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Recently, the Tax Court issued an interesting case in the Estate of Richmond, T C Memo 2014 – 26, regarding valuation. The decedent owned 23.4% of a C Corporation that had been in existence for a very long time and held mostly marketable securities.

The Court found that the prevailing approach would be to value the shares under the net asset value theory, which was also the IRS’s position; rather than the taxpayer’s (the Estate) position of capitalizing the actual one year dividend.

With respect to the built-in capital gains discount, the Court agreed with the IRS and followed the precedent of the Tax Court and Second and Sixth Circuits and based the discount on the present value of the tax liabilities that the Corporation would recognize. The Court rejected the Estate’s argument that the Court should base the discount in accordance with the view of the the Fifth and Eleventh Circuits which calculates the discount on the tax liability as if the tax was immediately due and payable in full on the valuation date. The Court noted that the executors resided in Pennsylvania and New Jersey and the will was probated in Pennsylvania, thus an appeal would be to the Third Circuit. It would be interesting if the facts of the case resulted in a potential appeal to the Fifth or Eleventh Circuit; would the outcome of the Tax Court be different on the issue of the built in capital gains?

Also, the Company accountant prepared the valuations and the Court imposed the valuation misstatement penalty of 20% due to the fact that the accountant did not have appraiser certifications and the accountant did not explain the basis for their conclusions.

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