Estate of Marjorie deGreeff Litchfield v. Commissioner of Internal Revenue

Edward S. Litchfield (Edward) died in 1984, owning shares in two closely held family-owned corporations, Litchfield Realty Co. (LRC) and Litchfield Securities Co. (LSC). Edward’s will transferred the shares death-tax-free to a trust for Edward’s wife, Marjorie deGreeff Litchfield (Litchfield), for her lifetime. Litchfield died in April 2001. Under I.R.C. § 2044, Litchfield’s estate (defendant) was required to include the fair market value of the shares owned by the trust. Similar valuation issues were raised concerning both corporations. LRC was initially incorporated as a C corporation. All shares were always owned by family members or the trust. In valuing the shares, the parties used the net-asset valuation method and applied discounts for built-in capital gains, lack of control, and lack of marketability. On the valuation date, the estate owned 43.1 percent of the outstanding 500,000 shares. LRC’s assets had a total net value of $33,174,196—$23,422,439 in farmland and equipment and $9,751,757 in marketable securities. This included $28,762,306 in built-in capital gains, which was 86.7 percent of LRC’s total net asset value. In January 2000, LRC converted to an S corporation. In February 2000, the shareholders executed an agreement prohibiting transfers that would jeopardize LRC’s S corporation or Iowa family-farm status, and LRC retained a right of first refusal. In preparing the federal estate-tax return, the valuation expert discounted the estate’s 43.1 percent stock interest by 17.4 percent for built-in capital gains, by 14.8 percent for lack of control, and by 36 percent for lack of marketability. He found the estate’s interest was valued at $6,475,000. The commissioner of internal revenue (plaintiff) found that there was an estate-tax deficiency and argued that the estate’s expert had erroneously calculated the discounts for built-in capital gains, lack of control, and lack of marketability.