Kohler v. Commissioner

The Kohler family and its affiliates owned approximately 96 percent of the outstanding stock of the Kohler Company. The family wished to consolidate all ownership within the family and began structuring a reorganization to remove the outside shareholders. In addition to removing the outside shareholders, the reorganization would impose transfer restrictions on the post-reorganization shares. While the family was planning this reorganization, Frederic Kohler, who held a large number of shares, died. Less than six months later, the reorganization was completed, and Kohler’s shares, which were now held by his estate, were exchanged for new shares pursuant to the plan of reorganization. The reorganization qualified for tax-free treatment. The representative of Kohler’s estate (plaintiff) elected to have the estate valued at a date six months after the date of Kohler’s death. The representative valued the shares held by the estate in their post-reorganization form. The Internal Revenue Service (IRS) (defendant) valued the shares as of the date of the reorganization in their pre-reorganization form. Because the pre-reorganization shares were not subject to the new transfer restrictions, the IRS’s valuation was substantially higher than that of the estate, and the IRS assessed a deficiency against the estate. The representative of Kohler’s estate sued in tax court.