Ninth Circuit Reverses Tax Court in Family Limited Partnership Valuation Case-Giustina Est. v. Comr.

Executive Summary: In this federal estate tax case, the Ninth Circuit reversed the Tax Court’s decision substantially in favor of the IRS in a valuation case where the issue was the size of the discount for built-in capital gains and remands for recalculation.

Facts: In this case, the decedent owned a 41.128% interest in an Oregon family limited partnership that owned approximately 48,000 acres of timber land.

Valuation Positions: If you will recall, the valuation positions of the parties and how the Tax Court came out are as follows:

Position                                                  Estate                                 IRS                               Tax Court

Estate Tax Return Value                   $12,678,117

Estate Litigation Value                       $12,995,000

IRS Notice of Deficiency Value                                                       $35,710,000

IRS Litigation Value                                                                           $33,515,000

Tax Court Conclusion of Value                                                                                                  $27,454,115

Value per Cash Flow Method           $33,800,000                         $65,760,000                         $51,702,857

Tax-Fee Risk Rate                              4.5%                                       4.52%                                    4.5%

Equity Risk Premium                          3.6% (.5 Beta)                     11.7%

Small Stock Premium                         6.4%                                                                                       6.4%

Partnership Specific Risk                 3.5%                                                                                       1.75%

Assumed Growth Rate                     4%                                                                                          4%

Discount for Lack of Marketability 35%                                        25%                                        25%

Discount for Lack of Control            0                                              12%                                        0

Cash Flow Method Weighting        30%                                        20%                                        75%

Asset Approach Weighting             0                                              60%                                        25%

Market Approach Weighting           30%                                        20%                                        0

Capitalization of Distributions          30%                                        0                                              0

Asset Accumulation Method           10%                                        0                                              0

Value of Land (40% Discount*)      $142,974,438                      $142,974,438                    $142,974,438

* Discount for delays in marketing and selling the timber land

The Ninth Circuit found three areas in which the Tax Court erred in its analysis.  The first ground was the Tax Court clearly erred in its assignment of a 25% probability of the decedent’s interest (which was an assignee interest that didn’t have voting rights) combining with other limited partners to form a 2/3 bloc for the purpose of liquidating the partnership’s timberland.  The Ninth Circuit called down the Tax Court once again (this occurred previously in Simplot Estate v. Comr.) for its assumption that the hypothetical willing buyer would be a current limited partner.  The Ninth Circuit observed:

[The Tax Court’s] conclusion is contrary to the evidence in the record.  In order for liquidation to occur, we must assume that (1) a hypothetical buyer would somehow obtain admission as a limited partner from the general partners, who have repeatedly emphasized the importance that they place upon continued operation of the partnership; (2) the buyer would then turn around and seek dissolution of the partnership or removal of the general partners who just approved his admission to the partnership; and (3) the buyer would manage to convince at least two (or possibly more) other limited partners to go along, despite the fact that “no limited partner ever asked or ever discussed the sale of an interest.” Alternatively, we must assume that the existing limited partners, or their heirs or assigns, owning two-thirds of the partnership, would seek dissolution. We conclude that it was clear error to assign a 25% likelihood to these hypothetical events.

The Ninth Circuit remanded the matter to the tax Court to “recalculate the value of the estate based on the partnership’s value as a going concern.”

The Ninth Circuit also held that the Tax Court clearly erred in halving the estate’s appraiser’s proffered specific-company risk premium without explanation.

However, the Ninth Circuit affirmed the Tax Court’s disregard of tax-effecting (which, in my opinion, it should have been done) as well as the Tax Court’s selection of 25% as the discount for lack of marketability.

Comments: I pointed out in LISI EP 1829 that, in my opinion, there were two basic grounds for appeal.  First, I indicated that the Tax Court’s reliance on a valuation method (cash-flow method) substantially more than either expert did was suggestive of appeal. Second, I pointed out that the Tax Court’s employment of a “unique proportionality method” in which the Tax Court assumed a 75% chance of being valued as a going concern and a 25% chance of being liquidated was problematic, especially since the Tax Court just seemed to pull those percentages out of thin air.  The Ninth Circuit apparently agreed with me.


I don’t think that the Tax Court’s proportionality analysis is applicable or helpful, particularly not in this case because there was effectively no chance that the partners would have liquidated the timber holdings and generated a whopping capital gains tax.  For the Tax Court to weight the likelihood of liquidation at 25% indeed was contrary to the evidence and also common sense.


What does the Ninth Circuit’s holding on the going concern issue mean?  Recall that 60% of the IRS expert’s conclusion of value was weighted in the asset approach.  This weighting now has effectively been tossed out, as has the 25% allocation to the asset approach that the Tax Court used.  The Estate spread out the percentages in its expert’s weightings of the conclusions of value that its four valuation methods generated, although the Tax Court disregarded 70% of the conclusions of value that these methods produced.  We’ll have to see how Judge Morrison of the Tax Court, who wrote the Tax Court’s opinion in this case, interprets the Ninth Circuit’s inexplicably brief and even somewhat cryptic unpublished opinion.  I wonder whether the Tax Court has enough guidance to produce a responsive recalculation.

Citations: Giustina Estate v. Comr, T.C. Memo. 2011-141 (June 22, 2011), rev’d and rem’d No. 12-71747 (December 5, 2014); Simplot Estate v. Comr., 249 F. 3d 1191 (9th Cir. 2001).

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Oh When the Lawyers Come Marchin’ In! Intersection of the NFL and Blended Families

There certainly was a lot of hubbub emanating out of the headquarters of the New Orleans Saints this past week, which in part took Deflate-gate off of the top of the sports headlines, at least in the Big Easy (although not so much for this exile). The story line perhaps is almost as old as mankind itself: greed, jealousy and distrust in families, especially when it involves remarrying a younger woman who is not the mother of your children. King Lear, anyone?

The players in this sad act are an elderly father, his still fairly new and younger wife, on one side, and his adopted daughter and her two children, on the other side. Also involved behind the scenes for each side are two of the most egotistical and self-aggrandizing lawyers, Phil Wittmann and Randy Smith, who I’ve ever had the pleasure of meeting, which, in my opinion, doesn’t bode well for anything other than a lengthy vituperative, vicious–and expensive–ordeal.

Neither of those lawyers is known for their prowess in settling cases until the eve of trial after probably millions of dollars in legal fees have been collected. I knew and deeply respected Wittmann’s late name partners Paul O.H. Pigman and Saul Stone, but I never developed much respect for Wittmann because of his propensity in pleadings and in court to take a scorched earth view of litigation. Smith obviously learned well. Given the way these guys practice, this one could get very ugly as almost nothing is sacred with either of those guys.

Niccolo Machiavelli (yeah, that Machiavelli) once wrote “Men sooner forget the death of their father than the loss of their patrimony,” which essentially means that heirs are more impacted by the loss or potential loss of their inheritance than the loss of a parent. That seems to be as true today as it was when Machiavelli penned his now infamous sixteenth century entreaty essentially seeking employment to Lorenzo the Magnificent de Medici (which, by the way, was unsuccessful in that aspect, although the book did quite well, albeit after his death).

This story involves the venerable owner of the New Orleans Saints and Pelicans: Tom Benson.  Mr. Benson, who I actually had the pleasure of meeting several times when I lived there, really was the savior of NFL football in N’Awlins. I would describe Tom Benson as a man who would do almost anything for charity. However, make no mistake about it: Tom Benson is down deep a tough and persuasive businessman. After all, he was a car dealer, and car dealing is a very tough business.

