On February 18, 2021, the Tax Court issued a Memorandum Opinion in the case of Estate of Warne v. Commissioner (T.C. Memo. 2021-17). The primary issue presented in Warne was whether the IRS erred in increasing the value of the estate and the LLCs and by denying a giant charitable deduction ($25 million). Specifically, the issues in Warne concerned valuation of certain family LLCs, discounts for lack of marketability for interests in such LLCs, and whether minority interest discounts applied to the charitable contribution deductions.
In 1981, Thomas and Miriam Warne created the Warne Family Trust (Family Trust). Over the years, the Family Trust became the majority interest holder of five LLCs: WRW Properties, LLC (WRW); Warne Ranch, LLC; VJK Properties, LLC (VJK); Warne Investments, LLC; and Royal Gardens, LLC (collectively, five LLCs). The decedent, Miriam Warne, as trustee, served as the managing member of each LLC.
Experts for the petitioner and the IRS prepared appraisals for the properties owned by the LLCs. According to the Tax Court, the experts were not the brightest shovels in the barn, and the Tax Court did not put much estimation into their estimates.
Discounts for Lack of Control and Marketability
The parties agreed to apply discounts for lack of control and marketability for the Family Trust’s majority interests in the LLCs on the date of death. Both experts generated nearly identical reports for each LLC. The estate’s expert concluded that there should be a 10% lack of marketability/control discount, and the IRS’s expert concluded there should be a 4% discount.
Gift & Estate Tax Valuation Principles
IRC § 2501(a) imposes a gift tax for gifts made during the calendar year by individuals. The donor is liable for this tax, which is based, in part, on the aggregate sum of gifts made during the taxable year. IRC § 2502(a) and (c). The value of a gift is the fair market value of the property on the date the donor made the gift. IRC § 2512(a). Unless an alternative valuation date is elected, the value of a decedent’s gross estate is the fair market value of the property included in the estate on the date of death. IRC § 2031(a); IRC § 2032. For both estate and gift tax purposes, the fair market value of property is the price a willing buyer would pay a willing seller when neither is acting under compulsion and both have reasonable knowledge of the facts and circumstances. Treas. Reg. § 20.2031-1(b); Treas. Reg. § 25.2512-1; see also United States v. Cartwright, 411 U.S. 546, 551 (1973).
The Tax Court is not bound by the methods or opinions of so-called “experts,” and the Tax Court may pick and choose what parts of the experts’ analyses it likes and shuck the others like rotten husks of corn on a dirty barn floor. Estate of Stevens v. Commissioner, T.C. Memo. 2000-53; Helvering v. Nat’l Grocery Co., 304 U.S. 282, 295 (1938). Because valuation is not an exact science, the Tax Court’s conclusions need not be specifically set forth in the record if they are properly deduced from the evidence. Elements affecting value that depend upon events or combinations of occurrences which, while within the realm of possibility, are not fairly shown to be reasonably probable should be excluded from consideration for that would be to allow mere speculation and conjecture to become a guide for the ascertainment of value. Olson v. United States, 292 U.S. 246, 257 (1934).
When valuing an asset as part of an estate, the Tax Court values the entire interest held by the estate, without regard to the later disposition of that asset. Ahmanson Found. v. United States, 674 F.2d 761 (9th Cir. 1981). But when property is split as part of a charitable contribution, a different principle applies. The valuation of these same sorts of assets for the purpose of the charitable deduction, however, is subject to the principle that the testator may only be allowed a deduction for estate tax purposes for what is actually received by the charity–a principle required by the purpose of the charitable deduction. Id. at 772. In short, when valuing charitable contributions, the Tax Court does not value what an estate contributed; it values what the charitable organizations received.
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Moral of the story – if the Tax Court thinks that your experts are, in the words of Sir Charles Barkley, “turrible,” it will interpose its own methodologies and measurements on marketability discounts, et al. This goes for both petitioners and the IRS. You’ve been warned.