Those guys don't know anything . . .
Or so I seem to hear every time I discuss the need to hire an expert to value business and real estate interests. It’s frequently been my experience that few things bring implementation of a succession plan to a halt faster than having to pay a valuation expert. After all, those guys don’t know anything . . . right? However, in case after case, a detailed, substantiated valuation, bests the IRS almost every time there’s a dispute over asset valuation or the application of minority, lack of control or other discounts. The case of Litchfield v. Commissioner, T.C. Memo 2009-21 which came down earlier this year is no exception.
In Litchfield, the estate owned interests in a real estate company and a securities company. A portion of the interests were owned by Ms. Litchfield outright and a portion of the interests were owned through a QTIP trust. The combined interests added up to a minority stake in each company, permitting the application of a valuation discount. In upholding most of the discounted valuation, the tax court found that the estate’s valuation expert used more precise methods for determining value and had a more thorough knowledge of the companies’ business strategies. This depth of understanding was found to be more convincing than the less rigorous valuation methods used by the IRS. So remember the real benefit of a valuation expert—done properly, your transactions and discounts are more likely to be honored in the face of an IRS challenge.