The story broke this past week as Tom Benson announced that his wife, not heir-apparent granddaughter Rita Benson LeBlanc, would become the continuity in ownership of the Saints and Pelicans. Shortly thereafter, Benson’s adopted daughter and her two children returned fire, launching a two state attack that attacks Tom Benson’s mental competence. The Texas litigation appears to be purely financial, i.e., to continue the cash flow to the daughter’s management company, money that I’m sure that she’ll need to pay the undoubtedly massive fees of Smith, who once worked for Wittmann, where he learned the fine art of milking a client’s emotions for oodles of cash.

However, this saga actually probably began when Tom Benson married Gayle back in 2004, at which point the daughter and grandchildren were probably already apoplectic about a new family member. Granddaughter and erstwhile heir-apparent Rita Benson LeBlanc definitely seems to have anger management and entitlement issues, and she actually had her wings clipped by Tom Benson back in 2012 for an overly abrasive and contentious management style wherein she ran through many personal assistants.

The marquis litigation is an interdiction proceeding that Smith filed on behalf of the daughter and grandchildren that will be decided in an Orleans Parish District Court by Judge Kern Reese, who wasn’t on that bench when I was in practice in New Orleans, so I don’t know him (although it was my opinion that the quality of person who took that bench definitely significantly declined beginning back in the early 1990’s). I’m certain that whatever Reese’s decision is, his won’t be the last word.

There will be long and drawn out –and very expensive–appeals process, and I’m confident that this one will end up in the Louisiana Supreme Court.  Having participated in the crafting of the current interdiction law in Louisiana and having commented on it, albeit years ago, interdiction petitions are serious business and require specific, verified allegations. Perhaps in a follow-up piece, I’ll comment on the petition itself.

In my opinion, the family, including all sides, would be well served by calling an immediate standstill truce and allowing an interdisciplinary team of mediators and wealth psychologists in to begin to work through the issues off-line outside of the public limelight and paparazzi instead of allowing their respective legal gunslingers (because that’s what Wittmann and Smith are) to fight it out at the legal O K Corral.

If that happens, the only winners will be Stone Pigman (Wittmann’s firm) and Smith & Fawer (Smith’s firm). However, especially given their involvement, and after having written two books on blended families (Estate Planning for the Blended Family with Emily Bouchard and The Tools & Techniques of Estate Planning for Modern Families with Stephan R. Leimberg), I am less than sanguine that this family will heed that advice anytime soon.

What is likely to happen in the meantime is that the management of the Saints, Pelicans and the Benson empire will suffer for it. The team of Loomis and Payton, who know what they’re doing with respect to the Saints, are unlikely to stick around to witness this fight to the death and beyond, because I predict that round two will commence shortly after Tom Benson assumes room temperature. Watch for fireworks beginning with the likely “pull the plug decision” that could come at the end of Tom Benson’s life, continuing on to the funeral and who can attend, etc. The blended family of the late Casey Kasem are still fighting over him.

If I could have ten minutes with each party, outaide of the presence of their lawyers, I’d tell Tom Benson that his daughter and grandchildren are frightened about loss of their inheritance and that he should take some immediate step to assure them of a significant, immediate and meaningful inheritance, free from his wife, Gayle Benson, even if it means paying some gift tax now. I’d tell Tom Benson that he’s making a huge mistake in cutting off physical access to himself with respect to his daughter and grandchildren because that really has done nothing but fuel the flames of discontent and distrust by his daughter and her children and given them something to include in their allegations. Like them right now or not, they’re still his family and have been far longer than Gayle Benson. This is about love and trust.

I’d tell the daughter and her two obviously spoiled rotten and feeling entitled children that Tom Benson isn’t dead yet and is free to do with his property as he wishes and that their actions certainly give Tom Benson adequate grounds to cut them out of what they obviously perceive to be their birthright, which it isn’t. I would tell them that they need to respect his need for companionship and offer to stop the interdiction proceeding if they can have physical access to Tom Benson to ensure that Gayle Benson actually is not asserting undue influence as they claim in their petition for interdiction, which Gayle Benson can’t object to because if she does, that would speak volumes that perhaps she is the gold-digger as the daughter and grandchildren contend.

I’d tell Gayle Benson that, despite the allegations, she’s not the issue but that she must rise above the fray and the onslaught of allegations that Smith and his underlings obviously will throw at her (her deposition will likely be a doozy) and look to the long-term familial relationships here and work toward continuing those. Whatever she can do to get Tom Benson to see his daughter and grandchildren regularly, she should do. She must do.

As an aside, I remember becoming tangentially involved late in a piece of vexatious estate litigation against Wittmann many years ago. One day, Wittmann came in wearing a tie that said “ubi testamentum ibi heres” (Latin that essentially means where there’s a will, there are heirs, which I’m certain that he wore on purpose that day). We won that case, even though we were on the wrong side of an arcane (and ultimately repealed) law. Then, obviously behind the scenes, I helped my friend and Wittmann’s partner Paul Pigman solve his client’s estate tax issue that our win caused, which indeed was gratifying, as was writing an article about that case in which I found (after the case was concluded) and cited a very old case that Wittmann had failed to find that would have helped him win.

I’m praying for the Benson family for healing and strength. With their lawyers, they’re gonna need those prayers.



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Trustee’s Purchase of Three Deferred Annuities Curiously Held Not to Be a Breach of Trust

In re Amendment and Restatement of Revocable Living Trust of Alfred J. Berget


Although this is a very close case, it probably should have been reversed. A corporate trustee probably, almost definitely, loses. The inherent problem of the lay trustee, who can easily be hornswaggled by a Svengali-esque and often incompetent financial advisor, could well lie at the heart of this case. The investment in deferred annuities was, in my opinion, per se improper, and the court should have so held.

The weighting of the underlying investments inside of the deferred annuities strikes me as way too aggressive too, and I believe that the investment strategy not only harmed the income beneficiary in the long run, it did a disservice to the principal beneficiaries too, who are innocent. The income beneficiary probably received too much due to the fanciful “formula” for determining income, a method that has no basis in fact. How any professional could take a position and advise someone that “70% of quarterly principal gains is income” is beyond me, other than to say that those professionals perhaps also should have been defendants.


In this appellate court decision, the Minnesota Court of Appeals gets as close to reversing a trial court without doing so in a case involving a challenge to the investment propriety of deferred annuities in a trust. In this decision, the appellate court maintains the trial court’s determination that the lay trustee’s actions in purchasing the deferred annuities was not a breach of trust because she relied on the advice of an investment professional. The appellate court expressly limits its own decision to the facts of the case, and, at several points, questions the investment strategy before affirming on the basis of scope of appellate review.


In 1996, the grantor established a revocable living trust. Grantor amended the terms of the trust instrument in 2005 to provide income for his sole surviving adult child after his death. Grantor appointed himself trustee during his lifetime and appointed a first cousin to serve as trustee after his death.

The trust instrument provided that, during grantor’s lifetime, he had discretion to pay any amount of income or principal to himself. The trust instrument provided that, after grantor’s death, the trustee “shall pay to [the child] seventy percent (70%) of the net income of this trust at least quarter annually,” and “[t]he remaining thirty percent (30%) of the net income of this trust shall be added to principal.”

The trust further provided that, after the child’s death or permanent admission to a nursing home, the trustee was to then pay all of the net income of the trust to grantor’s four grandchildren, two of whom are children of the child beneficiary, and two of whom are children of a pre-deceased child of grantor. The trust instrument gave the trustee broad discretion to invest in “property of any kind,” including “securities of any nature.” The sole successor income beneficiary of a now irrevocable trust alleged that the trustee breached fiduciary duties relating to the investment of trust assets and the distribution of income.

