Last month the United States tax court issues a decision in a case which caught the eye of many involved in estate planning matters. The main issues in the case, Tanenblatt v. Commission of Internal Revenue, was the value of a deceased individual's interest in a limited liability company. As most know, estate taxes are based on the value of the total assets owned by an individual at the time of passing. Consequently, determining the exact value of items like a business interest are critical in determining the tax burden. As you might imagine, there is frequently disagreement between surviving family members and the IRS regarding the overall assessments.
The tax court opinion (viewed in full online here) explains how the case involves a family that received a notice of deficiency from the IRS, claiming that an additional $309,000 in federal estate taxes was due. The discord was caused by confusion over the value of the decedent's interest in a New York LLC (the 37-41 East 18th Street Realty Co.). As the name implies, the LLC's main asset was a building on 18th Street in New York City. In preparing their tax return, the family essentially determined the value of the building (using an income capitalization approach), added a few smaller assets, applied "net asset value" (discounts for various reasons), multiplied by the individual's percent interest and determined the value of the share in the LLC -- around $1 million.
The government disagreed however. Their math showed that the property interest was worth around $2.5 million. The disagreement ultimately made its way to court and went to trial.
In deciding the disagreement, the court's main focus was on the specific methods used to calculate the overall value and taxable amount. Interestingly, there was significant disagreement about whether certain appraisals could be introduced at trial. Some tax court rules were not followed, and one favorable opinion from the family's perspective was not counted by the court. Essentially, the court determined that this favorable expert's opinion did not count because she was not officially qualified as an expert in this case--she only issued a report and did not testify at trial.
Ultimately, the court determined that the fair market value was around $2.3 million--slightly less than the IRS initially claimed but significantly more than the family argued. The family will therefore have to come up with funds to pay for the additional estate tax burden.
As this case shows, many of these valuation issues are quite complex. Even relatively small differences can have a sizeable effect on estate tax burdens. As a result, it is always prudent to seek out the help of estate planning lawyers before and after a passing for clear guidance and advocacy.