Asset and Business Valuation in Estate Tax Cases: The Role of the Courts

Abstract

The U.S. court system plays an important role in resolving asset valuation disagreements between taxpayers and the taxing authority. Prior literature suggests that, in estate tax cases, courts act as a compromisers choosing a value somewhere between the estimates arrived at by the taxpayer and the IRS. Some studies argue that the tax courts choose the arithmetic mean between the two estimates. Using models from prior literature and an updated data set, we re-examine the role of the courts in appraising disputed asset value estimates and find that the courts do not simply use the mean value between taxpayer and IRS asset valuation estimates. In addition to testing the concept of courts acting as compromisers, we investigate whether there are certain factors related to the case and the judge that may be correlated with the judge’s decision. We find evidence that suggests that the number of appraisers used by the taxpayer, the political affiliation of the judge, the type of asset being valued, and the age and complexity of the case are related to the decisions of the court. Our study should be of interest to taxpayers, the IRS, the courts, and tax researchers.

Keywords: Estate tax, Valuation, Courts

JEL Classification: G12, H25, K34