Grantor died in November 2006 at age 68. At that time, the child was 43 years old, and the eldest grandchild was college-aged. After grantor’s death, the assets of the trust consisted of approximately $1,100,000 in cash.
At the time of her appointment, the cousin trustee had not previously served as trustee of a trust and did not have any training or experience with investing money. She co-owns a company that installs, maintains, and repairs on-site sewage treatment systems, and she manages the office staff. Shortly after grantor’s death, his widow sent a handwritten note to the cousin trustee, saying: “Contact Dave [Bjorklund]. He’ll know what to do.”

Bjorklund had been a self-employed financial advisor for 35 years, selling life insurance and other financial products. Bjorklund had provided financial services and sold products to grantor during his lifetime. Before his death, grantor had informed the cousin trustee that Bjorklund was his financial advisor, and asked the cousin trustee to use Bjorklund because he trusted him and because Bjorklund “had done well for him.”

The cousin trustee met with Bjorklund in January 2007. Bjorklund prepared an investment plan and presented it to the cousin trustee later that month. Bjorklund recommended to the cousin trustee that she use $800,000 of the trust’s liquid assets to purchase three variable deferred annuities. Bjorklund testified at trial that grantor had utilized variable deferred annuities during his lifetime and had told Bjorklund that he wanted the same investment vehicle and strategies to be utilized by the trust.

The cousin trustee followed Bjorklund’s recommendation by purchasing three variable deferred annuities, in the amounts of $300,000, $300,000, and $200,000. With Bjorklund’s advice and assistance, the cousin trustee invested the three premium amounts in a Mellon Capital Management fund, which was comprised of individual stocks. The annuity contracts specified that the performance of the underlying investments would determine the value of the annuities. Dividends and interest would not be disbursed to the trust but would be reinvested.

Annuity payments would not begin until the “income date,” January 10, 2054 (over 40 years away), but the cousin trustee could withdraw funds before that date. By paying additional fees at the outset, cousin trustee obtained the right to withdraw a certain amount before the income date without accruing early withdrawal fees and to guarantee the return of $600,000 of the initial premiums without regard to the performance of the underlying investments. After settling the estate and satisfying certain liabilities, the trust was comprised of the three annuities and approximately $198,000 in cash.

With Bjorklund’s assistance, the cousin trustee used the remaining cash to establish a brokerage account by which the trust invested in mutual funds and ten stocks that are included in the Dow Jones industrial average.
The cousin trustee began making payments to the child income beneficiary in April 2007 based on her calculation of the net income of the trust. The cousin trustee’s method of determining the amount of income from the annuities was based on advice she received from two professionals: the attorney who helped the grantor establish the trust and Bjorklund.

To determine the amount of income from the annuities, the cousin trustee referred to the increase or decrease in the value of the annuities’ underlying investments during each quarter-year. If there was an increase in the value of the annuities during a particular quarter, the cousin trustee considered the amount of the increase to be income. After considering the income received from other assets and the trust’s expenses, the cousin trustee paid the income beneficiary and plaintiff an amount equal to 70% of the trust’s quarterly gains as income.

Before the cousin trustee purchased the variable deferred annuities, Bjorklund projected that the value of the annuities’ underlying investments would increase by 10% each year. Given the cousin trustee’s method of determining income, Bjorklund projected that 70% of each year’s increase in the value of the annuities (i.e., 7% of the principal at the beginning of that year) would be paid to the income beneficiary as income, and that 30% of that increase in value (i.e., 3% of the principal at the beginning of that year) would be retained and reclassified as principal, so that the principal essentially would reset on a quarterly basis. When Bjorklund presented his plan to the cousin trustee, he prepared a document, which was introduced as an exhibit at trial, projecting that, by 2035, the total value of the annuities would be $2,250,474, which would allow the trustee to distribute more than $150,000 to the income beneficiary that year.

Bjorklund recognized that the value of the annuities’ investments would not increase in a straight line. In the first three quarters of 2007, the value of the annuities increased. The cousin trustee made payments to the income beneficiary of $13,049 for the first quarter, $25,374 for the second quarter, and $17,590 for the third quarter. But the value of the annuities decreased in the fourth quarter of 2007, and the income beneficiary received no distribution. Due to the market downturn, the present value of the annuities decreased sharply in 2008 and 2009, from $748,615.34 on December 31, 2007, to $433,141.56 on December 31, 2009. Accordingly, the cousin trustee made no distributions to the income beneficiary.

The Complaint

The income beneficiary made four arguments in favor of his case. First, the income beneficiary contended that the cousin trustee breached her fiduciary duty because she purchased three variable deferred annuities. Second, the income beneficiary contended that the cousin trustee breached her fiduciary duty because she selected primarily growth-oriented stocks as the underlying investments of the annuities. Third, the income beneficiary contended that the cousin trustee breached her fiduciary duty to pay him 70% of the income of the trust. Finally, the income beneficiary contended that the cousin trustee breached her fiduciary duty because she did not re-evaluate the underlying investments of the annuities in 2010, after a prolonged period of poor performance.

The trial court ruled in favor of the cousin trustee, and both sides appealed.

The Appellate Decision

In affirming the trial court, the appellate court made some interesting statements in its opinion, including:

Although we have some concerns about the suitability of the variable deferred annuities that [the cousin trustee] purchased in light of the purposes of this trust, we are reluctant to conclude that the district court erred by finding that a lay trustee did not breach her fiduciary duties by purchasing them after receiving and relying on professional advice from a financial advisor who previously served as a financial advisor to the grantor of the trust.

Our conclusion on this issue should be understood as limited to the facts of this particular case. In another case involving an annuity contract, a different result may be appropriate.

By concluding that the district court did not err, we do not intend to endorse the trustee’s approach.


Although this is a very close case, it probably should have been reversed. A corporate trustee probably, almost definitely, loses. The inherent problem of the lay trustee, who can easily be hornswaggled by a Svengali-esque and often incompetent financial advisor, could well lie at the heart of this case. The investment in deferred annuities was, in my opinion, per se improper, and the court should have so held.

The weighting of the underlying investments inside of the deferred annuities strikes me as way too aggressive too, and I believe that the investment strategy not only harmed the income beneficiary in the long run, it did a disservice to the principal beneficiaries too, who are innocent. The income beneficiary probably received too much due to the fanciful “formula” for determining income, a method that has no basis in fact. How any professional could take a position and advise someone that “70% of quarterly principal gains is income” is beyond me, other than to say that those professionals perhaps also should have been defendants.

This situation is perplexing. Even though Minnesota is one of the few states that haven’t adopted the 2008 amendments to the Uniform Principal and income Act, given that the court didn’t even reference the Uniform Principal and Income Act, query whether the case was under-lawyered? The Uniform Principal and Income Act, specifically, Sec. 409, provides in pertinent part as follows:

(b) To the extent that a payment is characterized as interest, or a dividend, or a payment made in lieu of interest or a dividend, a trustee shall allocate it the payment to income. The trustee shall allocate to principal the balance of the payment and any other payment received in the same accounting period that is not characterized as interest, a dividend, or an equivalent payment.

(c) If no part of a payment is characterized as interest, a dividend, or an equivalent payment, and all or part of the payment is required to be made, a trustee shall allocate to income 10 percent of the part that is required to be made during the accounting period and the balance to principal. If no part of a payment is required to be made or the payment received is the entire amount to which the trustee is entitled, the trustee shall allocate the entire payment to principal. For purposes of this subsection, a payment is not “required to be made” to the extent that it is made because the trustee exercises a right of withdrawal.

The basic 10% test is a good one, and it should have been followed.


Paul Hood

LISI Estate Planning Newsletter #2275, (January 21, 2015) at Copyright 2015 L. Paul Hood, Jr. Reproduction in Any Form or Forwarding to Any Person Prohibited – Without Express Written Permission.

