Hello to all! it is interesting that, in the gift and estate tax valuation area, the Service has evidenced its disagreement with its own valuation standard - i.e. the "hypothetical willing buyer, willing buyer standard". This standard, per Code sections and Treasury Regutions, was designed to have an "objective standard of value" - but, of course, that opened up the issue of the non-marketability and lack of control of fractional interests in real estate and in companies of various types. Sol the result has been the "valuation discount game"!
In 2007, the Service proposed changes in Treasury Regulations to IRC Sec. 2053, with regard to contingent and as yet unsettled claims of liability - see my earlier newsletters on this subject. Now, as the result of the total taxpayer victory in the valuation case of Kohler v. Comm'r, T.C. Memo. 2006-152, the Service has proposed changes in Treas. Regs. Sec. 20.2032-1 to state that, where the alternate valuation date is selected by the estate(6 months after death value), only changes in value due to "market conditions" may be taken into account.
In the Kohler case, the privately-held company, after decedent's death owning 12.5% of the outstanding stock, approved a reorganization plan that involved teh opportunity to elect to have restricted stock - thus at least great discounts than would have been the case at the date of death. The plan was approved and the estate elected to take the restricted stock, obviously due to overall advantages to the estate. This was a key issue in the estate tax case, and the estate's appraiser was successful in arguing that, at the 6-month alternate valuation date, the now restricted stock was subject to deeper discounts - and the taxpayer estate prevailed.
Note that the estate could not, in and of itself, insure the reorg would take place, but in fact, the estate took advantage of the plan within the 6 month period. One of the Prop. Regs. examples deals with a family that sets up an FLP or LLC after date of decedent's death but prior to the alternate valuation date - presumably to take greater discounts. This too would not be allowed under the new Prop. Regs., which are subject to comment within the next couple of months.
Only "market conditions" can be taken into account, says the IRS. What are "market conditions" - as defined by the Service, these are "events outside of the control of the decedent(or decedent's executor or trustee) or other person whose property is being valued that affect the fair market value of the property being valued. Changes in value due to mere lapse of time or to other post-death events other than market conditions will be ignored in determining the value of decedent's gross estate under the alternate valuation method." Interestingly, in many cases, "lapse of time" is what the market determines lowers the value of assets, e.g. real estate in the recent economic downturn - but maybe that is not "mere" lapse of time!
So it appears this Service initiative is limited to situations in which the estate in some sense is pro-active in trying to (1) change downward the value of its assets, and (2) then elect the AVD, i.e. 6 months after decedent's death. In this limited sense, perhaps the proposal makes sense, but one wonders whether the Service really is trying to nit-pick its own traditional "fair market value" standard.
Regard to all.
Owen Fiore
email: owen@owenfiore.com
