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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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Taxpayers’ Appraiser Upheld by Fifth Circuit

September, 2006 | Issue 7

McCord v. Commissioner, recently decided in the U. S. Fifth Circuit Court of Appeals (No. 03-60700, August 22, 2006), was a unanimous reversal of an earlier Tax Court decision on the value of certain gifts made by members of the McCord family.

Partnership Formed
The McCord family formed McCord Interests, Ltd., L.L.P. (“MIL”), a Texas limited partnership, in June 1995. Mr. and Mrs. McCord, who were in their mid 80’s when the partnership was formed, contributed marketable securities (65%) and real estate, oil and gas interests (35%) to MIL in exchange for 82% of the Class B interests of the partnership.

Gifts Made
On January 12, 1996, the McCords assigned all of their Class B interests to the following donees: (a) four generation-skipping tax trusts, (b) the McCords’ four sons, (c) the Shreveport Symphony and (d) the Community Foundation of Texas (“CFT”). The gift amounts were expressed as dollar amounts in the assignment agreement, except for the gift to CFT, which was to be the residual amount remaining after the other gifts. The taxpayers retained an appraiser to determine, as of January 12, 1996, the value of each 1% of Class B interest in MIL. This value, $89,505, was then used to convert the dollar value of each of the gifts into percentage interests in MIL. This was confirmed by a confirmation agreement among the donees dated in March 1996. The McCords used the dollar values of the gifts set forth in the assignment agreement in preparing their 1996 gift tax returns.

IRS Responds
The IRS audited the gift tax returns, asserting, among other things, that the value of a 1% interest used in the returns was too low. The IRS claimed that it should be almost twice as high, $171,749 rather than $89,505.

Tax Court Decides
The matter ended up before the Tax Court in McCord v. Commissioner, 120 T.C. 358 (2003). On the question of the value of MIL, the Tax Court, using facts from the confirmation agreement and testimony from the IRS’s valuation expert, found a value of $120,046 a share.

Appeals Court Overrules
The Circuit Court noted with mild disdain that the Tax Court’s valuation finding was almost exactly half way between the dueling experts’ valuations of $89,505 per 1% and $150,665 per 1%. As the Court put it, “the (Tax Court) split this almost $10 million baby precisely halfway between the experts’ respective values.”

The Appeals Court also criticized the Tax Court for relying on post-gift events when it considered the confirmation agreement, saying “the (Tax Court) violated the firmly-established maxim that a gift is valued as of the date that it is complete; the flip side of that maxim is that subsequent occurrences are off limits.”

The Circuit Court reversed the Tax Court and upheld the taxpayers’ valuation of $89,505 per 1% interest. The taxpayers’ victory was won through a combination of sound valuation practice and expert legal representation.