In re: Berget Revocable Living Trust, Docket No. A13-2295 (Minn. App. December 8, 2014); and UPIA sec. 409.

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My “Last Best” Advice

In the estate planning process, clients (as well as their families) as well as estate planning advisors often are uncomfortable contemplating mortality.  Every now and then, a client attempts to turn the tables on an estate planner.  This type of client usually doesn’t like or want to think about death in any event and certainly not alone.  I’ve been asked by clients to contemplate my own mortality instead of just asking them to do so.  They asked me if my will is done, fully expecting to hear a story akin to the one about the cobbler’s children who have no shoes.  These clients wanted me in the “death game” with them!  I usually explained that I have a will in place.  I usually also went into some of my personal estate planning considerations, including life and disability insurance, that may apply to them, and I did so to hopefully prove my empathy.


An elderly client had an unusual and refreshing spin on this inquiry, and she really caused me to think.  That client asked me for the last advice that I’d impart to her if I were on my deathbed.  She said that in constructing her estate plan, we’d start with that most important advice, and then work from there.  In other words, she was asking me for the nuggets of advice which I would consider so important that I would expend my final breaths on that advice-My “last best” advice.


Wow! I had to think about that carefully.  The last advice that I would give?  Ever? I wouldn’t really have the luxury of time in which to give my final advice (I’m dying after all).  I only have about 2500 or so words to spare here.  Final words?  Here goes.


Involve your family directly in your estate planning decisions.  Your estate and financial planning decisions have ramifications and impacts upon your family and loved ones (including key employees in your company).  These impacts can be financial, social and financial, and your decisions can affect their social relationships, jobs and even health.  The wisdom of the ages has always known this.


Consider the words of Seneca (a first century A.D. Roman philosopher), who said, “What madness is it for a man to starve himself to enrich his heir, and so turn a friend into an enemy!-For his joy at your death will be proportioned to what you leave him.”  Or Marcus Aurelius (Emperor of the Roman Empire in the second century A.D.), who said “A great estate to those who do not know how to use it, for nothing is more common than to see wealthy persons living scandalously and miserably; riches do them no service in order to virtue and happiness; it is precept and principle, not an estate, that makes a man good for something.”  Or Niccolo Machiavelli (a fifteenth and sixteenth century Italian politician and author), in the famous work, The Prince, “A son can withstand the death of his father, but the loss of his inheritance will drive him to despair.”  I could go on with quotes from others at all times of history and in different cultures, but the message remains the same: people have been impacted by their ancestors’ estate planning in ways other than just financially.


Since your family and loved ones are going to be impacted by the results of your estate plan, why not involve them in its formulation?  Even if someone is not going to get what he or she wants (or feels that he or she deserves), it usually is better for the other survivors to have had everyone know your plans while you are still alive.  Otherwise, a complainer might deny that this was your real intention.


Or they might accuse the survivors who fared better of plotting against them.  The prospects for challenge or acrimony increase dramatically when bad news is sprung on people who then feel trapped and without an option other than to attack.  One of the biggest problems in estate fights is that the “star of the show” has already departed this great world’s stage.  The job of the litigants and the court is to ferret out, often with only indirect evidence, which usually is colored by the position or feelings of the giver of that evidence, what you really intended and whether you were of sound mind and free from undue influence when you did it.


Some clients are taken aback by my suggestion that they discuss their estate planning with their family and loved ones, believing that their privacy was supposed to be the most important aspects of their estate planning.  Quite often, the clients’ parents didn’t involve them in the parents’ estate planning process.  This oversight on their parents’ part is not justification for the client to repeat the mistake.  I am not suggesting that you give your loved ones a vote in your estate planning decisions.  Far from it.  Estate planning doesn’t have to be a democracy.  However, their input could be vital to the success or effectiveness of your estate plan as well as in the relationships of your surviving loved ones.  This is especially true in family businesses.


I recall a very sad situation where a dad was often cash poor because he was plowing significant sums into an insurance policy so that his son, who worked for the company, could preserve the business (which was named after the dad, as was the son) by being able to pay the estate taxes on the value of the business.  Dad passed up vacations, additional salary (as did son, who was underpaid in any event) and some financial security so that the life insurance premiums would be paid on time.  When Dad died, the son took the insurance proceeds and then sold the business.  When I asked why the son why he was selling the business (at what was a low price in my opinion), the son became emotional and told me that his dad had forced him to forego college and his own life dreams and aspirations for the “privilege” of working in the “family business.”  Breaking down into tears, the son told me that he had never liked the business and that he had wasted his life (the son was then in his 50’s) working in the business.


The son went on in a tearful rage to say that he was commuting his own sentence to time served and that he didn’t want to spend any more time imprisoned in “his father’s monument to his own memory.”  I observed that his father had sometimes gone to significant financial hardship to continue to pay those life insurance premiums, and that his father had seemingly wasted those insurance premiums given the son’s proposed sale.  I wondered aloud whether his father would have paid those premiums had he known what the son was going to do.  This brought only more rage and tears.  The son said that he indeed had told his father of his unhappiness and demonstrated that unhappiness through mediocre and disinterested work effort, but that his father never really “listened” to him.


The son analogized the insurance money, which was enough to live comfortably (but not extravagantly) for the rest of his life, to a reward for years of pain and suffering while toiling for a controlling, unappreciative parent who was hellbent on controlling him for his entire lifetime and beyond.  The son saw dad’s “estate planning insured buy-sell agreement” as a way to perpetuate deadhand control from the grave.  The son thought it deliciously ironic that he was able to use the insurance proceeds, paid for by premiums for which his father had to work very hard, to chase his own dream–not his dad’s wishes.  The son compared it to killing a robber with the robber’s own weapon.


The sad fact is that had father and son listened to each other, they probably would have sold the business while dad was still alive, when the business was much more valuable.


Your plan for the future after you will be altered if everyone is not on the same page.  Talk to them about it. And listen to them.


Estate planning techniques have differing impacts on your loved ones.  There are lots of different types of estate planning techniques, and there are many variations and options within each technique.  Each technique (and variation thereon) has differing potential impacts on relationships and finances of your loved ones.  Just as every family is different, the impacts of the estate planning techniques are different.  Be cognizant of the differences in these potential impacts when you are evaluating them for your family.


Don’t let the Tax Tail Wag the Life Dog.  Be wary of some types of techniques that some estate planners want you to implement just because they save taxes.  In my opinion, too many estate planners pass up the opportunity to facilitate a family’s healing by simply uniting them against a straw man enemy: IRS.  Now here’s a real secret (some of my colleagues probably would even call it heresy, but hey, I’ll be dead soon, right?): it is much harder to create an estate plan that focuses upon not negatively altering relationships than it is to beat Uncle Sam out of estate taxes!


We have seen popularity waves of various estate planning techniques.  Currently in vogue is the family partnership or LLC, which has always been a fine estate planning technique.  However, the family partnership/LLC has taken on increased usage and popularity, particularly over the last five to ten years, often because of its attractiveness as an estate tax planning technique.


However, family partnerships/LLCs are not for every family, even if they save estate taxes.  Many spouses make fine business partners.  But not all.  Silent or dutiful or cooperative children usually make fine partners, at least while at least one parent is alive.  But some children are not as silent, not as dutiful, not as cooperative.  This can be especially problematic where the parents ignore the partnership/LLC once established, which has tax and non-tax risks. Some children aren’t suited to be, or know how to be, partners with parents or siblings.  Some aren’t suitable partners period.  The worst case here is a free-for-all by people who have been consigned together.  The costs of untangling the financial and relationship matters (if it can be totally done) often are pretty close to any tax savings achieved.


