When challenging the IRS over the value of a Decedent’s share of an LLC, trustees of the Estate smartly used a valuation expert witness, only to fall short because they failed to submit payment necessary for the expert to testify at trial. In a story from FMV Opinions, Inc. Lance Hall, the managing director of FMV Opinions, Inc, the Estate of Diane Tanenblatt provides a cautionary tale to parties who think they can use an expert witness report without accompanying testimony during trial.
The Estate of Diane Tanenblatt Challenges the IRS
When submitting a value of an estate to the IRS for tax purposes, the trustees of the Tanenblatt Estate hired an independent expert witness to review the IRS valuation. The IRS submitted a value of the Estate based on a “Net Asset Value” calculation to derive the value of the Decedent’s share in an LLC. The Net Asset Value approach, which considers only the assets and liabilities of an estate, arrived at a value that the IRS used to assess its estate tax.
The Estate, unsatisfied with the IRS value, hired an independent valuation expert witness. The Estate’s expert witness combined a Net Asset Value approach with an Income approach – which factored in the income associated with Tanenblatt’s share of the LLC – and arrived at a value 42% below the number the IRS calculated. The lower value would, of course, lower the amount of the estate subject to IRS estate tax.
The Estate expert witness’s use of the income approach in addition to the Net Asset Value approach is uncommon when valuing shares of LLC’s or corporations, and in order to withstand the IRS challenge to the new value, the Estate needed its expert witness to testify in trial. The Estate neglected to submit full payment to its expert, however, and was unable to substantiate her claims without her testimony at trial. As a result, the IRS value was accepted and the Estate’s use of an expert witness to generate a report was ultimately for naught.
How the Estate Properly Used Its Expert Witness
Before looking at what the Estate did wrong in this case, it is worth noting that there were some positive decisions. First, hiring an independent expert to challenge a tax valuation can have a positive impact on any person who is facing estate tax on an inheritance, real estate tax on his property, or any other tax on possessions or property. The IRS – or any local or state tax agency – can be challenged, but doing so requires the use of a valuation expert witness to do a complete analysis of the property, assets, or other financial holdings.
The Estate was also smart to have its valuation expert witness generate a complete report that explained her methodology and defended her value of the Decedent’s share of the LLC. Although an expert witness will need to be present at trial, it is important that parties have the expert provide a clear report that explains her qualifications, details her analysis of the facts, the methods used to come to her conclusion, and the support needed to defend her position. An expert witness report can be crucial to building a case – whether it is for a tax valuation, a medical malpractice suit, or a personal injury claim.
Why the Estate Failed
Despite making good use of a valuation expert witness before the trial, the Estate was ultimately unsuccessful because it failed to pay its expert in time for the trial. An expert witness report cannot be properly used at trial without the testimony of the expert. In order for the work that an expert witness does before the trial to have impact during the trial, the expert must be there to explain her work and defend it against the opposing party.
In this case, the expert witness’s testimony was particularly necessary because the Estate was suggesting a unique valuation technique – something that needed to be explained and defended against IRS challenge. The Estate’s failure to pay its expert witness serves as a cautionary tale to any party considering the use of an expert to support his case. When hiring an expert witness, it is important to know the full cost – including what it will take to have the expert testify. Without testimony, an expert witness report is likely not admissible during trial, and without adequate payment, the expert will not agree to testify despite work previously completed.
(The above summary of an FMV Alert is published with the permission of FMV Opinions, Inc. The full article can be accessed here.)