Proposed Regs Regarding the Alternate Valuation Date Contradict Tax Court

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May 09, 2008

Recently proposed regs (REG-112196-07) on an estate's election for an alternate valuation date contradict a recent Tax Court decision.

In Kohler v. Commissioner, the Tax Court held that valuation discounts attributable to restrictions imposed on closely held stock pursuant to a post-death reorganization of the closely held company should be taken into consideration in valuing the stock on the AVD. The IRS chose not to follow the holding in Kohler, citing legislative and prior case history.

The IRS (in the preamble to the proposed regs) notes that the intent of Sec. 2032 was to respond to hardships due to market conditions when property of an estate, which would be used to pay the estate's estate tax liability, was worth substantially less than its value on the date of the decedent's date of death. In general, an estate tax is imposed on the value of a decedent's estate as of the date of his or her death, but Sec. 2032 allows a decedent's estate to elect an AVD if it results in a valuation of the decedent's estate that is lower than its date of death valuation and results in a combined estate and generation-skipping transfer tax liability that would have been less than such liability on the decedent's date of death. For property that is distributed, sold or otherwise exchanged within six months of a decedent's date of death, the AVD is the date of the distribution, sale or exchange. For all other property includable in a decedent's estate, the AVD is the date that is six months after the decedent's date of death.

In the IRS's opinion, Sec. 2032 was not intended for use when the decrease in value of estate property was caused by an action of the decedent or his or her estate. The proposed regulations add Prop. Reg. Sec. 20.2032-1(f), which provide that an election to use the AVD may only be made when the decrease in the value of estate property is caused by market conditions. The regs define market conditions as events outside the control of the decedent (or the decedent's executor or trustee) or other person whose property is being valued that affects the value of the property being valued. The regulations further provide that changes in value due to the mere lapse of time or to other post-death events other than market conditions will be ignored in determining the value of the estate property on the AVD. When finalized, the proposed regulations are applicable to estates of decedents dying on or after April 25, 2008.

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