One of the most important responsibilities we have when helping families with closely held businesses is to help them realize potential estate planning opportunities and/or problems. A classic example is with the Green Bay Packaging Inc. that was founded in 1933 by George Kress. The firm manufactures corrugated packaging, folding cartons, coated labels, and related products. It remains privately held, though it employs about 3,400 people in 14 states. The Kress family owns 90% of the stock, and the remaining shares are owned by employees and directors of the company.
In order to keep the family business in the family, members of the Kress family engaged in systematic intrafamily gifts of stock. In 2007, 2008, and 2009 James and Julie Kress made substantial taxable gifts to their children and grandchildren, and they paid federal gift taxes of over $1.2 million each.
The IRS audited those gift tax returns and concluded that the shares were undervalued. For example, where the couple had reported a value of $28.00 per share in 2007, the IRS believed that $45.97 was closer to the true value. The couple paid the deficiency and sued for refund.
At trial the IRS did not provide a rationale for the $45.97 figure. Their expert concluded that $38.04 was the appropriate per share price. The Wisconsin Federal District Court picked apart the analysis and rejected it. The appraiser had failed to consider the worsening economy in the years that the gifts were made, and at least one of his “comparables” was not truly comparable at all.
However, the taxpayer’s expert was not accepted in full either. The expert had applied a marketability discount of 30% to reflect the lack of liquidity in the holdings and the restrictions in place to keep the family holdings in the family. The Court believed that the appraiser failed to demonstrate the impact of the specific family transfer restrictions on value, and reduced the discount to 27%. The bottom line was that the share value in each of the three years went up by only about $1, so they recovered most of the excess gift tax.
It seems possible that the litigation costs were larger than the additional taxes that the IRS eventually wrangled from the Kress family. But the larger cost of these transactions is the uncertainty that hung over the family for more than a decade. They may have felt patriotic when they paid $1.2 million in gift taxes for the privilege of letting their children own a piece of the company. Or they may have considered it part of the price of success. Still, would they have proceeded with the gifts had they known about the years of court fights that lay ahead?
At The Trust Company of Kansas, we help people. We promise to minimize the burden of wealth management and bestow the freedom to enjoy everything else. The officers at The Trust Company of Kansas are always willing to discuss your financial goals with you and help you to create a plan that is well-aligned with your wishes. If you have a specific question about business succession or estate planning, please contact us at (800) 530-5254 or visit tckansas.com/contactus, and one of our Certified Trust and Financial Advisors will be happy to assist you.