Greed Can Be Bad....

I attended an MCLE seminar today (Mandatory Continuing Legal Education) downtown at the Con Center. I want to start by telling you about a new tax case... but before you skip this... even non-lawyers and non-CPA's will probably get a laugh out of this story. This is like an email joke to forward but it's real life! The case is called the Estate of Thompson v. Commissioner and can be found at 2d Cir 2007 (499 F3d 129). However, you don't need to go look the case up because I am going to tell you what happened. Let me start by saying, if you are a young lawyer or law student who stumbled upon this on Google, please don't use my analysis as legal precident. Go read the case for yourself rather than quoting me as I am not a legal reporting service!

Ok, dude died in 1998. His estate owned a 20% stake in a family run business. On his estate tax (or "death tax") return his estate (with Gordon Gecko as attorney?) valued his 20% interest to be worth $1,750,000 (or $3.59 a share). They used valuation "experts" from Alaska to value this New York city business I am told in the hopes of having Alaska based IRS auditors. That might be a red herring but is funny and was mentioned by the Court.

Anyway, the IRS comes back in an audit and says no, no, no you don't... we think it's worth $723.36 per share (or $35,273,000 - that's THIRTY FIVE MILLION for those that don't do numbers). Now let me start by saying one of my jobs, in high net worth cases, is to find ways to de-value assets. There are a number of different ways to do so but in general we subscribe to the "don't be a pig rule" which means take a 35% or 40% discount on the true value of a 20% stake in a family business. So if the true value is $35mil you knock off 40%, after having a discount appraisal analysis done by an expert, and then you pay tax as if it's a $21mil asset. Now, bear in mind, the estate tax was 55% back in '98 and thus each dollar they could de-value it saved the estate 55 cents so this is not chump change. A standard 40% discount, reducing the total value by $14mil would save the family over $7mil in taxes. Yes, really!

Ok, so the IRS came back and said they thought it was worth $35mil AND they basically said that the tax return was so severely discounted that it wasn't reasonable and thus assesed an additional $7mil penalty. Imagine getting that letter from the IRS; basically saying, not only do you owe $15mil more in tax you also owe $7mil as a penalty so please cut us a check for $22mil in the next 60 days! That might make for a bad day!

Ok, so the taxpayer (or in this case, his estate) fought this in tax Court and had what I would call a victory! The Tax Court agreed to a valuation of $13.5mil ($28/share) AND waived the $7mil penalty as it was a reasonable mistake since they had hired a valuation expert, blah, blah, blah.... Ok, for those that don't know, this is where you take the deal, pay the tax, and walk away....

Oh no, they didn't... yes, Gordon Gecko, decided to APPEAL that decision because they still didn't like the valuation at $13.5mil because remember they originally tried to argue it was worth only $1,750,000. The IRS decided if the taxpayer wanted to appeal so would they... YES, the IRS decided to fight the overturning of the $7mil penalty and guess what happened... the IRS won! Gordon Gecko's client had to pay the $7mil penalty and was not successful at changing the value from the $13.5. They thus probably had to write a check for around $14mil. OUCH!

Greed can be bad.

Peace out.