Page 25 - Business Valuation for Estates & Gift Taxes

Blind reliance on even well-established factors like those found in Mandelbaum can lead to unintended,
and likely unfavorable, results. For example, in Peter S. Peracchio v. Commissioner, T.C. Memo 2003-
280, Judge Halpern stated

To the extent [the appraiser] believes that the benchmark range of discounts we utilized in Man-
delbaum v. Commissioner, supra, is controlling in this or any other case, he is mistaken. Nothing
in Mandelbaum suggests that we ascertained that range of discounts for any purpose other than
the resolution of that case. To the contrary, we specifically stated that we were using the upper
and lower limits of that range ‘as benchmarks of the marketability discount for the shares at
hand.’ If, instead, [the appraiser] simply believes that such range of discounts is equally appro-
priate under the facts of this case, he offers no justification whatsoever for that view. We believe
he would be hard pressed to do so; the entity at issue in Mandelbaum, an established operating
company, bears little resemblance to the partnership.

This is the good example of a valuation analyst relying on a case that did not adequately support his po-
sition. As stated earlier in this chapter, Tax Court memorandum cases can be cited as legal authority, but
they do not create precedent. In addition, the Mandelbaum case dealt with discounts for lack of marketa-
bility in an operating business, whereas the Peracchio case dealt with a holding company. Judge
Halpern clearly was not persuaded that the same factors were appropriate for the two types of entities.
The important lesson from this example is that valuation analysts should carefully review case law with
professionals who are well versed in valuation case law when appropriate, especially if there is any
doubt about the use of case law to support a conclusion of value.

Issues in Tax Court Cases

Over the years, the Tax Court and U.S. District Court have dealt with a variety of valuation issues—
some of which are discussed in the following text.

Standard of Value

In the estate and gift tax arena, the required standard of value is fair market value. Courts do not always
understand this value concept and, as a result, apply it incorrectly as illustrated in Estate of Alice Fried-
lander Kaufman v. Commissioner, T.C. Memo 1999-119, which was appealed to the 9th Circuit Court of
Appeals (Morrissey, et al. v. Commissioner, No. 99-71013 [9th Circuit, March 15, 2001]). In the origi-
nal case, the court ruled in favor of the IRS on the value of an interest in an operating company. The
valuation analyst for the taxpayer had considered two transactions of the company’s stock that had oc-
curred shortly after the valuation date, which the court rejected stating that they were "not sufficiently
similar to the estate’s much larger 21.51 percent interest to make their sales price representative of the
value of the estate’s stock."

The taxpayers appealed the decision to the 9th Circuit which reversed and remanded the Tax Court’s de-
cision stating that the two sales that occurred soon after the date of death were at arm’s length and
should be considered when determining the fair value of the stock. Some of the court’s remarks follow:

[Definition of fair market value]. The willing buyer and willing seller are to be postulated, not as
a particular named X or Y, but objectively and impersonally. As the Tax Court itself has held,
the Commissioner cannot ‘tailor hypothetical' so that the willing seller and willing buyer were
seen as the particular persons who would most likely undertake the transaction.’ Actual sales be-
tween a willing seller and buyer are evidence of what the hypothetical buyer and seller would
agree on. [citations omitted]. No good reason existed to reject the sales by Branch and Hoffman

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