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Volume XII, Number 279

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Tax Court Uses A Net Asset Value Method To Determine Decedent's Interest In A Family-Owned Personal Holding Company

The Decedent in this case owned a 23.44% interest in a family holding company, Person Holding Co. ("PHC"). PHC's assets consisted of publicly traded securities. Decedent was one of the three largest shareholders.

In the years before Decedent's death, PHC followed a philosophy of maximizing dividend income. It paid dividends reliably at a rate that had grown slightly more than 5% per year in the years from 1970 to 2005.

The estate engaged an accounting firm to value Decedent's PHC stock. The accountant, who was not a certified appraiser, used the capitalization-of-dividends method and provided an unsigned draft of the valuation report. The estate never asked him to finalize the report and used the unsigned draft on the Estate Tax Return.

The Court stated that the theory behind the income capitalization valuation method is that if an asset produces a predictable income stream, its value can be ascertained by calculating the present value of the future income stream. The Court further noted that such method is entirely appropriate where a company's assets are difficult to value, but not appropriate in the present case because the method ignored the most reliable data of value, i.e., the actual market prices of PHC's publicly traded securities.

The Court thus rejected the estate's value and upheld a large valuation misstatement penalty, finding that the estate failed to demonstrate good faith or reasonable cause for its low value. The Court was particularly concerned in this regard that the estate did not hire a qualified appraiser.

© 2022 Proskauer Rose LLP. National Law Review, Volume IV, Number 107
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About this Author

Albert W Gortz, Proskauer Rose Law Firm, Personal Planning Attorney
Partner

Albert W. Gortz is a Partner in the Personal Planning Department and has been with the firm since 1970 and in the Florida office since he opened it in 1977.

561-995-4700
George D Karibjanian, Proskauer Rose Law Firm, Personal Planning Attorney
Senior Counsel

George D. Karibjanian is a Senior Counsel in the Personal Planning Department, resident in the Boca Raton office. George is Board Certified by the Florida Bar in Wills, Trusts & Estates and is a Fellow in the American College of Trust and Estate Counsel.

561-995-4780
David Pratt, Personal Planning Attorney, Proskauer Rose Law Firm,
Partner

David Pratt is a Partner in the Personal Planning Department and head of the Boca Raton office. His practice is dedicated exclusively to the areas of trusts and estates, estate, gift and generation-skipping transfer, fiduciary and individual income taxation and fiduciary litigation. He has extensive experience in estate planning and post-mortem tax planning. He has been asked to serve as an expert witness on several occasions, and has been referred to as a “seasoned trusts and estates lawyer” in a Florida Third District Court of Appeals Opinion

561-995-4777
Mitchell M Gaswirth, Proskauer Rose Law Firm, Tax Attorney
Partner

Mitchell M. Gaswirth is a Partner in the Tax Department. His practice focuses primarily on income, gift and estate tax and related business planning. Mitchell counsels individuals, entrepreneurs and business entities in connection with the various income and other tax issues which arise in sophisticated business transactions.

310-284-5693
Andrew M Katzenstein, Proskauer Law Firm, Personal Planning Attorney
Partner

Andrew M. Katzenstein is a Partner in the Personal Planning Department in the Los Angeles office where he assists high net worth individuals, companies and charitable organizations with all aspects of tax and estate planning. He focuses his practice on tax planning matters, which include estate, gift and generation-skipping tax planning, as well as income tax of trust planning, probate and trust administration matters, resolving disputes between fiduciaries and beneficiaries, and charitable planning

310-284-4553
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