July 3, 2014
Authored by: Kathy Sherby and Stephanie Moll
Apparently, this life lesson was not learned, or if learned, was forgotten, by Roy Greenbaum, the Personal Representative in Estate of Tanenblatt v. Comm’r. The issue in this case concerned the valuation of a 16.667% interest in an LLC included in the Diane Tanenblatt’s gross estate.
The PR initially reported the value of the LLC interest at $1,788,000, based upon an initial appraisal, which was attached to the estate tax return. The initial appraisal applied 20% and 35% discounts for lack of control and lack of marketability. The IRS accepted the pre-discount initial appraisal value for the LLC, but allowed only 10% and 20% discounts and assessed a deficiency of $309,457.
The PR then obtained a second appraisal and attached the second appraisal to his Tax Court petition challenging the deficiency, alleging a new, lower value for the LLC interest of $1,037,796 and seeking a refund.
Prior to trial, the PR’s counsel filed a motion to compel the IRS to stipulate the authenticity of the second appraisal and consent to its being admitted at trial. Tax Court Rule 143 sets out the requirements for introducing the testimony of an expert witness at trial:
(1) the expert must prepare a written report;
(2) the expert will be called as a witness;
(3) the written report will be identified by the expert, marked as an exhibit and introduced into evidence as the direct testimony of the expert; and
(4) the expert will be available for cross examination by the opposing counsel.
The PR did not comply with the requirements of Rule 143 and the Court denied the PR’s motion to admit the second appraisal as evidence.
At the hearing, the PR’s counsel confided to the Court that he was unable to produce the second appraiser as an expert witness as required by the Rule because the PR was in a fee dispute with the appraiser, whom he had not paid, and as a result the appraiser was refusing to come to the trial to testify.
At trial, the IRS called its valuation expert as a witness and the Court accepted him as a business valuation expert, receiving his written report into evidence. The IRS’ appraiser valued the LLC interest at $2,303,000. Because the PR could not call his appraiser as a witness, failing to comply with Rule 143, the Court excluded the second appraisal altogether. In doing so, the Court found the value of the LLC interest to be the value determined by IRS’ expert, the only evidence of value before the Court.