No, the case got blown when the co-executors took his numbers, and without thinking slapped them into the 706, posted same off to IRS, and called it a day.

Judge Gustafson sums it up: “On the record before us, we cannot say that the estate acted with reasonable cause and in good faith in using an unsigned draft report prepared by its accountant as its basis for reporting the value of the decedent’s interest in PHC on the estate tax return. Mr. Winnington is not a certified appraiser. The estate never demonstrated or discussed how Mr. Winnington arrived at the value reported on the estate return except to say that two prior estate transactions involving PHC stock used the capitalization-of-dividends method for valuation. Furthermore, the estate did not explain–much less excuse–whatever defects in Mr. Winnington’s valuation resulted in that initial $3.1 million value’s being abandoned in favor of the higher $5 million value for which the estate contended at trial. Consequently, the value reported on the estate tax return is essentially unexplained.” 2014 T. C. Memo. 26, at pp. 49-50.

Takeaway- Prepare the return as if you were preparing for trial. If you want to win, you must try to win on the return. By the time you get the SNOD, it may be too late.

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