Freedom Is Precious
My last newsletter, dated October 20th, was prepared prior to my release from the Federal Bureau of Prisons custody. I had been at the Coeur d’Alene “halfway house” for six weeks after traveling from California to Idaho. Being out of the “camp” certainly was a welcome change, but actually being released on October 20th was exhilarating and beyond description. Mary Ann and I have so much enjoyed being together, and my now being able to talk with family and friends often and without time limit truly is wonderful.
Four of our children, Karen, John, Susie and Mark, together with spouses, significant others and grandchildren, put on a blast of a welcome home party for me on October 28th at our Syringa home. Family and friends totaled 40 in number and it was a great party. Mary Ann, who has been so wonderful during these past several difficult years, had a great time, and the top surprise was her scroll-like (meaning long!) “Honey Do” list of chores for me now that I am home. I must confess that nearly six weeks later I have not completed many of the jobs – that’s for the best, as enjoying by doing will keep me active.
Mary Ann and I sincerely hope everyone who reads this newsletter will have a wonderful holiday season – healthy, joyous, peaceful and with family presence, support and love. We certainly hope for the best during the holidays and look forward to a much better 2007.
Consulting Mission Statement
With sincere thanks to my former law firm, now Ramsbacher Prokey LLP, and especially John Ramsbacher and John Prokey, the firm’s partners, I was able to keep up fairly well on new tax and estate planning developments during my 14-month stay in “camp”. Now that I am released, I have commenced non-lawyer consulting and already have been involved in several significant projects.
The archives of the newsletter, available for your review, include the Mission Statement, my updated Resume, and a form of Engagement Letter. Any questions on these items are most welcome via telephone, email or letter.
The Mission Statement might be rephrased in terms of the areas of service I can perform as a non-lawyer consultant, in full cooperation with clients and their advisors, including legal counsel. So following is an outline of such service areas:
1. Participation in the process of Family Wealth Planning (inter-vivos and testamentary) with the integration of family, investment and business goals to create, manage and preserve wealth.
2. Conducting of audit reviews of existing wealth planning, especially related to entity and technique structures, such as Family Limited Partnerships (FLPs) and LLCs, revocable and irrevocable trusts, gifts, sales and both compensation and asset leasing arrangements, uses of life insurance, and various charitable trusts and programs.
3. Assistance to the client’s legal, tax and financial advisors as to designing, documenting, implementing and reviewing for performance both entities and techniques that often are intended to be tax efficient in carrying out family goals.
4. Analysis and providing suggestions and strategy recommendations on client advisor handling of income and transfer tax disputes with IRS, at audit, Appeals and in the U.S. Tax Court, with emphasis on productive settlement negotiations and evidentiary standards.
5. Review of valuation principles and strategies as applied to entity equity interests, including working with valuation appraisers, legal counsel and the client in considering valuation adjustment (“discount”) and methodology issues and planning.
The Langer Tax Court Opinion – A Taxpayer Winner!
In my October 20, 2006 newsletter issue, I commented strongly on the failure of advisors, including appraisers and legal counsel, to effectively represent the interests of their client in a gift tax case. My discussion of the Dallas case provided lessons to clients and their advisors on the importance of adequate case preparation as well as presentation, if necessary, at trial.
Now along comes the case of Estate of Wallace Langer v. Commissioner, T.C. Memo. 2006-232 (10/30/06), which is a case study in effective representation, both by tax counsel and by the taxpayer’s business valuation appraiser. My initial comments on this case were published in Steve Leimberg’s popular and timely Email Estate Planning Newsletter, Archive Message #1048, which can be found at www.leimbergservices.com.
For the convenience of my readers, I have revised somewhat those comments and present a complete article on Langer set forth as follows – enjoy and Merry Christmas and Happy Holidays!
Text of Article: (Key message is to show (i) how tax cases start with good planning and continue through audit, Appeals and only occasionally into trial in Tax Court, and (ii) that the cooperation of independent professionals – tax lawyers and appraisers – is essential to taxpayer client success – and satisfaction! The Langer case is an excellent example of both these points.)
The cooperation and yet independence of taxpayer’s legal counsel and appraisers served well the Estate of Wallace Langer, as evidenced in Langer v. Commissioner, T.C. Memo. 2006-212(October 30, 2006). At trial in U.S. Tax Court, real estate valuation was the only issue in dispute. This was due to the solid efforts of counsel and appraisers during the planning of the Langer Family’s estate plans as well as during the Wallace Langer Estate’s audit of the Federal estate tax return and subsequent Appeals negotiations and court-imposed settlement negotiations between taxpayer counsel and IRS trial counsel.
The decedent at death owned a 29.19% non-managing member interest in the LangerFamily LLC (LFLLC), which entity owned a number of commercial development parcels of land formerly owned and farmed by the Langer Family for over 100 years in Sherwood, Oregon, just outside Portland. Read on and learn how effective legal representation and competent professional appraisal efforts can combine for a nearly 50% combined valuation discount of an LLC interest – without any litigated 2036 attack and without trial on the discount!
Langer Family LLC.
