A Comprehensive Look at Tax Court Valuation

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A Comprehensive Look At Tax Court Valuation

The valuation of property is an issue that arises in many areas of tax accounting. When disputes over value between the taxpayer and the government occur, the United States Tax Court is most often the forum that resolves the question. The Tax Court has the reputation of compromising valuation issues. In Buffalo Tool & Die Manufacturing Co. v. Commissioner [74 T.C. 441], decided in May, 1980, the Tax Court, suspecting that compromise was expected, warned practitioners that parties who did not settle valuation issues prior to trial would run the risk that the Court would decide the issue substantially in favor of the other party. This study examines Tax Court valuation decisions after 1980 to determine whether the Tax Court has, in fact, chosen the value of one party over the other rather than compromised.

BACKGROUND

The Tax Court Rules of Practice provide in Rule 142 (a) that, as a general rule, the taxpayer must bear the burden of proof in all Tax Court cases. Therefore, if the taxpayer fails to produce adequate evidence of value, the Court must rule in favor of the government. If both the taxpayer and the government submit substantial evidence of value (such as calling appraisers as expert witnesses, establishing a recent sale, or other acceptable means), the Tax Court must then weigh the evidence and decide what is the fair market value of the property. Though guidelines for valuation exist for some types of property (see Rev. Rul. 59-60, 1959-1 CB 237), the Court most often must rely on the basic legal definition of value, "the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts" (Regs. [Section] 1.170-1(c)(2); [Section] 20.2031-1(b)).

This process of determining value for tax purposes has been widely criticized [7, 9, 11, 12]. Tax practitioners perceive that the Tax Court compromises valuation issues[8]. In Buffalo Tool & Die, the Tax Court recognized this be lief and warned practitioners that it should not continue. The court stated:

We are convinced that the valuation issue is capable of resolution by the

parties themselves through an agreement which will reflect a compromise

Solomon-like adjustment, hereby saving the expenditure of time, effort, and

money by the parties and the Court--a process not likely to produce a better

result. Indeed, each of the parties should keep in mind that, in the final

analysis, the Court may find the evidence of valuation by one of the parties

sufficiently more convincing than that of the other party, so that the final result

will produce a significant financial defeat for one or the other, rather than

a middle-of-the-road compromise which we suspect each of the parties

expects the Court to reach. If the parties insist on our valuing any or all of the

assets, we will. We do not intend to avoid our responsibilities but instead

seek to administer to them more efficiently--a factor which has become

increasingly important in light of the constantly expanding workload of the

Court.

Tax practitioners recognized a change in the Court's behavior after this announcement of a more stringent policy toward valuation issues[2].

PREVIOUS STUDIES

Tax Court valuation policy has been the subject of a number of studies prior to 1980. Each of these studies looked at the Court's valuation decisions in only one type of case or for only one type of property, particularly charitable contribution cases and estate and gift tax cases that involved closely held stock.

Charitable Contributions. Englebrecht and Jamison examined the population of charitable contribution cases decided from 1970-1977[5]. The authors developed a model using the court-determined value divided by the amount claimed by the taxpayer as the dependent variable and the compromise value divided by the amount claimed by the taxpayer as the independent variable. …