In Uncategorized on 03/02/2020 at 16:22

Once again we have a valuation jump-ball, and Judge Kerrigan lets in IRS’ expert’s report, only to toss him and it, in Pierson M. Grieve, 2020 T. C. Memo. 28, filed 3/2/20.

The issue is the valuation of the gift Pierson made when he handed over his stock portfolio to a couple LLCs (hi, Judge Holmes) at the behest of his tax lawyer daughter after his wife passed away in the middle of their estate planning.

Pierson’s expert valuer applies some discounts to lack of control and lack of marketability, but IRS’ expert says those only applies if the willing buyer doesn’t also buy out the minority member’s 0.2% interest, and works up a premium to entice the minuscule minority to sell.

Except the minuscule minority is the same tax lawyer daughter who manages the portfolio for no fee, but says she’d charge any incoming buyer through the left nostril for her valuable services, and anyway swears she wouldn’t sell nothing never nohow.

Judge Kerrigan bounces IRS’ expert for what the basketball referees call traveling: an extra step.

“Respondent’s expert relies upon an additional action, the purchase of the [minority] class A units.  Mr. M contends that the economic realities have to be taken into consideration and that the economic stake of the holder of a 99.8% interest of the [majority] class B units ‘dwarfs’ that of the holder of the class A units.  However, Margaret, the sole owner of the class A units, testified that she had no intention of selling the units.  She further testified that if she ever sold the units she would demand a premium much higher than what was estimated in the M reports. If the class B units were ever sold outside the family, Margaret explained that she would require that she be paid a management fee.” 2020 T. C. Memo. 28, at p. 30. (Name omitted).

Any additional action beyond the date of valuation (the FMV as at the date of the gift), though possible, is not reasonably probable.

“Mr. M’s valuations relied on an additional action.  He concluded that to determine the value of what a willing buyer would pay and what a willing seller would seek for the class B units, a premium to purchase the class A units has to be taken into account.  Elements affecting the value that depend upon events within the realm of possibility should not be considered if the events are not shown to be reasonably probable. The facts do not show that it is reasonably probable that a willing seller or a willing buyer of the class B units would also buy the class A units and that the class A units would be available to purchase.  To determine the fair market values of the class B units we look at the willing buyer and willing seller of the class B units, and not the willing buyer and willing seller of the class A units.: 2020 T. C. Memo. 28, at p. 34. (Name and citation omitted).

Anyway, IRS’s expert produced no evidence to support his valuation of the premium for the minority interests.

So Judge Kerrigan does a mix-and-match for the valuations of each of the LLCs, and allowing the discounts Pierson’s expert adduced.

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