Developments in Estate Valuations and C Corporations

On August 4, 2014,  the U.S. Tax Court issued a final decision in the case of Estate of Franklin Z. Adell v. Commissioner (T.C. Memo 2014-155). The case involved Franklin Z. Adell, deceased. At the time of his death, Franklin owned 100 percent of the stock of STN.Com, a cable uplinking company. STN had only one customer, The Word network.  The Word is a broadcast network managed by Franklin’s son, Kevin. Nearly all of STN’s revenue came from its contract with The Word network. Upon Franklin’s death, Kevin became the President of STN.

In the Form 706 as originally filed, Franklin’s estate valued the STN stock at $9.3 million as per an appraisal report prepared by the valuation firm of Stout Risius Ross, Inc. Upon audit, the IRS determined the value to be over $92.2 million. The primary difference in values was the fact that the estate reduced the stock value by Kevin’s “personal goodwill” based upon the argument that the success of STN depended heavily on Kevin’s personal relationships with board members of its only customer, The Word network. Additionally, Kevin did not have a noncompete agreement with STN so that a potential buyer would only acquire STN if it could retain Kevin going forward.

The Tax Court ruled in favor of the estate, finding that their $9.3 million valuation of the STN stock as reported within the Form 706 was correct mainly because it properly accounted for Kevin’s personal goodwill.

Not only is this case important for estate valuations, but also just as significant for the sales of C corporations in which an allocation of the purchase price might be made to personal goodwill to bypass any corporate-level tax.