Estate of Gallagher Tax Court Case is a Valuation Tutorial

The Tax Court Speaks Loudly and Firmly on the Responsibilities of Business Appraisers

Hempstead & Co. has published “Estate of Gallagher is a Valuation Tutorial.”  The article emphasizes the importance of providing the court with a clear and convincing explanation of the assumptions and arguments you have employed in carrying out a business appraisal. It discusses the recent Tax Court Memorandum opinion in the Estate of Gallagher v. Commissioner, (TC Memo. 2011-148).  The court’s valuation was closest to the value on the return as filed.

A recent opinion by the U.S. Tax Court, Estate of Gallagher v. Commissioner, TC Memo 2011-148, deals with a full range of the issues frequently encountered in valuing a privately held company for estate tax purposes.  In a recent “Around the Valuation World” topical monthly webcast for NACVA, I talked about the importance of Gallagher, the facts of the case, Judge Halpern’s concerns at the Tax Court, and lessons learned for improving the credibility of all business appraisals, whether they come before the court or not. Listen to full audio HERE.

Gallagher was an estate tax case involving a Family Limited Partnership (FLP), which is a vehicle to move wealth from one generation to another.  FLPs have tax and non-tax elements and consequences.  FLPs also have general partners and limited partners:  Key issues affecting limited partners are lack of control and lack of marketability.

At issue in Gallagher were a business valuation and a 15% interest in that business.   The taxpayer claimed the 15% interest amounted to $35M, but the Internal Revenue Service (IRS) claimed it should be correctly valued at $49M.  At trial, both parties introduced new appraisals ($28M, per taxpayer, and $41M, per IRS).  The case resulted in Judge Halpern finding the correct value was $32M. 

The judge was critical of both appraisers’ failure to defend, explain, document, and properly support their conclusions and opinions.  

Key lessons learned?  It is very important to understand the necessity of providing persuasive support for all elements of your business appraisals.  Documentation, explanation, clarification and defense are key words to appraisal credibility.

Howard A. Lewis, MS, ABAR, AVA, CBA is the Executive Director of the Institute of Business Appraisers, the nation’s oldest membership association serving the educational and accreditation needs of business appraisers. Prior to joining IBA in 2008, Howard served as the National Program Manager for the Engineering and Valuation Programs at the Internal Revenue Service (IRS). He can be reached at 954-607-6664 or e-mail at hlewis@go-iba.org