372 F. Supp. 3d 731
E.D. Wis.2019Background
- James and Julie Kress, longtime shareholders of closely held S‑corporation Green Bay Packaging, gifted minority shares to family in 2006–2008 and reported per‑share values of $28.00 (2007), $25.90 (2008), and $21.60 (2009); IRS issued deficiency notices and assessed higher values based on employee purchase prices, plaintiffs paid the additional tax and sued for refund.
- GBP is a large, family‑controlled S‑corporation with substantial non‑operating assets (Hanging Valley investments, cash‑value life insurance, two private aircraft) and bylaws containing a Family Transfer Restriction limiting transfers to Kress family members.
- Experts for plaintiffs (Emory, Czaplinski) and the government (Burns) offered competing valuations using market, income, and asset approaches and differing marketability discounts; Burns originally produced higher per‑share values and low marketability discounts; Emory produced the values used on plaintiffs’ returns and higher discounts.
- The court excluded IRS internal administrative documents (letters and memo) as irrelevant to the court’s de novo valuation review, but took judicial notice of national economic facts relating to the 2008 recession as relevant to valuation.
- The judge found plaintiffs met the burden‑shifting prerequisites under 26 U.S.C. § 7491(a) (shifting burden to Government), evaluated experts’ methodologies, gave less weight to Burns (overstated value: ignored recession effect, mis‑treated non‑operating assets, and used low marketability discounts), and found Emory most persuasive.
- Court held the Family Transfer Restriction is a bona fide business arrangement under § 2703(b)(1) and (2) but not comparable to arm’s‑length restrictions under § 2703(b)(3); nonetheless the court declined to treat the restriction as increasing the valuation and adjusted Emory’s marketability discounts downward by 3 percentage points to reach per‑share fair market values: $29.20 (2007), $27.01 (2008), $22.50 (2009).
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Proper fair market value per share for gifts (2007–2009) | Emory valuations (used on returns): $28.00 (2007), $25.90 (2008), $21.60 (2009); market approach with substantial marketability discounts | Burns: higher values ($38.40, $27.81, $40.05) using weighted market/income approaches, low marketability discounts, add‑back of non‑operating assets | Court adopted Emory methodology as most persuasive but adjusted marketability discounts to 27% (2007–08) and 25% (2009) yielding $29.20, $27.01, $22.50 per share |
| Admissibility of IRS administrative determinations and internal memorandum | Kress: proffered IRS letters/memo (relevance to assessment) | Government: IRS administrative rationale irrelevant in de novo judicial review | Excluded IRS administrative documents as irrelevant to de novo valuation |
| Judicial notice of 2008 recession facts | Kress: national economic indicators relevant to valuation under Rev. Rul. 59‑60 | Government: some items irrelevant or inadmissible hearsay if relied on for truth | Court took judicial notice of generally known economic facts as relevant to valuation dates |
| Effect of Family Transfer Restriction (Bylaws) on valuation under §2703 | Kress: restriction lowers transferability and thus value; restriction is bona fide business arrangement | Government: restriction is device to transfer property to family and not comparable to arm’s‑length restrictions; §2703 limits application to decedents | Court: Restriction is bona fide (§2703(b)(1)) and §2703(b)(2) not applicable to inter vivos gifts (statute refers to decedent), but plaintiffs failed to show comparability under §2703(b)(3); restriction not used to increase value; any consideration of restriction in discounts was improper |
Key Cases Cited
- Ruth v. United States, 823 F.2d 1091 (7th Cir. 1987) (de novo review of IRS assessment; administrative procedures not controlling)
- R.E. Dietz Corp. v. United States, 939 F.2d 1 (2d Cir. 1991) (Commissioner’s factual/legal analysis not binding in de novo review)
- United States v. Janis, 428 U.S. 433 (1976) (taxpayer bears burden to prove entitlement to refund)
- Eyler v. Comm'r, 88 F.3d 445 (7th Cir. 1996) (fair market value is question of fact for trier of fact)
- Frieders' Estate v. Comm'r, 687 F.2d 224 (7th Cir. 1982) (definition of fair market value for gift/estate tax purposes)
- Chevron U.S.A., Inc. v. Nat'l Res. Def. Council, 467 U.S. 837 (1984) (agency interpretation of ambiguous statute reviewed for reasonableness)
- Holman v. Comm'r, 601 F.3d 763 (8th Cir. 2010) (treatment of transfer restrictions and bona fides where entity was non‑operating holding structure)