The Tax Court and Expert Valuations

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Jason B. Freeman

Jason B. Freeman

Managing Member


Mr. Freeman is the founding member of Freeman Law, PLLC. He is a dual-credentialed attorney-CPA, author, law professor, and trial attorney.

Mr. Freeman has been named by Chambers & Partners as among the leading tax and litigation attorneys in the United States and to U.S. News and World Report’s Best Lawyers in America list. He is a former recipient of the American Bar Association’s “On the Rise – Top 40 Young Lawyers” in America award. Mr. Freeman was named the “Leading Tax Controversy Litigation Attorney of the Year” for the State of Texas for 2019 and 2020 by AI.

Mr. Freeman has been recognized multiple times by D Magazine, a D Magazine Partner service, as one of the Best Lawyers in Dallas, and as a Super Lawyer by Super Lawyers, a Thomson Reuters service. He has previously been recognized by Super Lawyers as a Top 100 Up-And-Coming Attorney in Texas.

Mr. Freeman currently serves as the chairman of the Texas Society of CPAs (TXCPA). He is a former chairman of the Dallas Society of CPAs (TXCPA-Dallas). Mr. Freeman also served multiple terms as the President of the North Texas chapter of the American Academy of Attorney-CPAs. He has been previously recognized as the Young CPA of the Year in the State of Texas (an award given to only one CPA in the state of Texas under 40).

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 Court Litigation Attorneys

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