Estate of Richmond
Estate of Helen P. Richmond v.
Commissioner, TC Memo 2014-26
(February 11, 2014)
In this case, the IRS (“IRS” or
“Respondent”) levied a gross
valuation misstatement penalty of
40%, which was appealed by the
Estate of Richmond (“Petitioner”) to
the U.S. Tax Court.
Background
The Petitioner claimed that the
fair market value of its interest in a
family-owned investment holding
company, which was the main subject
of the dispute, was $5,046,500
compared to the Respondent’s
conclusion of $7,330,000. The
Petitioner’s valuation expert used a
capitalization-of-dividends method to
value the Petitioner’s interest in the
holding company. In contrast, the
Respondent’s valuation expert used a
net asset valuation method.
The next point of dispute was the
impact of the built-in capital gains
tax. The Petitioner argued that the
holding company’s value should be
discounted by 100% of its built-in
capital gains. The Respondent argued
for none of the holding company’s
value to be discounted by built-in
capital gains when the Respondent
sent the Petitioner its notice of
deficiency, although this was later
revised to 43% by the Respondent’s
expert.
Regarding discounts for lack of
control and lack of marketability, the
Petitioner’s valuation expert chose
8% and 35.6%, respectively, while the
Respondent’s valuation expert chose
6% and 21%, respectively.
The Court’s Conclusion
The Court found the Respondent’s
valuation expert’s use of the net
asset valuation method to be more
appropriate since the assets under
the holding company were all
marketable securities of which its
prices could be readily obtained.
On the matter of built-in capital
gains, the Court agreed with the
Respondent’s percentage of the
built-in capital gains used to discount
the holding company’s value, but
it disagreed with the Respondent’s
valuation expert’s methodology.
Regarding the discounts for lack of
control and lack of marketability,
the Court chose 7.75% and 32.1%,
respectively, based on the medians of
closed-end funds and restricted stock
studies. Lastly, the Court upheld
the Respondent’s gross valuation
misstatement penalty of 40%.
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Spring-Summer 2014
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