Changes on Estate & Gift Tax Valuations

There are two recent Tax Court cases that may impact estate and gift business valuations, the Estate of John F. Koons, III v. Commissioner, T.C. Memo 2013-94, and the Estate of William M. Davidson (court date pending).

In Koons, one of the issues was the selection of an appropriate discount for lack of marketability regarding an interest in an LLC. The IRS’s expert used a DLOM of 7.5%, and the taxpayer’s expert used 31.7%. Why the big difference? A stock redemption agreement was signed prior to death but not completed as of the valuation date that would give the owner substantial control over the LLC. The IRS expert assumed that the redemption would occur, but the opposing expert assumed it would not. Given the facts and circumstances surrounding the redemption, the court agreed with the IRS expert’s lower DLOM.

The case is being appealed to the 11th Circuit. The point in this case is that, if a post-valuation-date event is likely to occur, should it be taken into account in the valuation.

The Davidson case involves the use of self-canceling installment notes, or SCINs. While the case doesn’t have a court date yet, the IRS has filed a petition claiming that the estate is undervalued and owes up to $2 billion in taxes (yes, billion).

William Davidson is the late owner of the professional sport teams, the Detroit Pistons and the Tampa Bay Lightning, and also Guardian Industries (one of the country’s largest private companies). In addition to the undervaluation allegation, the IRS is questioning the SCIN technique of selling assets to heirs based on a payment schedule that includes a provision that cancels the payments when the seller dies. The recipients had to make payments to Davidson for those assets while he lived, but the debt they owed was canceled — and the assets theirs outright — when Davidson died.

While SCINs are legal, the IRS is claiming that the payments should have been higher because Davidson made errors in figuring his life expectancy, which caused the heirs to pay much less than fair market value; therefore, some of the assets qualified as gifts should be taxed. Very little has been written about the valuation of SCINs. But if the Davidson estate prevails in Tax Court, Their use will likely increase.