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Tax Blog

Court Rails on Bad Business Valuation

If you’ve ever gone to a home improvement store, you are likely familiar with the company Kohler. Kohler is an American company that sells sinks, faucets, toilets, and other plumbing items. Their motto is “The Bold Look of Kohler” and we’ve all heard it.

In a recent case where the IRS had to prove ITSELF, Kohler went to bat against the IRS in court. Kohler is a privately-held company, not traded on any world market, so it required a valuation for estate tax purposes. The IRS’s expert valued the company at over $145,000,000, using methods that the Court went on to condemn ad nausea in the decision. Among other problems, the IRS’s appraiser spent 2 ½ hours interviewing and meeting management. He did not use a dividend approach and he made an $11,000,000 error. The Court went so far as to say:

“This is not a minor mistake. When we doubt the judgment of an expert witness on one point, we become reluctant to accept the expert's conclusions on other points.” Brewer Quality Homes, Inc. v. Commissioner, T.C. Memo.2003–200, affd. 122 Fed. Appx. 88 (5th Cir.2004).

Kohler’s experts used multiple methods (income and a dividend method as well as the Court desired), spent 3 ½ days with management and arrived at a more reasonable $47,000,000 and $50,000,000 of which the court agreed.

Comment: Many in the industry rely on values that are at best estimates. This is unacceptable with the IRS and it should be unacceptable to you as well. When buying or selling a business, or transferring ownership, or planning an estate, a valuation MUST be done by a qualified appraiser and the proper value MUST be reached. Had the IRS prevailed, it is possible that the company of Kohler might not be a going concern given the taxes alone would have exceeded the value of the company with the properly created appraisals.

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