In Estate of Richmond v. Commissioner, T.C. Memo 2014-26, No. 21448-09 (Feb. 11, 2014), the Tax Court applied an accuracy-related penalty to an estate regarding the undervaluation of the decedent's interest in a corporation.
The case reinforces the risks taxpayers create in failing to use due diligence in documenting values reported for gift or estate tax purposes, and addresses a frequent question posed by taxpayers: whether formal appraisals are necessary for filing federal tax returns.
In Estate of Richmond, the decedent owned an interest in a closely held corporation when she died. The estate hired a CPA to provide an estimate of value of the interest. The CPA was a member of the firm that provided services to the corporation and thus was in a position to be knowledgeable about the corporation.
The CPA had prepared 10 to 20 valuation reports during his career and testified in court about them, but he lacked any recognized credentials that would substantiate his expertise in conducting appraisals. The CPA prepared a valuation report in draft form that concluded the decedent's interest in the corporation was worth approximately $3.1 million. A law firm prepared the estate tax return using that value and attached the unsigned report in support of the value.
Upon audit, the IRS concluded that the decedent's interest in the corporation was worth approximately $9.2 million, almost three times the value claimed by the estate. At trial, both the IRS and the estate revised their value estimates and hired new experts to determine the interest's value. The estate claimed the interest was worth $5 million and the IRS claimed it was worth $7.3 million. The Tax Court concluded that neither expert's approach was correct and determined the value to be $6.5 million.
The court then turned to whether the 20% accuracy-related penalty applied to the estate's undervaluation of the interest on the estate tax return. The estate argued that the wide range of estimated values demonstrated the difficulty in valuing the interest, and as a result, the estate's use of an incorrect estimate should be excused.
The Tax Court said the difficulty in valuing such an interest warranted hiring a credentialed professional. Because the CPA hired to provide the original value estimate lacked any appraisal credentials, the court concluded the estate could not have reasonably relied on his value estimate for purposes of filing the return. Accordingly, the court ruled that the 20% penalty applied.
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