The Tax Court and Expert Valuations

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Matthew L. Roberts

Matthew L. Roberts

Principal

469.998.8482
mroberts@freemanlaw.com

Mr. Roberts is a Principal of the firm. He devotes a substantial portion of his legal practice to helping his clients successfully navigate and resolve their federal tax disputes, either administratively, or, if necessary, through litigation. As a trusted advisor he has provided legal advice and counsel to hundreds of clients, including individuals and entrepreneurs, non-profits, trusts and estates, partnerships, and corporations.

Having served nearly three years as an attorney-advisor to the Chief Judge of the United States Tax Court in Washington, D.C., Mr. Roberts leverages his unique insight into government processes to offer his clients creative, innovative, and cost-effective solutions to their tax problems. In private practice, he has successfully represented clients in all phases of a federal tax dispute, including IRS audits, appeals, litigation, and collection matters. He also has significant experience representing clients in employment tax audits, voluntary disclosures, FBAR penalties and litigation, trust fund penalties, penalty abatement and waiver requests, and criminal tax matters.

Often times, Mr. Roberts has been engaged to utilize his extensive knowledge of tax controversy matters to assist clients in their transactional matters. For example, he has provided tax advice to businesses on complex tax matters related to domestic and international transactions, formations, acquisitions, dispositions, mergers, spin-offs, liquidations, and partnership divisions.

In addition to federal tax disputes, Mr. Roberts has represented clients in matters relating to white-collar crimes, estate and probate disputes, fiduciary disputes, complex contractual and settlement disputes, business disparagement and defamation claims, and other complex civil litigation matters.

The Tax Court and Expert Valuations

Nelson v. Comm’r, T.C. Memo. 2020-81 | June 10, 2020 | Pugh, J. | Dkt. Nos. 27313-13, 27321-13

Short SummaryMrs. Nelson’s father cofounded Compressor Systems, Inc. (CSI).  CSI sells and rents gas compression equipment to the oil and gas industry and provides financing and maintenance services in connection with that equipment.  Mrs. Nelson’s father continued to expand his family businesses throughout his life, operating in Texas as a Caterpillar-approved dealer in certain territories.

As part of this expansion, Mrs. Nelson’s father organized Warren Equipment Co. (WEC), which was a holding company that owned 100% of seven other operating subsidiaries, including CSI.  After his death, Mrs. Nelson indirectly through Longspar held most of the common and preferred stock in WEC.  Longspar was formed as a Texas limited partnership to:  (1) consolidate and protect assets; (2) establish a mechanism to make gifts without fractionalizing interests; and (3) to ensure that WEC remained in business and under family control.

On December 23, 2008, the taxpayers (Mr. and Mrs. Nelson) formed the Nelson 2008 Descendants Trust (Trust).  Mr. Nelson is a beneficiary of the Trust, along with their four daughters.  Thereafter, Mrs. Nelson made two transfers of limited partnership interests in Longspar to the Trust.  The first transfer occurred on December 31, 2008, and was done via a Memorandum of Gift and Assignment of Limited Partner Interest for $2,096,000 “as determined by a qualified appraiser within ninety (90) days of the effective date of this Assignment.”  The second transfer occurred on January 2, 2009, and was done via a Memorandum of Sale and Assignment of Limited Partner Interest for $20,000,000 “as determined by a qualified appraiser within one hundred eighty (180) days of the effective date of this Assignment.”  In connection with the second assignment, the Trust executed a promissory note for $20 million.

After the assignments, the taxpayers hired an appraiser to value the limited partnership interests in Longspar.  The appraiser concluded that, as of the valuation date, the fair market value of a 1% limited partnership interest in Longspar was $341,000.  In arriving at this conclusion, the appraiser relied on a fair market valuation of WEC’s common stock completed by Ernst & Young.  Thus, on the basis of his valuation, the appraiser determined that Mrs. Nelson’s December 31, 2008, and January 2, 2009, transfers equated to the rounded amounts of 6.14% and 58.65% limited partnership interests in Longspar, respectively.

The taxpayers filed separate Forms 709, United States Gift (and Generation-Skipping Transfer) Tax Returns for 2008 and 2009.  On their 2008 Forms 709 they each reported the gift to the Trust “having a fair market value of $2,096,000 as determined by independent appraisal to be 6.1466275% limited partner interest” in Longspar.  They did not report the January 2, 2009, transfer.

The 2008 and 2009 gift tax years were audited by the IRS.  Later, the IRS issued notices of deficiency determining that the taxpayers had undervalued the December 31, 2008, gift and that their halves of the gift were each worth $1,761,009 rather than $1,048,00 as of the valuation date.  The IRS also determined that the taxpayers had undervalued the January 2, 2009, transfer by $13,607,038 and therefore concluded that each had made a split gift in 2009 of $6,803,519.

Key IssueWhether the interests in Longspar Partners, Ltd. (Longspar), transferred on December 31, 2008, and January 2, 2009, were fixed dollar amounts or percentage interests; and (2) the fair market value of those interests.

Primary Holdings:

Key Points of Law

InsightAs with many valuation issues in tax litigation, the Nelson case involved a battle of expert opinions.  When large gifts are made, taxpayers are well advised to seek qualified appraisals of any gift transfers and document the transfers accordingly.

 

Tax Litigation Attorneys

Need assistance in managing the Tax Compliance process? With our unique substantive and procedural knowledge, we can provide a comprehensive approach to the tax dispute resolution process, often collaborating with clients’ existing tax professionals to formulate creative solutions to the most complex tax problems. Freeman Law offers value-driven legal services and provides practical solutions to complex tax issues.  Schedule a consultation now or call (214) 984-3410 to discuss your tax concerns and questions? 

 

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