I am not intending to be critical of the family partnership/LLC as an estate planning technique.  I have assisted many in the formation of family partnerships/LLCs.  However, it may well be that some estate planners have been heavy-handed in their “prescriptions” of family partnerships/LLCs without either discussing the side effects thereof or doing any real analysis of the profile of the persons likely to be involved.  Maslow’s admonition applies here: “Who is good with a hammer begins to believe that everything is a nail.”  There are other types of estate planning techniques.


You must be in control of your estate planning process.  Even though most estate plans are built to ensure control by a client, the sad fact is that most clients were not, will not be or are not in control of the estate planning process.  You may not have been in real control of selecting your estate planning advisors.  Even if you were, you probably have had little say so about the makeup of the aspects of your estate plan.  Given all of the complexities involved in the techniques of estate planning, you cannot be expected to know as much about the technical ins and outs of estate planning as your estate planning advisors.  That is why you hired them.  However, don’t you know more about yourself, your family and your property than that advisor does?  Of course you do.  Your knowledge and input is a key ingredient in your estate plan.


I firmly believe that if more people felt like they could be in control of their estate planning, more people would do more of the estate planning that they should do.


You may ask why you should be in control of your estate planning process?  Do you feel that your lack of knowledge of the technical aspects of estate planning compromises your ability to be in control of your estate planning?  Do you feel confused and to some extent helpless when evaluating various estate planning bricks?  Do you think that controlling your estate planning in light of your lack of technical information about the bricks of estate planning increases the chances of a less then optimal estate plan?


My experience has been that the quality and strength of a client’s estate plan is directly proportional to the client’s control of and true involvement in the estate planning process.  Yet this seems to happen too seldom.  Why?  For starters if you are like most, you do not have a real conscious idea of what you really want to accomplish in your estate planning or indeed what you even could accomplish.  Your notion of your estate planning has to be and may vary significantly from what it could be.  There may be psychological reasons why you will not tend to your estate planning.  May be you feel that the grim reaper will not come for you for a long time.


I offer the following as another possible explanation: “planning paralysis,” which is a feeling of helplessness or a fear of feeling helpless about the estate planning process.  It also is a feeling which arises when people are dazed by the staggering number of estate planning options and decisions.  We all like to be our own persons.  To control our own destiny.  That is the American way.  Maybe you had (or heard about) a bad experience with an estate planning advisor.  Maybe you just are uncomfortable revealing personal or financial information to an estate planning advisor or to anyone else.  Maybe you just do not trust advisors, or you feel overmatched by them.  You might be concerned about cost.  Maybe you are concerned about not hurting someone’s feelings.


However, I suspect the real reason that most people are slow to either begin or follow through on estate planning is a fear of loss of control.  Clients fear the unknown – the “ride” the advisor will put you once you get started with estate planning.  I believe that people’s fear of loss of control manifests itself in procrastination.  Someone may feel that he or she lacks the requisite knowledge of the “bricks” of estate planning to intelligently argue with them.


There is no question that your estate plan should be much more important to you than to your estate planning advisors.  Advisors can and indeed should push a client only so far.  You can lead a horse to water, but you cannot make it drink.


However, an advisor should at least assist a client with drawing a clear picture as to why the client has not made progress with an estate plan.  Once a client understands the real reason why he or she has not progressed, the client should at least be able to begin the process of dealing with his or her obstacles in the way of the estate plan that the client actually wants and understands.


But don’t delay, because your time may be up soon.  Like mine is. Godspeed.

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Richmond Est. v. Comr., a BIG tax discount case goes badly for taxpayer

Key words: Valuation; discount for built-in capital gains
Executive Summary: In this federal estate tax case, in a memorandum decision, the Tax Court (Judge Gustafson) determined the discount for built-in capital gains for a 23.44% interest in a Pennsylvania C corporation, which owned, as its principal asset, a non-diversified portfolio of highly appreciated publicly-traded stock. The result was primarily a victory for the IRS and resulted in the imposition of an accuracy penalty. The case is appealable to the U.S. 3rd Circuit Court of Appeals.
Facts: At the time of her death, the decedent owned 23.44% of the stock of Pearson Holding Company (“PHC”), a closely-held Pennsylvania C corporation that owned a non-diversified portfolio of highly appreciated publicly-traded stock worth $50,690,504 out of a total asset value at the corporate level of $52,159,430. The decedent died on December 10, 2005. The estate’s appraiser had appraisal experience (i.e., having written 10-20 valuation reports and having testified in court), but he did not have any appraiser certifications.
That appraiser prepared a draft report that valued the decedent’s interest in PHC at $3,149,767, using a capitalization-of-dividends method. He provided the unsigned draft of the valuation report to the executors and to the return preparer, and he was never asked to finalize his report. Without further consultation with that appraiser, the estate reported the value of the decedent’s interest in PHC as $3,149,767 on the Federal estate tax return that the executors filed with the IRS.
Burden of Proof
The first issue that Judge Gustafson dealt with was whether the burden of proof shifted from the estate to the IRS under IRC Sec. 7491. Judge Gustafson noted that he decided the case based upon a preponderance of the evidence, rendering the IRC Sec. 7491 burden shift immaterial.
Valuation Positions
The valuation positions of the parties and how the Tax Court came out are as follows:
Value-estate tax return: $3,149,767
Value-estate-trial-income approach (capitalization of dividends): $5,046,500
Value-estate trial-cost approach (net asset value method): $4,721,962
Value-IRS notice of deficiency: $9,223,658
Value-IRS-trial: $7,330,000-cost approach (discounted net asset value method)
Value-Tax Court: $6,503,804-cost approach (net asset value method)
BIG tax discount-Estate:$18,113,083 (100%, i.e., dollar-for-dollar reduction of BIG tax)
BIG tax discount-IRS: $7,817,106 (essentially 15% of the net asset value of $52,114,041)
BIG tax discount-Tax Court: $7,817,106 (15% of $52,114,041)
Estimated amount of time to total diversification-Estate: n/a
Estimated amount of time to total diversification-IRS: 20-30 years
Estimated amount of time to total diversification-Tax Court: 20-30 years
Discount-lack of control-estate: 8%
Discount-lack of control-IRS: 6%
Discount-lack of control-Tax Court: 7.75%
Discount-lack of marketability-estate: 35.6% (using restricted stock studies analysis)
Discount-lack of marketability-IRS: 21% (using restricted stock studies analysis)
Discount-lack of marketability-Tax Court: 32.1% accepting restricted stock studies analysis)
Appraisal method-estate tax return: Capitalization of dividends (income approach)
Appraisal method-estate-trial: Capitalization of dividends (income approach)
Appraisal method-IRS-trial: Net asset value
Appraisal method-Tax Court: Net asset value
Annual stock diversification: 1.1% (2000-2005)/1.4% (2005-)*
IRS appraiser-trial: John Thomson
Estate appraiser-trial: Robert Schweihs

* Would take 70 years to fully diversify the appreciated stock at that rate

Built-in capital gains tax (“BIG tax”) discount

The principal issue in this case was determination of the proper BIG tax discount. The appraisers differed considerably in amount and method of computation.

At the outset, Judge Gustafson observed:

As the owner of less than a majority of PHC’s stock, [the decedent] could not unilaterally change the management or investment philosophy of the company; nor could she unilaterally gain access to the corporate books, increase distributions from the company, or cause the company to redeem its stock. She could not force PHC to make an S election or to diversify its holdings. She had no rights to “put” her stock to the company (i.e., to force it to buy her shares), and the company could not “call” her stock (i.e., could not demand to buy it).

