July, 2006 | Issue 6
A series of errors by an IRS appraisal expert caused a Tax Court Judge to rule, lock, stock and barrel, for the taxpayer in a recent major estate tax case. The main Petitioner in Kohler et al. v. Commissioner, T.C. Memo 2006-152 (July 25, 2006) was the Estate of Frederic C. Kohler. The Estate held a 14.45% stock interest in Kohler Co., a major privately-held manufacturer of plumbing fixtures, gas engines, generators and other products. The Estate had valued this stock holding at $47 million on its estate tax return. The IRS believed that the stock was worth $145 million, a difference of about $100 million.
Both parties submitted expert reports providing valuations of the Estate’s Kohler stock. The Judge had a number of “grave concerns” about the valuation methods and conclusions of the IRS’s valuation expert. It is instructive to enumerate some of them.
- The expert was not a member of the American Society of Appraisers (ASA) or the Appraisal Foundation.
- The expert’s report was not submitted in accordance with the Uniform Standards of Professional Appraisal Practice (USPAP).
- The expert did not provide the customary USPAP certification which, among other things, assures readers that the appraiser has no bias regarding the parties.
- The expert spent only 2 ½ hours with Kohler management in researching the company.
- He failed to use a dividend-based income approach in valuing the company.
- He found an $11 million error in his report when he got to Court. The Judge’s comment was “This is not a minor mistake.”
- He “invented” a new expense structure for the company’s projections for his income approach analysis. He did not discuss it with management to test whether it was realistic.
The Judge commented as follows on the work of the IRS’s expert. “After carefully reviewing and considering all of the evidence, we continue to find (Mr. X’s) conclusions to be incredible. We therefore give no weight to respondent’s expert’s conclusions.”
The Burden of Proof
The Estate had earlier won a ruling from the Judge that the IRS had the burden of proving that the value of the Kohler stock on the Estate’s return was incorrect. Since the Judge gave no weight to the conclusions of the IRS’s expert, he ruled that the IRS had not met its burden of proof. Accordingly, he found the value of the Estate’s stock to be the amount reported on its return, $47,009,652. The Estate won, to the penny.