Federal Case Law Update
A summary of recent federal court cases involving gross misstatement of valuation.
This monthâ€™s federal court case summaries feature seven cases that highlight the recent U.S. Supreme Court decision involving gross misstatement of valuation. In addition, the summary features cases that delineate the consequences to valuation professionals who fail to comply with Tax Court pre-trial orders under Tax Ct. R. 91 and more.
Salem Financial v. United States
September 20, 2013
United States Court of Federal Claims
Holdings: -In this tax refund case, an unusually complex financial transaction known as structured trust advantaged repackaged securities (STARS) , where the taxpayer’s revenue momentarily was cycled through a U.K. trustee to create U.K. taxes and foreign tax credits and then returned to the U.S. taxpayer, was an abusive tax avoidance scheme because the trust and the loan components, whether viewed separately or together, lacked economic substance; -Because the taxpayer was engaged in an economically meaningless tax shelter, the negligence accuracy-related penalty of I.R.C. Â§ 6662(b)(1) and the substantial understatement accuracy-related penalty of I.R.C. Â§ 6662(b)(2) applied. The defenses of reasonable basis, substantial authority, and reasonable cause and good faith were not available to the taxpayer given the lack of economic substance and designation of transaction as a tax shelter.Â Taxpayerâ€™s claims for tax refund denied in their entirety.Â
In re Fannie Mae Sec
December 6, 2013
United States District Court for the District of Columbia
Holdings: -Under Fed. R. Civ. P. 23(e), a settlement was approved in a federal law securities fraud case because it was fair, reasonable, and adequate since it was the result of armâ€™s-length negotiations conducted after completion of discovery and motion practice, the amount was large in comparison to likely recovery if the class proceeded to a protracted trial, there was almost no objection from class members, and the settlement’s plan of allocation provided a fair means of determining the amount of each class member’s recovery; -Attorneys’ fees of 22 percent of the settlement fund were appropriate because the case was lengthy, highly complex, and vigorously contested, counsel devoted a large amount of time to the case while there was high risk of nonpayment, counsel were skilled and performed well, and a lodestar cross-check confirmed the reasonableness of this fee.
Fish v. Commissioner
T.C. Memo 2013-270
November 25, 2013
United States Tax Court
Holdings: -A taxpayer improperly claimed flow-through income from a dividend distribution to the taxpayer’s S corporation from its subsidiary as capital gains, since the corporation held over 50 percent of the combined voting power of all classes of the subsidiary’s stock, and thus the subsidiary and the corporation were related persons, which required the taxpayer to treat the gain as ordinary income under I.R.C. Â§ 1239; -The subsidiary and the corporation were also related persons based on the corporation’s ownership of more than 50 percent of the total value of the shares of all classes of the subsidiary’s stock based on a redemption price valuation, which was more reliable than values generated in a hypothetical liquidation.
61 York Acquisition, LLC v. Commissioner
T.C. Memo 2013-266
November 19, 2013
United States Tax CourtÂ
Holdings: -This case was ripe for partial summary judgment; -A contribution was made exclusively for conservation purposes if it met the tests of I.R.C. Â§ 170(h)(4), (5); -The partnership did not assign a restrictive easement in the entire exterior of the property as required by the plain meaning of Â§ 170(h)(4)(B)(1), because the partnership only had rights to the facade, as defined by the Amended and Restated Declaration of Covenants, Conditions, Restrictions and Easements; -The partnership’s contribution was not a “qualified conservation contribution” under Â§ 170(h)(1), because it was not a restriction that preserved the entire exterior of a certified historic structure.Â The commissionerâ€™s motion for partial summary judgment was granted.Â
Estate of Tannenblatt v. Commissioner
T.C. Memo 2013-263
November 18, 2013
United States Tax Court
Holdings: -Where petitioner failed to comply with U.S. Tax Ct. R. 143(g)(1) and the courtâ€™s standing pretrial order for submission of an appraisal into evidence,Â petitioner could not use U.S. Tax Ct. R. 91, governing stipulations for trial, to end-run the courtâ€™s procedural rules with respect to expert testimony or to prevent the court from exercising its gatekeeper function under Fed. R. Evid. 702; -As petitioner neither qualified the appraiser as an expert under Rule 702 nor satisfied U.S. Tax Ct. R. 143(g), the court excluded the appraisal; -The commissionerâ€™s appraiser properly considered restrictions imposed on transferability of an interest in the subject property, an LLC, as a factor in his marketability discount analysis; -In valuing the subject interest for estate tax purposes, it was appropriate to take into account discounts for lack of control and lack of marketability.Â The court determined the fair market value of the estateâ€™s interest in a limited liability company and re-detemined the deficiency accordingly.Â
Peter Agrapides is shareholder of Western Valuation Advisors, a Salt Lake City-based valuation advisory firm.