Proving Estate and Gift Tax Value: Evolving Lessons From Recent Cases

[1] Introduction

The term, "fair market value," proves one of the most litigated in the Federal estate and gift tax code. Value lies in the eyes of the appraiser, often resulting in wide disparities between the Service's and taxpayer's appraised values. [See, e.g., Est. of Giovacchini v. Comm'r, TC Memo. 2013-27 (taxpayer's appraisal asserted $7.4 million value and Service's over $25 million).] The underlying assumptions, and at times the legal principles, on which an appraisal rests can vary greatly based on the particular asset and the appraisal method. The Tax Court claims wide latitude in deciding an asset's value, reserving the right to draw from each appraisal submitted as it deems appropriate to arrive at ultimate value based on a preponderance of the evidence. This article addresses the evolving trends in proving value as indicated by recent case law.

The positions of the Service and the taxpayer with respect to valuation depend in large part on the issue litigated. In the estate planning context the parties preferences as to value depend on whether the taxpayer's assets can be fully sheltered by the applicable exclusion amount. In a taxable estate, the taxpayer typically prefers a lower value in order to minimize estate tax payable; whereas, in a non-taxable estate, the taxpayer may prefer a higher value, especially with respect to depreciable assets, in order to obtain an increased basis. In each case the Commissioner likely will take the opposite position. The consistent tension between the Service and taxpayer as to valuation yields numerous cases each year. The recent cases discussed in this article involve taxable estates or gifts where the Commissioner's appraisal yields a higher asserted value than that of the taxpayer's appraisal.

The determination of value can have a substantial impact on the amount of tax ultimately paid and whether the court may assess a penalty for undervaluation. Analysis of recent cases provides a better understanding of trends in proving valuation…

[2] Trends in Application of the Burden of Proof: Applying the Preponderance of Evidence Standard

Taxpayers generally bear the burden of proving value, however, by presenting credible evidence and meeting certain other requirements, a taxpayer can shift the burden of proof to the Commissioner of the Internal Revenue Service. [Tax Court Rule 142; IRC § 7491. IRC § 7491.] The consistent theme running through recent opinions is a simple, and one would think obvious, one -- that it is important to submit some evidence or to stipulate to facts supporting each of the key assumptions on which a party's appraisal rests regardless of who bears the burden of proof. The corollary theme is that courts should premise any determination of value on such evidence. Despite the elemental nature of providing an evidentiary basis for each finding, recent court opinions reveal that both the parties and the Tax Court have on occasion detrimentally ignored its importance in questions of value. Recent cases highlight that a lack of evidence in the record and inattention to detail in the appraisal or in the submission of testimony can cause the court to arrive at a value favoring the other party. Current appellate court opinions also take issue with the manner in which the Tax Court employs the preponderance of evidence standard admonishing that any determination of value must be grounded on facts substantiated by the evidence and not on conjecture as to assumptions and facts not supported by the evidence. Both criticisms rest in application of the burden of proof in valuation cases…

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Information referenced herein is provided for educational purposes only. For legal advice applicable to the facts of your particular situation, you should obtain the services of a qualified attorney licensed to practice law in your state.

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