The Estate of Diane Tanenblatt et al. v. Commissioner, T.C. Memo. 2013-263, involved two valuation issues. First, the taxpayer argued that the willing buyer-willing seller test must assume a non-family member purchaser who would not be admitted to the LLC as a member. The IRS disagreed and Judge Halpern agreed with the IRS, holding:
We must determine whether respondent and Mr. Thomson [government appraiser] erred in classifying the subject interest as a member’s interest rather than classifying it as an assignee’s interest. A member’s interest is more valuable than an equivalent percentage interest of an assignee because the member’s interest can participate in management and control of the LLC. We think respondent and Mr. Thomson did not err. Decedent was a member of the LLC when she transferred the subject interest to the trust. We assume, therefore, that, until she made the transfer, she enjoyed all of the benefits and was saddled with all of the burdens attendant upon being a “member” of the LLC. The term “member’s interest” (or the term “membership interest”, which the parties use, but which we do not, because it is a term defined in the operating agreement to mean a member’s proportional interest in capital) is both a convenient and an accurate classification for indicating that decedent’s interest in the LLC was of the fullest kind; i.e., she shared in management and control and did not merely share in profits and losses. For the same reasons, the term is a convenient and accurate classification for the subject interest in the hands of the trust, which also was a member of the LLC. Moreover, there is no evidence that, on or before the valuation date, the trust distributed, sold, exchanged, or otherwise disposed of the subject interest, so that, possibly, on that date, it could more accurately be described as an assignee’s interest. Therefore, because the term “member’s interest” conveniently and accurately describes the rights inherent to a subject interest on the date decedent transferred it, on the date she died, and on the valuation date, neither respondent nor Mr. Thomson erred in classifying it as such (or, in their terms, classifying it as a “membership interest”).
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Certainly, in applying the willing buyer-willing seller standard to determine the value of the subject interest, it would be appropriate to take into consideration limitations in the operating agreement on the rights of a nonfamily member transferee to participate in control and management of the LLC and limitations on the transferee’s rights otherwise to be treated as a member. Petitioner, however, seeks to collapse the two steps of the valuation process — i.e., (1) identify the property to be valued and its nature and character, and (2) objectively determine its value — into a single step. Petitioner would expand section 20.2031-1(b), Estate Tax Regs., beyond its intended scope by using the provision to redefine the character of the subject interest as an assignee’s interest. See Kerr v. Commissioner, 113 T.C. 449, 469 (1999), aff’d, 292 F.3d (5th Cir. 2002). As discussed in the immediately preceding paragraph of this report, on the valuation date the subject interest was a member’s interest. The holder of that interest, at that time, enjoyed fully the benefits and burdens of being a member of the LLC, including his or her inability to transfer all of those benefits and burdens to a nonfamily member transferee. The hypothetical willing buyer and hypothetical willing seller — “both having reasonable knowledge of relevant facts”, sec. 20.2031-1(b), Estate Tax Regs. — would understand a member’s interest to be so restricted, and would take that restriction into account in their negotiations of what a member’s interest was worth. Mr. Thomson considered restrictions imposed on transferability of an interest in the LLC as a factor in his marketability discount analysis.
The taxpayer filed with its Tax Court petition a new appraisal which was lower than the appraisal submitted with the Form 706. The Tax Court was asked to consider the new appraisal in an unusual procedural move. A relevant factor for the new appraisal may have been a fee dispute with the original appraiser. The opinion states:
Before trial, petitioner untimely moved to compel respondent to stipulate either the Tindall appraisal or, alternatively, the entire petition (including the attached Tindall appraisal). Petitioner alternatively moved to sanction respondent for failing to so stipulate. We denied petitioner’s pretrial motions and proceeded to hold trial. The parties have stipulated copies of the petition and the answer, which are attachments to the stipulation, and have stipulated separately the text of the averment. They did so subject to the caveat that the stipulations “show the parties’ pleadings in this case and are not admitted in evidence.” Petitioner asks that we reconsider our prior rulings with respect to the Tindall appraisal or otherwise allow it into evidence and consider it expert testimony.
Petitioner’s path for attempting to introduce the Tindall appraisal into evidence as expert testimony is, to say the least, unusual. Generally, a party obtains the testimony of an expert witness by calling that witness to testify. See Rule 143(g)(1). Pursuant to that Rule, the expert witness must prepare a written report, which is marked as an exhibit and, after having been identified by the witness and adopted by him, received into evidence as his direct testimony unless the Court determines that the witness is not qualified as an expert. The Rule [*11] further provides that, not less than 30 days before the call of the trial calendar on which a case appears, a party calling an expert witness shall serve on each other party and submit to the Court a copy of the expert’s report. Finally, the Rule also provides that, generally, we will exclude an expert witness’ testimony altogether for failure to comply with the Rule. Those requirements are echoed in our standing pretrial order, which was served on petitioner.
Petitioner’s chosen means for seeking to introduce the Tindall appraisal into evidence is perhaps explained by a conversation we had with his counsel at the hearing during which we considered petitioner’s pretrial motions along with respondent’s motion in limine to exclude the Tindall appraisal on various grounds, including that petitioner had not submitted and served a copy of the report as required by Rule 143(g)(1) and our standing pretrial order. Petitioner had filed no response to respondent’s motion in limine, and, at the hearing, in response to the Court’s question as to whether petitioner was just relying on his own motions (with respect to stipulating the Tindall appraisal into evidence), petitioner’s counsel candidly responded: “Probably. Your honor, because right now my client’s in a fee dispute with the appraiser, so right now I cannot get the appraiser to come in and testify.” Apparently, counsel’s time is less dear than was Dr. Tindall’s.
The court refused to consider the Tindall appraisal:
Petitioner did not call Dr. Tindall as a witness but asks us to rely on her report (which, under our Rules, would serve as her direct testimony) as her expert opinion. Petitioner has neither qualified Dr. Tindall as an expert entitled pursuant to rule 702 of the Federal Rules of Evidence to give her opinion on technical matters nor has he satisfied our procedural rules for expert testimony, found in Rule 143(g) and in our standing pretrial order. In other words, petitioner has failed to satisfy the preconditions for our receiving Dr. Tindall’s opinion into evidence. Because her report (i.e., the Tindall appraisal) is not in evidence, we may not consider her opinion.
The gap between the government’s position and the Form 706 filing was not enormous. Each began with the same underlying value for a New York City office building owned by the LLC. The transferred interest was 16.67%. The taxpayer’s Form 706 appraiser took a 20% lack of control discount and a 35% discount for lack of marketability. The government expert reduced those to 10% and 20%. The increase in the value of the estate was $687,882.