– The U.S. Tax Court, in Estate

of Mildred Green, TC Memo 2003-348

Same Stock: Several Different Valuations

Careful valuation of closely held stock is critical in achieving estate planning goals. One case involving a Missouri bank holding company illustrates how an estate’s end result was far different from the decedent’s original plans.

Mildred Green owned 5.09 percent of Royal Bancshares Inc. (RBI) when she died. RBI had 62 shareholders at the time, with no one person holding a controlling interest. The corporation owned a subsidiary, Royal Banks of Missouri, which operated five branches in the St. Louis metropolitan area.

In her will, Green provided for the disposition of most of her assets, including the closely-held stock. Her will directed that one-half of the “rest, residue and remainder” of her estate’s property go to a charitable foundation and the other half to a trust for her three grandchildren.

The IRS audited the estate and determined that the value of the Royal Bancshares stock was more than six times what was reported on the estate tax return. A federal estate tax and generation skipping tax deficiency of $1,205,541 was assessed and the bequests to the charitable foundation and the grandchildren were reduced.

At trial, the Tax Court explained that “valuation of stock is a purely factual determination; there is no one universally applicable formula.” And as the right-hand chart shows, the different parties came up with diverse valuations. Part of the complicated calculations allocated two discounts to the value of the stock shares due to a lack of control and a lack of marketability.

These two discounts come from the fact that a buyer would be unwilling to pay full price for an interest in a closely-held company since the shares can’t be easily sold and don’t provide opportunities for controlling matters such as salary, dividends, contracts and mergers.

But despite the discrepancies in the total valuation of the Royal Bancshares in the Green estate, the court noted that the IRS’ expert witness and the estate’s expert witness agreed “to a considerable extent on the valuation of RBI stock … The greatest difference in the experts’ respective positions relates to the lack of marketability discount.”