The estate’s appraiser took the tact of the Fifth (Dunn Est. v. Comr.) and Eleventh Circuits (Jelke Est. v. Comr.) and concluded that the BIG tax discount should be 100% of the BIG tax, i.e., dollar-for-dollar reduction of the BIG tax. On the other hand, the IRS appraiser attacked the BIG tax discount in a rather bizarre and convoluted way. He analyzed the correlation between unrealized appreciation (i.e., built-in gain) and NAV discounts for closed-end funds as of December 31, 2004.

He compiled data from closed-end funds with unrealized appreciation accounting for 11% to 46% of the total net asset value, and he was unable to find any statistical correlation between the BIG discount that could be observed on sales and the unrealized appreciation of the seven closed-end funds. He concluded that in the case of companies with unrealized appreciation that consist of as much as 46% of the company’s value (which he rounded up to 50%), buyers are indifferent to the BIG tax liabilities on that appreciation when purchasing an interest in a closed-end fund. Therefore, the IRS appraiser reasoned that a potential buyer would be indifferent to PHC’s BIG tax to the extent that it was attributable to the portion of its unrealized appreciation that is equal to 50% of its $52,114,041 NAV (i.e., tax attributable to $26,057,021).

PHC’s unrealized appreciation accounted for $45,576,677 of its value (i.e., approximately 87.5% of the total NAV of $52,114,041), so the remaining appreciation (i.e., the amount of unrealized appreciation above 50% of NAV, or $45,576,677 less $26,057,021) is $19,519,656 (i.e., approximately 37.5% of NAV). The IRS appraiser concluded that “a dollar-for-dollar discount over 50% of the tax exposure” was appropriate. Thus, the IRS appraiser allowed a dollar-for-dollar discount for the tax attributable to the appreciation over 50% of PHC’s NAV (i.e., a dollar-for-dollar discount for the tax attributable to $19,519,656 in appreciation, i.e., a discount of $7,757,111 when using a 39.74% combined Federal and State capital gains tax rate).

Applying an effective tax rate of 39.74% to this gain equal to 37.5% of PHC’s NAV (i.e., the portion of PHC’s unrealized appreciation for which the tax liability would be afforded a dollar-for dollar discount), the IRS appraiser figured that the allowable discount for BICG should be 14.9% (i.e., 39.74% times 37.5%), rounded up to 15%.

Judge Gustafson concluded the following about the viability of the estate appraiser’s 100% reduction of BIG tax approach:

[W]e consider it plainly wrong in a case like the present one. The relevant inquiry is, of course, what price a willing buyer and seller would agree to; and it is clear that they would not agree to a 100% discount. To demonstrate this fact, PHC (with assets worth $52 million but burdened by an $18.1 million BICG tax) can be compared to a hypothetical holding company (“HHC”) that is identical to PHC except that HHC is burdened not by any BICG tax but by an $18.1 million note payable that is due tomorrow. No investor would be indifferent to this distinction and treat PHC and HHC as if they were equivalent. The investor knows that, if he buys HHC, then tomorrow he must pay off the $18.1 million note and have a portfolio not of $52 million worth of stock but only $34 million; and in the future–beginning tomorrow–he will receive the capital gains and the dividends generated by that smaller $34 million portfolio. On the other hand, the investor also knows that if instead he buys PHC, then he may defer the payment of the $18.1 million BICG tax as long as he retains the appreciated stock; in the future–until he sells off the appreciated stock over time and incurs the tax piecemeal over that period–he will receive the capital gains and dividends generated by the entire $52 million portfolio. PHC is simply worth more than HHC, because a prospective BICG tax liability is not the same as a debt that really does immediately reduce the value of a company dollar for dollar. A 100% discount, on the other hand, illogically treats a potential liability that is susceptible of indefinite postponement as if it were the same as an accrued liability due immediately. We do not adopt this approach. [Emphasis added]

However, Judge Gustafson was not impressed or persuaded by the IRS appraiser’s reasoning, concluding:

This reasoning is not supported by the evidence. We are unconvinced that a buyer would be wholly indifferent to the tax implications of built-in gain that constitutes up to half of a company’s assets. Furthermore, [the IRS appraiser] points to no data to show that, once a fund’s unrealized appreciation exceeds 50% of its NAV, there would then begin to be a correlation between NAV discount and the unrealized appreciation above 50%; nor is there evidence that the discount would simply be dollar for dollar for the portion in excess of 50% and not something more–e.g., an increase in elasticity (price sensitivity) for BICG liability once it reaches a certain point. He presented no data at all concerning funds with built-in gain constituting more than 50% of NAV. As a result, we cannot endorse [the IRS appraiser]’s approach to calculating the BICG discount, but we view the resulting discount amount–$7,817,106–to be a concession on the Commissioner’s part. [Emphasis added]

Turning to his own analysis of the appropriate BIG tax discount, Judge Gustafson observed:

Our conclusion: present value of the BICG tax liability If (as we hold) the BICG tax liability cannot be disregarded in valuing PHC, but if (as we also hold) PHC’s value cannot be reasonably discounted by that liability dollar for dollar, then the most reasonable discount is the present value of the cost of paying off that liability in the future. … The Commissioner’s expert did not use this present value approach, because he observed that at PHC’s historic rate for turning over its securities, it would take 70 years before all the stock had been sold and all the built-in gain had been taxed. If the $18.1 million of BICG tax were discounted over that period, on the assumption that PHC’s stocks would be gradually sold and its BICG tax would be gradually incurred over 70 years (on an average of $258,758 per year), then the present value of the $18.1 million liability would be only $3,664,119 (assuming a 7% discount rate).

However, this 70-year assumption would mistakenly allow PHC’s unique, subjective investment goals to dictate the value of the company, whereas what we seek is a fair market value—the price at which PHC would change hands between a willing buyer and a willing seller, not the price that a particular seller might demand or that a particular buyer might be willing to pay, and therefore not a price that assumes subsequent management of the company by a specific owner. As the estate rightly acknowledged, “The willing buyer and the willing seller are hypothetical, not actual persons, and each is a rational economic actor; that is, each seeks to maximize his advantage in the context of the market that exists at the valuation date.”

The advice that PHC received to diversify its portfolio (i.e., to sell stock more quickly than its 70-year trend would call for) indicates that a rational actor would expect a turnover period shorter than 70 years. PHC’s decision not to follow that advice was not irrational, but it was particular to PHC’s subjective goals. Even assuming that the PHC management would indefinitely follow its traditional philosophy and would sell stock only at the 70-year pace, and assuming that PHC shareholders would refuse to sell at prices that presumed a shorter turnover, that refusal would not affect the fair market value of PHC; it would instead indicate that PHC’s particular managers and owners were willing to forfeit or forgo some of PHC’s fair market value in order to pursue other aims.

The estate put on no evidence as to the length of the period that a typical investor would consider likely or optimal for turning over PHC’s stock (apart from the general fact that PHC’s advisors repeatedly suggested that PHC sell stock in order to diversify) but asserted only PHC’s particular historic rate (yielding a 70-year turnover period and, to the estate’s detriment, a relatively small $3.6 million BICG tax liability discount). [IRS appraiser]’s testimony on this score–i.e., that, notwithstanding PHC’s historic turnover rate, a potential investor would expect that a portfolio like PHC’s would turn over within a period of 20 to 30 years–is not rebutted, and we find it reasonable. …

We found the dollar-for-dollar method to be problematic, but we find his $7.8 million bottom line–which we take as a concession by the Commissioner–to be reasonable, for reasons different from those he advances.

