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Dell Appraisal Spawns a Multitude of Valuation Approaches

February 2017 | Issue 84 Introduction A Delaware Chancery appraisal case involving computer company Dell Inc. gave rise to a multitude of valuation measurements.  It is instructive to see how the court sorted through them in coming up with its final appraisal conclusion.  The case is In re Appraisal of Dell Inc., 2016 Del. Ch. LEXIS […] More...

Future Expected Investment Strategy Determines Value of FLP Interest

January 2016 | Issue 83 The estate of Helen P. Richmond held a 23.44% interest in Pearson Holding Co. (“PHC”), a family investment company.  The estate valued this holding at $3,150,000, later adjusted to $5,046,000.  The IRS valued it at $7,330,000.  This difference of opinion was aired in US Tax Court in a case called Estate […] More...

Do Attached Strings Affect the Value of a Gift?

October 2015 | Issue 82 Steinberg v. Commissioner, 145 T.C. No. 7 (Sept. 16, 2015) explores how a contingent liability accepted by a donee can impact the value of a gift for gift tax purposes. Introduction In 2007, Petitioner Jean Steinberg, age 89, entered into a net gift agreement under which she gave her four […] More...

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Appraisal Blunders Sink IRS in Major Estate Tax Case

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.

The Appraisals
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.