In Uncategorized on 02/28/2023 at 16:37

The reputed dying words of a Manhattan real estate dynast furnish forth the caption for Judge Tamara Ashford’s deep-dive into valuation of a closely-held family Sub S, owner of the largest residence in America still in the beneficial hands of the original owners’ family, Biltmore, in Asheville, NC, the home of the Vanderbilts, now a Gilded Age Disneyland.

This is the story of Estate of William A.V. Cecil, Sr., Donor, Deceased, William A.V. Cecil, Jr., Co-Executor, T. C. Memo. 2023-24, filed 2/28/23, conjoined with estate of Bill, Sr.’s deceased spouse Mary.

The late Bill, Sr., and the late Mary, ere they became the late Bill, Sr., and the late Mary, split-gifted (Section 2513(a)) a bunch voting and nonvoting stock (hi, Judge Holmes) in the family Sub S to trusts for the grandkids, and filed the requisite Forms 709. IRS responded with a $13 million SNOD.

Judge Ashford, clearly a connoisseur of familial lockdowns, spends five (count ’em, five) pages of her opinion describing how the Vanderbilt heirs tied up, locked up, barricaded, and otherwise fortified the family patrimony against ne’er-do-well descendants, and predatory spouses current and ex; held semi-annual meetings to inculcate even in eight-year-old infants the duty to protect, preserve, and defend, etc.; entered into voting trusts, amended certificate of incorporation and by-laws…you get the picture.  T. C. Memo. 2023-24, at pp. 5-9.

With closely-held stock, you get valuations. Oh boy, do you get valuations! After IRS and Jr. put in two experts each, Judge Ashford swims through an alphabet soup of appraisal methods. IRS has one expert solely for the art works and collectibles. But at close of play, IRS’ lead expert has the best valuation, without the tax affect of Sub S vs C Corp (of which more hereinbelow) and without lack of control discount, although his lack of control number is taken into account. Jr’s lead appraiser furnishes the discounts for lack of marketability for each class and block of shares.

I thought Tax Court put paid to tax affect years ago. That’s discounting the worth of Sub S stock (no tax at entity level) to match with C Corp stock (entity level tax, then tax on distribution at shareholder level) for comparables. After citing all the cases that said so, Judge Ashford looks back to Judge Holmes’ blockbuster opinion in Estate of Jackson to sidestep the question, as Judge Holmes didn’t slam the door. And here, both IRS’ lead and Jr.’s lead opine that tax affect must play a role.

“As we observed in Estate of Jackson, there is not a total bar against the use of tax affecting when the circumstances call for it. Now given that each side’s experts… totally agree that tax affecting should be taken into account to value the subject stock, and experts on both sides agree on the specific method that we should employ to take that principle into account, we conclude that the circumstances of these cases require our application of tax affecting. While Messrs. [IRS] and [Jr.] do not agree on the specific rate that applies here to implement tax affecting (Mr. [IRS] determined the rate to be 24.6% while Mr. [Jr.] determined the rate to be 17.6%), we consider it appropriate on the basis of the record (and relying on Mr. [Jr.]’s opinion in this regard) to set that rate at 17.6%. We emphasize, however, that while we are applying tax affecting here, given the unique setting at hand, we are not necessarily holding that tax affecting is always, or even more often than not, a proper consideration for valuing an S corporation.” T. C. Memo. 2023-24, at p. 27. (Names omitted).

For Estate of Jackson, see my blogpost “The Opinion You’ve All Been Waiting For,” 5/3/21.


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