A present-value approach that uses either a 20-year or a 30-year holding period and uses the different discount rates employed in various contexts in this case yields the following range of present values for the $18.1 million BICG:

Discount rate 20 years 30 years
(as calculated by P using
Ibbotson’s data) $7,570,358 $5,565,937

(as used by P in the capitalization of
dividend model) 7,580,584 5,575,086

(as calculated by the Court using
PHC’s historic data) 8,029,070 5,982,097

(generally accepted rate
of return) 9,594,513 7,492,200

Since the Commissioner’s $7.8 million concession falls comfortably within this range of $5.5 to 9.6 million, we use that figure. As a result, on the basis of these findings and the record before us, we find a $7,817,106 BICG discount to be reasonable in this case.

Discount for lack of control (“DLOC”)

The battle over DLOC boiled down to a battle over statistical measuring methods. The IRS appraiser looked at the mean of 59 data points in closed-end funds and calculated it as 6.7%. He then concluded that, even though the decedent did not control PHC, the decedent’s 23.44% interest was a large and influential block of PHC’s stock, so that her lack of control was somewhat mitigated, so the IRS appraiser reduced DLOC by .7% to 6.0% because of the “low dispersion of the remaining ownership interest [in PHC] and ease of management”. The estate’s expert used the same data but simply selected the median of the data set, 8.0%, as the appropriate DLOC.

Judge Gustafson did not accept the IRS appraiser’s subtle invitation to consider the “swing vote” issue and had the following to say about his DLOC analysis:

[IRS Appraiser] did not explain how he chose -0.7% as the amount of the appropriate reduction, and it appears to be simply a visceral reduction, for which we do not see the justification.

After tossing out three data points that were outliers on the high and low ends, Judge Gustafson selected the median and concluded that a DLOC of 7.75% was reasonable in this case.

Discount for lack of marketability (“DLOM”)

In computing DLOM, the IRS appraiser relied upon seven restricted stock studies. He chose the low end of the range, 26.4%, and then reduced it to 21% because PHC paid consistent dividends, had a very small amount of debt and was managed by professional investors.

For reasons not stated in the opinion, the estate’s appraiser did not perform an independent analysis of DLOM. Rather, he selected the highest end of the range of the same seven restricted stock studies that the IRS appraiser used: 35.6%. He argued that the seven restricted stock studies that the IRS appraiser used to derive DLOM are based on entities whose stock (unlike PHC’s) would relatively soon be freely marketable. The estate’s appraiser contended that restricted stock in publicly-traded corporations, on which public trading is restricted for only a brief defined period (during which only private trades may be made) may be less discounted in value than stock (like PHC’s) whose non-public status is of indefinite duration.

Judge Gustafson was not happy with the DLOM work of either appraiser. Judge Gustafson concluded that a 32.1% DLOM was appropriate, reasoning:

The parties seem to agree that the general range of marketability discounts relevant for consideration in this case is 26.4 to 35.6%, with an average discount of 32.1%, and we are unconvinced by either party’s rationale for deviating from this generality. We therefore find that a marketability discount of 32.1%–i.e., the average of the data sets–is reasonable in this case.


Judge Gustafson concluded that the value of the decedent’s 23.44% stock holding in PHC was worth $6,503,804 on the date of death, which was closer to the IRS’s valuation position of $7,330,000 than the estate’s valuation position of $5,046,500.

Accuracy-related penalty

IRC Sec. 6662(g)(1) provides for a 20% accuracy-related penalty where the taxpayer’s value on the return is less than 65% of the proper value. Mathematically, the return position, $3,149,767, was 48.43% of the value that Judge Gustafson determined, $6,503,804, thereby falling within the ambit of the penalty. There is an exception to imposition of the penalty. IRC 6664(c)(1) provides that the penalty is not to be imposed “if it is shown that there was a reasonable cause for such portion and that the taxpayer acted in good faith with respect to such portion.”

In sustaining the penalty, Judge Gustafson reasoned that the reasonable cause exception was inapplicable, noting:

While we do not disagree with the estate’s assertion that the decedent’s interest in PHC may be difficult to value, we believe that this further supports the importance of hiring a qualified appraiser. On the record before us, we cannot say that the estate acted with reasonable cause and in good faith in using an unsigned draft report prepared by its accountant as its basis for reporting the value of the decedent’s interest in PHC on the estate tax return. [Estate’s return appraiser] is not a certified appraiser. The estate never demonstrated or discussed how [Estate’s return appraiser] arrived at the value reported on the estate return except to say that two prior estate transactions involving PHC stock used the capitalization-of-dividends method for valuation. Furthermore, the estate did not explain–much less excuse–whatever defects in [estate return appraiser]’s valuation resulted in that initial $3.1 million value’s being abandoned in favor of the higher $5 million value for which the estate contended at trial.

Consequently, the value reported on the estate tax return is essentially unexplained.

In order to be able to invoke “reasonable cause” in a case of this difficulty and magnitude, the estate needed to have the decedent’s interest in PHC appraised by a certified appraiser. It did not. Instead, the estate relied on the valuation by [estate return appraiser] but did not show that he was really qualified to value the decedent’s interest in the company. [Emphasis added]

Therefore, Judge Gustafson sustained the accuracy-related penalty.

Comments: Reliance upon an unsigned business appraisal report to use on a federal estate tax return? Are you kidding me? In this day and age, it is unfathomable to me to rely upon the valuation work of an accountant who does not hold a special designation as a business appraiser for use on a federal estate tax return! The accuracy-related penalty was harsh but probably warranted under the facts.

I return to Hood’s Rules of Business Valuation: (1) actual value is irrelevant; (2) actual value is unknown; and (3) perceived, defensible value is everything. Perception is reality. Non-accredited practitioners can be easily painted as unexperienced and incompetent, even if they know what they’re doing. The risk of employing a non-accredited appraiser in a tax matter simply is too great to bear in my opinion.

In my opinion, there are five major business valuation credentialing organizations: American Society of Appraisers (“ASA”), AICPA (but only CPAs who hold the ABV designation), Canadian Institute of Certified Business Valuators (“CICBV”), Institute of Business Appraisers (“IBA”) and National Association of Certified Valuation Analysts (“NACVA”). Run from anyone who doesn’t hold a designation from one or more of these organizations. However, just because the business appraiser holds a designation doesn’t mean that the appraisal will be competent work. Caveat emptor.

In computing the BIG tax discount, Judge Gustafson disregarded the dollar-for-dollar reduction method and instead utilized a present value analysis and a holding period assumption, which the Tax Court also employed in Borgatello v. Comr. and more recently in Jensen Est. v. Comr. I agree with Judge Gustafson’s analysis of the BIG discount as the present value of the BIG tax liability.

As I have said and written before, the dollar-for-dollar reduction of the BIG tax, while certainly simple, strikes me as arbitrary and contrary to what a willing seller would agree to in an arm’s-length transaction. I predict that you’ll continue to see more of this type of analysis, except in the Fifth and Eleventh Circuits.

This case is appealable to the U.S. Third Circuit Court of Appeals. It is unknown at this point whether the estate will appeal. However, what seems clear is that if the estate does appeal, it will invite the Third Circuit to follow the lead of the Fifth and Eleventh Circuits.

On the other hand, the IRS appraiser’s modified dollar-for-dollar closed-end fund methodology, which Judge Vasquez expressly rejected in Jensen Est. v. Comr., was rejected again in this case by Judge Gustafson.

On DLOM, Judge Gustafson didn’t really respond to the principal criticism of the restricted stock studies that the estate’s appraiser raised: restricted stock isn’t restricted from public sale for very long, whereas closely-held stock has an indefinite holding period absent a put right. In my opinion, this is a very valid criticism of the restricted stock studies.