After many decades of farming, the Langer Family members came together in formation of a limited liability company to maximize development potential of their land, part of the “Town Center” area of Sherwood. Maximizing land values was an important goal, as was management of the development process, including dealing with the city council. And, of course, how to preserve for family members maximum value, net of income and estate tax, was a planning imperative. LFLLC was a manager-managed LLC, according to tax counsel John Draneas, of nearby Lake Oswego, Oregon, who represented the estate in the Tax Court litigation as well as in the audit and subsequent negotiations with IRS. This article must deal with the real estate valuations of two of seven Planned Unit Development (PUD) parcels owned by LFLLC as this was the subject of Tax Court determination. However, as we will see, most of the potential for dispute had been resolved, largely in the estate’s favor, prior to trial!
Real Estate Valuation – Comparable Sales Methodology Adjusted.
At the Tax Court trial, the remaining two PUD phases in dispute (out of seven phases owned by LFLLC at decedent’s date of death in early 2000) were the subject of valuation testimony by appraisers for taxpayer and IRS. Remember that by the date of trial, stipulations were in place on the real estate values of five of seven PUD parcels, the viability of the LLC for estate tax purposes (Section 2036 having been raised in audit but dropped by the IRS Estate Tax Attorney due to strong business purpose for the entity), and a 47-1/2% combined control and marketability valuation adjustment (discount) for decedent’s interest in the entity’s net asset value. Congratulations to the professional valuation appraiser selected by counsel John Draneas, namely, Steve Kam, ASA, of Cogent Valuation in San Francisco, who developed a report concluding a 63%-plus discount!
PUD phases 2(2.48 acres, rectangular in shape) and 5(11.7 acres, with an “awkward configuration”, with both parcels being not on the street exposure, were analyzed by petitioner estate’s appraiser Kelley and by the IRS appraiser Pio. The accepted “highest and best use” standard for real estate value was accepted as was the comparable sales methodology. Clearly, given the facts involving the Town of Sherwood and the impetus for the LLC itself, commercial retail development was the highest and best use.
However, in advancing specific comparables, considering PUD risks, uncertainties and costs as well as interpreting sales comparables, the appraisers came up with substantially different conclusions. On Phase 2, there was only about a $100,000 difference between the appraisers – not much considering both the 29%-plus interest of decedent in the LLC and the stipulated 47-1/2% discount! The Tax Court agreed and went with the Pio appraisal of $620,000.
But then on Phase 5, the IRS appraiser opined a value of $3.4 million, while taxpayer’s appraiser Kelley came up with $2.1 million. This is a $1.3 million value differential, but in terms of estate tax value for decedent’s estate is barely $200,000 – meaning a bit over $100,000 in estate tax at issue, plus interest – for over 5 years! Yet it seems that the 11 hours of trial, all in one day per Mr. Draneas, was worth it – the Tax Court came up with a $2.8 million value for Phase 5.
Nevertheless, the Tax Court provided a number of insights for appraisers and client advisors in its consideration of the opinions of value on Phase 5:
1. Date of Death Value is the Key Date – Beginning with negotiations with Target 6 months following decedent’s death, it still took several years of negotiations with both the buyer and the Town of Sherwood for the LLC to dispose of Phase 5. Appraiser Kelley, while paying lip service to the comparable sales method, essentially employed a discounted cash flow (DCF) analysis relying on what he described as “extended marketing and the due diligence period” required to complete a sale. The Tax Court disagreed, for two reasons: (1) date of death is the valuation date (unless the estate elected the 6-month later alternate valuation date, and (2) uncertainties such as offsite improvement costs, changing city and resident views on commercial development, and possible oversupply of commercial properties all should be reflected in the appropriate sales comparables.
2. Relevancy of Sales Comparables - The court accepted only 2 of appraiser Kelley’s 4 comparables as the others were sales which occurred 3 years following decedent’s death. Then Tax Court Judge Haines also rejected 5 of appraiser Pio’s comparables, fixing upon the same two comparables that he accepted from the Kelley report. This reminds all of us, appraisers included, that the Tax Court always will play the “pick and choose” game with appraisal reports. So the better the report, the more choosing from that report will be considered appropriate by the court, the trier of fact – including the fact question of “fair market value”.
3. Weighing Comparable Sales – Five factors were listed by the court in weighing relevant comparable sales: location, exposure, configuration, accessibility, and zoning. Two of these factors were believed by Judge Haines to be most significant in this particular case, namely, location and exposure. There was a traffic count issue as Phase 5 was located on a less desirable street than were the court-selected comparables. Also, the “awkward configuration” of Phase 5 was a negative factor, in the court’s opinion. And then, showing how judgment must play into any use of comparable sales methodology, the court concluded: “…we find that a 25-percent discount from the average sales price per square foot of the comparables is appropriate"! I would say not a bad result for a day’s work in trial of counsel and his witnesses.
Diligence Pays Off.
This estate plan for the Langer Family began with the family decision to “go with the flow” of Sherwood’s development, actual and potential. So the originally 8-Phase PUD approval from the Town of Sherwood was obtained by the Langer Family in 1995, and thereafter the LFLLC was formed in May of 1998, bringing together under a manger’s control the family members’ respective farmland holdings. Legal counsel guided the family throughout the process, and qualified appraisal assistance was obtained early on and for Wallace Langer’s Estate Tax Return (Form 706). Thus, there were five years of careful planning before decedent’s death.
Then after decedent’s death in the year 2000, again careful planning of taxpayer’s advisors, including the appraiser here, led to resolving really most of the issues before Tax Court trial in favor of the estate. Hats off to all the advisors, and the Langer case is a good lesson for all of us on how diligence pays off!
