Sunday, July 17, 2011

Tax Court Sets Value of a Publishing Company Lower Than Initially Reported on Estate Tax Return!

In Estate of Gallagher v. Comm'r, T.C. Memo. 2011-148 (June 28, 2011), the Tax Court set a value for an interest in a publishing company below the amount found on the Estate Tax Return.  The Tax Court applied the discounted cash flow method to determine the fair market value of the 15% interest held in a publishing company held by the Decedent. The estate tax return had initially valued the Decedent's portion of the publishing company at $34.9 million and on audit, the IRS determined the value to be $49.5 million.  The estate petitioned to the United States Tax Court and obtained an independent appraisal indicating its value to be only $26.6 million. The Tax Court (Judge James S. Halpern, J.T.C. held the value of the Decedent's interest to be $32.6 million (less than on the return), using the discounted cash flow method of valuation. The Court also applied discounts for lack of marketability and lack of control.
The upshot is that when the IRS challenges a valuation, sometimes, you end up better off than the value that was placed on the return.

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