VALUATION CASE ALERT

It was a brutal day in Tax Court for the Estate of Richmond (T. C. Memo 2014-26), Tuesday, as the taxpayer not only lost out on a significant portion of a key valuation adjustment (built-in-gains tax liability), but was also assessed a 20% penalty for a substantial valuation understatement for which there was no reasonable cause.

This case illustrates the importance of hiring a qualified appraiserto substantiate the value to be reported on an estate tax return, and the unfortunate consequences of failing to do so. Richmond also brings to light (again) the differences in opinion on how to treat valuation adjustment for built-in-gains arising in security holding C-corporations. Based on recent rulings, it appears that courts were moving in favor of a dollar-for-dollar adjustment for this tax liability, especially when applying a net asset value method in the valuation. However, the Tax Court in this matter only allowed a reduction in the company’s NAV for 43% of the $18.1 million tax liability, largely based on the argument that such a liability does not have a specified maturity date.

Lastly, this case also contains a few interesting points to analyze with respect to the issue of lack of controls of marketability.