Kress v. United States
382 F. Supp. 3d 820
E.D. Wis.2019Background
- Plaintiffs (owners of family‑held GBP, an S‑corporation) gifted minority shares in 2007–2009 and sought refunds after the IRS valued the gifts higher than Plaintiffs reported.
- Core dispute: fair market value per share of GBP minority stock on Jan 1 of 2007, 2008, and 2009.
- Experts: Plaintiffs offered Emory and Czaplinski; Government offered Burns. Each used market, income, and/or asset approaches producing divergent per‑share values.
- Court took judicial notice of widely known economic and market facts from 2007–2009 (financial crisis, GDP decline, unemployment surge, market drops) as relevant to valuation.
- Plaintiffs met the burden-shifting requirements under 26 U.S.C. § 7491; burden shifted to Government but the trier resolves conflicts by weight of evidence.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Proper fair market value of GBP minority shares for 2007–2009 | Emory (and Czaplinski) valuations ($28.00/$25.90/$21.60 by Emory; similar figures by Czaplinski) reflect market conditions and appropriate discounts | Burns’ higher valuations reflect combined market/income approaches and lower marketability discounts; IRS initially sought even higher values | Court found Emory most persuasive; adopted adjusted values of $29.20 (2007), $27.01 (2008), $22.50 (2009) after revising marketability discounts |
| Use of comparable companies and treatment of 2008 recession | Emory accounted for recession and excluded or down‑weighted outliers; used multiple guideline firms | Burns relied on Rock‑Tenn (an outlier in 2009) and did not sufficiently account for recession effects | Court discounted Burns’ analyses for failing to account for recession and for using inappropriate comparable (Rock‑Tenn) in 2009 |
| Treatment of non‑operating assets in minority valuation | Emory included non‑operating assets only insofar as they affected book/earnings; did not add full value back | Burns separated and largely added full value of non‑operating assets to operating value | Court held Burns overstated value by treating non‑operating assets as fully realizable by a minority holder and gave Burns less weight |
| Applicability and effect of GBP family transfer restriction on valuation | Plaintiffs argued restriction reduces marketability and should be considered | Government argued restriction is not bona fide or is a device to transfer value to family and should be ignored under §2703 | Court: restriction is a bona fide business arrangement (serves family business purposes) and §2703(b)(2) (referring to "decedent") does not bar considering such restrictions for inter vivos gifts; but Plaintiffs failed to show comparable arm’s‑length agreements, so restriction could not be relied on to increase marketability discount; court reduced Emory’s discounts slightly (3%) to remove any effect of the restriction |
Key Cases Cited
- United States v. Janis, 428 U.S. 433 (principle that taxpayers bear burden to prove entitlement to refund)
- Eyler v. Commissioner, 88 F.3d 445 (7th Cir.) (fair market value is a factual determination requiring weighing all evidence)
- Frieders' Estate v. Commissioner, 687 F.2d 224 (7th Cir.) (definition of fair market value / Treas. Reg. citation authority)
- Helvering v. National Grocery Co., 304 U.S. 282 (appraisal opinion not bound by expert testimony)
- Holman v. Commissioner, 601 F.3d 763 (8th Cir.) (discussion of family/transfer restrictions and bona fide business purpose)