Estate and Succession Planning has been my professional and now consulting concentration for 50+ years - even though the American Taxpayer Relief Act of 2012 made "permanent" very high estate and gift tax per person exemptions, there is much to do in estate and succession planning. Less exposure to the Federal and even some State death taxes really means more wealth to to the younger generations. "You can't take it with you", referring to property of the decededent at his or her death, is still very true. Many of my Newsletter readers have decades of experience in succession planning and realize the importance of this area. As I said way back at the 1978 NYU Institute on Federal Taxation, it is not just tax savings that is important here, but rather the key issue is for advisors to assist clients in meeting family, business and investment goals on a multi-generational basis.
Webcasts and Webinars for Tax Advisor CPE I now am working with two CPE providers on webcasting, namely, WesternCPE (www.westerncpe.com) and CPE Solutions (www.cpecredit.com). On Monday, June 20th I present an introductory succession planning course with CPE Solutions, namely, "Estate & Succession Planning for the 99%" - namely, concentrating on the 99+% of American families/our clients who do not have to worry at least about the Federal estate tax. Then beginning in July, WesternCPE will be scheduling various of my four estate and succession planning courses, which include the "99%" course, Trusts & Pass-Through Entity Planning, Valuation Strategies and Buy-Sell & Deferred Compensation Agreements. In the Fall, beginning October, I will be presenting live webinars on the foregoing four courses plus a special new one, "Estate & Succession Planning Developments - 2012-2016" for CPE Solutions - check out the dates and times online at www.cpecredit.com.
Giustina Tax Court Case - The Final Chapter. I have been following this case for several years, and now it has come to the final chapter - the Tax Court Supplemental Opinion on its 2011 Opinion, following the 9th Circuit Court of Appeals 2014 reversal and remand to the Tax Court. This case is a classic "battle of the appraisers" valuation case involving a non-controlling, limited partner interest of the decedent in a Family Limited Partnership. In the first case, its opinion issued in 2011, Judge Morrison of the Tax Court took over the valuation process and obviously went too far! Let's see what happened and learn about valuation in the process.
The best quote is that included in the 9th Circuit's Opinion, quoting from Simplot v. Commissioner (9th Circuit, 2001): The Tax Court engaged in "imaginary scenarios as to who a purchaser might be, how long the purchaser would be willing to wait without any return on his investment, and what combinations the purchaser might be able to effect with the existing partners." The decedent, Natale Giustina, was the patriarch of a family owning some 48,000 acres of substantially contiguous timberland being managed and farmed on a long-term, sustainable yield basis. He owned at his 2005 date of death a 41+% non-controlling, limited partner interest in Giustina Land & Timber, and FLP in which the general partners were younger generation family members.
I reviewed the case in one of my 2011 Newsletters, and again, upon the 2014 9th Circuit Opinion being issued in a February, 2015 Newsletter. The basic issue here ended up being the evidence of valuation and that the Tax Court Judge, Judge Morrison, failed to follow the evidence and rather inserted his own opinions regarded what might happen, thus violating the hypothetical willing buyer - willing seller Fair Market Value standard of value. The citations for the three (3) opinions in this case are: T.C. Memo. 2011-141, 586 F. App'x 417 (9th Cir. 2014), and most recently, T.C. Memo. 2016-114 (June 13, 2016). All of these opinions can be downloading from the internet, so I suggest advisors read them as together a primer on what is involved and how to handle a valuation case. D. John Thornton, a well-known tax attorney in Boise, ID, was lead counsel in the referenced Simplot case as well as in Giustina.
The 9th Circuit took issue with the Tax Court's conclusion that there was a 25% likelihood of liquidation of the partnership, even though (1) the decedent had only a non-controlling limited interest in the FLP, and (2) the uncontroverted evidence at trial was that the FLP would be operated for decades as a sustainable yield timber farm. So there was no evidence any decision would ever be made to sell out all the timber. The assumptions behind Judge Morrison's conclusion were just too much for the 9th Circuit panel to accept, and so it concluded the Tax Court decision involved "clear error" and reversed. But the appellate court went further and directed the trial court to use only valuation methodology as a "going concern". Note that the present value on an income valuation method of the FLP was $50 million, while the value an a net asset value methodology was $150 million! The battle of the appraisers was quite interesting to review in the opinions issued in Giustina, and again I suggest my readers check out the three opinions! The 9th Circuit directed the Tax Court here, which generally is unusual, but it reconfirms the critical importance of following the evidence. Even though the Federal trial courts are the "gatekeepers" on expert testimony of all types (ala the 1993 U.S. Supreme Court case of Daubert), the facts presented in evidence still must guide the courts.
Reviewing these three opinions will allow readers to better understand how the mixing of valuation methodologies takes place in the litigation context. Robert Reilly of Willamette Management Associates was the estate's expert and John Thomson of Klaris Thomson Schroeder was the IRS independent appraiser - both of these appraisers are well-known and have lots of experience in estate tax valuation cases. Mr. Thomson weighed the NAV method (a number 3x that of the income method!) by 60% and other methods, income and market, by an aggregate of 40%. Mr. Reilly used only the income and market methods, stating that the NAV method could or should not be used as the estate had only a minority interest in the FLP. The court however in 2011 believed there still was a 25% probability that partners would get together and sell all the timber - note that the parties here had agreed to a 40% "market absorption" discount on the timber value! No evidence was presented on any probability of sale and liquidation of the partnership assets - to the contrary all evidence pointed to long-term sustainable timber farming!
The bottom line was that the estate's 706 value nearly prevailed in the end - 11 years after Mr. Giustina's death! You can see my June, 2016 LISI (Leimberg Information Services, Inc.) email commentary detailing all three opinions in this case. Truly, valuation is a core concept in tax planning, but a somewhat uncertain and nebulous one at that!
I hope you enjoy this Newsletter as summer begins in earnest!