If they mean anything at all in the context of valuing interests in closely-held entities, results from a restricted stock studies analysis should serve as a floor on DLOM, i.e., that’s as low as it can be for a closely-held entity without a put right. I’m not a big fan of using a benchmark analysis of any kind, and that includes the pre-IPO studies and the restricted stock studies. I prefer a mix of measures to be employed, including an income approach like QMDM and an options approach, as opposed to putting all of one’s eggs into one method’s basket.

Cites: Richmond Est. v. Comr., T.C. Memo 2014-24; Jensen Est. v. Comr., T.C. Memo 2010-182; Litchfield Est. v. Comr., T.C. Memo 2009-21; Jelke Est. v. Comr., T.C. Memo 2005-131, vacated and remanded on other aspects of the valuation issue, 507 F. 3d 1317 (11th Cir. 2007), cert denied, U.S. Sup. Ct. Docket No. 07-1582 (2008); Dunn Est. v. Comr., 301 F. 3d 339 (5th Cir. 2002), rev’g T.C. Memo 2000-12; Borgatello Est. v. Comr., T.C. Memo 2000-264.

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Zacharius v. Kensington Publishing: The Intersection of Blended Families and Shareholder Agreements

This is a classic battle involving a blended family and pits a step-mother against a step-child.  Shortly after stepping down in 2005 as CEO of the family publishing company in favor of his son as his successor, Walter married Suzanne in 2006.  Walter, who held a majority of the stock of the closely-held corporation, and his two children entered into a stock voting agreement that kept voting to the group of the “initial shareholders,” who were Walter and his two children.  Walter died in 2011.

About a year later, frustrated that she had no input on the selection of directors, Suzanne attempted to sell her majority interest to a major publishing house.  She sued the corporation and Walter’s two children in New York state court to break the stock voting agreement.  Suzanne had a litany of complaints, including a claim of excessive compensation of the children.  Not unexpectedly,  the defendants move to dismiss the lawsuit.  The court dismissed five of the six grounds in the complaint, upholding the stock voting agreement.

The substantive issues aren’t as interesting to me as the situation, which seems to perfectly illustrate a case of poor planning on Walter’s part.  Or was it?  Walter may well have intended that Suzanne not receive full benefit of the Kensington stock because it clearly was conceivable that his plan, which divided the stock economic rights from the voting rights, was going to negatively impact Suzanne, his subsequent spouse.

Let’s face it: a majority of closely held stock is virtually worthless without the right to vote that stock.  If Suzanne was unable to monetize the stock or otherwise make it reasonably productive of income.  If the trust was a QTIP trust, Suzanne probably would have had at least some right to make the trust assets “reasonably productive of income.”  Maybe the trust had other assets that did produce income.  This ruling sheds no light on these issues, so this is sheer speculation on my part that is based upon my experience as a tax and estate planning lawyer.

Suzanne was not the mother of Walter’s children, and, since she married Walter late in his life, probably didn’t have any relationship with Walter’s children.  I strongly suspect that suing Walter’s children didn’t help herself with any positive relationship with them.  Walter and Suzanne probably were in the blended family spousal category of “empty nesters” in our two books on estate planning for blended families.

What could Walter have done to help Suzanne?  For starters, he could have required the corporation or his own children to buy his shares from his estate.  The bottom line seems to be that Suzanne sued because the existence of the stock voting agreement meant that she was thwarted from enjoying any real economic benefit from the majority interest in the Kensington stock.  If Walter didn’t intend Suzanne to receive any economic benefit from the stock, then he shouldn’t have left it to her.  I strongly suspect that this case will settle with Walter’s children purchasing Suzanne’s interests or in some way paying dividends on that stock.

Estate planning for blended families is difficult and often poses gut-wrenching choice decisions over how to treat a subsequent spouse and the client’s children.  What is sad in this case is that Walter’s plan virtually guaranteed a lawsuit by Suzanne against his children, which is not something that I would have recommended that he do.  Not only are lawsuits expensive and emotionally charged, but lots of family laundry gets aired for a voyeuristic public.   The lawsuit probably will destroy whatever minimal chance of any relationship between Suzanne and Walter’s children.

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That investment boilerplate matters, especially in blended families!!!


The Illinois appellate court affirmed the trial court’s granting of a motion for summary judgment on a claim for breach of fiduciary duty and unjust enrichment that a step-daughter brought against her step-mother, who was the income beneficiary of a QTIP trust that the step-mother-trustee had invested solely in municipal bonds. The appellate court was significantly swayed by the overall estate plan of the deceased father, who had created two other testamentary trusts for the benefit of his daughter and her descendants without including his surviving wife. The appellate court also was influenced by the language in the QTIP trust instrument that expressly negated the duty of investment diversification. The Illinois Supreme Court denied further appeal.


The decedent trust grantor, Luther, created a revocable living trust that divided into three trusts at his death, which occurred in 2003. Two of these resulting trusts solely provided for the decedent’s daughter, Tiffany, and her descendants. The QTIP trust benefitted the decedent’s surviving widow, Audrey, with Tiffany, Audrey’s step-daughter, and her descendants as the principal beneficiary. As trustee of the QTIP trust, which expressly negated the trustee’s duty to diversify trust investments, Audrey solely invested the trust corpus in municipal bonds. Luther didn’t give Audrey any right to make principal distributions for her own benefit from the QTIP trust.
Tiffany sued Audrey for breach of fiduciary duty and for unjust enrichment, alleging that the decision to solely invest the QTIP trust corpus in municipal bonds instead of in a diversified portfolio had damaged the value of the trust principal to the tune of approximately $300,000. Audrey filed a motion for summary judgment on all four counts, pointing to the express language in the trust instrument that negated the duty to diversify investments in the QTIP trust. In finding in Audrey’s favor, the trial court was swayed by the overall estate plan, which significantly benefitted Tiffany and her descendants, as well as the language in the QTIP trust that expressly negated the duty to diversify trust investments.
On appeal, Tiffany argued that the trial court had erroneously interpreted Luther’s intent regarding the QTIP trust and further that Audrey’s actions had violated the fiduciary duties of impartiality and prudent investment, neither of which had been negated in the QTIP trust. The appellate court disagreed and upheld the trial court’s granting of summary judgment in favor of Audrey on all counts. The Illinois Supreme Court denied further appeal.
It strikes me as somewhat surprising that neither court focused very much attention on the trustee’s duty of impartiality, which certainly would seem to have been violated by Audrey’s purposeful investment of 100% of the corpus of the QTIP trust in municipal bonds, which solely benefitted her at Tiffany’s expense. In my opinion, this decision could just as easily have gone the other way, but the Illinois Supreme Court denied further appeal.

It seems clear to me that the trust investment language was boilerplate. I would have probably gone the other way and found that the fact that Luther didn’t give Audrey any rights to principal from the QTIP trust to have been more important than either court found it to be. Instead, the courts seemed to be more significantly influenced by two facts other than that the trust instrument indeed negated the trustee’s duty to diversify the trust’s investments. The first fact was that Luther set up two other trusts in his estate plan for the sole benefit of Tiffany and her descendants, excluding Audrey. The second was that somehow the court believed Audrey’s testimony and that of her son that she actually sought out the best investment advice and was not wedded to tax-free municipal bonds.

Estate planning for blended families requires very fine distinctions as it is heavily nuanced in ways that typically aren’t required to be addressed or even considered in estate planning for single relationship couples. Even otherwise irrelevant boilerplate has to be carefully rethought and recalibrated in the blended family situation. In this case, it is hard to believe that the investment of 100% of the corpus of the QTIP trust in municipal bonds was somehow not a breach of the duty of impartiality. However, the boilerplate language concerning investment, which may not have even been considered important by Luther, was dispositive.


Carter v. Carter, 2012 IL App (1st) 110855 (Feb. 7, 2012).

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