Aaron Jones owned an S corporation and a limited partnership that had both voting and nonvoting interests. The businesses owned more than 165,000 acres of timberland in western Oregon.
In 2009, he gifted partial interests to his three daughters and their trusts. Mr. Jones timely filed a gift tax return, form 709 with various appraisals. He reported total gifts of about $21 million, but the Internal Revenue Service audited the return and the IRS expert valued the total gifts to be about $120 million.
The main difference between the appraisals was the taxpayer used the “income” approach and the IRS used “Asset-Based” approach. The business planted trees, harvested them and sold logs (operating company) and it also purchased a lot of timberland that it held for an increase in value over time.
The taxpayer pointed out the national economy in 2009 was down and home sales were greatly reduced, so it was difficult to make a profit from operations of selling logs.
The Tax Court agreed with the taxpayer appraisals but increased the total gifts to $24 million with a gift tax of less than $2 million (instead of zero).
The gifts were valued after a discount for “lack of marketability” of 35 percent. The IRS expert suggested a discount of 30 percent would be more proper, but did not support it with facts or reasons. The court allowed a 35 percent discount, which reduced the taxable gifts and saved a lot of gift tax.
The owners were subject to a buy-sell agreement and restrictions on any sales, gifts or transfers. The taxpayer then also claimed a discount for the liability of income taxes that would result if the ownership interests were sold. That discount for federal and state income taxes that were likely if sold, further reduced the value of the gifts.
The IRS also had to consider the decision in Estate of Giustina, where valuation of an Oregon timber business was favorable to the taxpayer. The Ninth Circuit Court of Appeals did not allow “...imaginary scenarios as to who a purchaser might be, how long the purchaser would be willing to wait without any return on his investment...” and found the Asset-Based method did not apply.
This was another example of the importance of having a qualified appraisal combined with facts that were favorable to a low valuation (economy in trouble).
Did you hear, “Make up your mind that no matter what comes your way, no matter how difficult, no matter how unfair, you will do more than simply survive. You will thrive in spite of it.” — Joel Osteen
John Bullis is a certified public accountant, personal financial specialist and certified senior adviser who has served Carson City for 45 years. He is founder emeritus of Bullis and Company CPAs.