Many tax practitioners agree that valuing property for tax purposes is the most important issue that they face. Yet valuation issues are often murky and amorphous. In most cases valuation disputes are resolved in favor of the party that has the most convincing valuation expert. In other cases valuation disputes are resolved on even less definite grounds. This brings me to Garwood Irrigation Company v. Commissioner, which is one of my favorite cases.
Facts & Porcedural History
The Garwood case involved the valuation of the taxpayer’s water rights. Both the IRS and the taxpayer put on valuation experts to establish the true value of the taxpayer’s water rights. Initially the IRS asserted that the correct value was $76,609,000 and the taxpayer asserted that the value was $31,410,000. At trial the IRS’s valuation expert placed the value at $45,809,384 and the taxpayer’s valuation expert placed the value at $10,700,000. As outlined in the thirty-nine-page decision, the court found that the taxpayer’s water rights were actually worth $22,532,519 – $8,877,481 less than the value that the taxpayer had originally claimed on its tax return.
There are several issues that make this opinion interesting. One issue is that the court heard valuation evidence put on by both parties, experts who were deemed qualified as experts by the court, but it chose to ignore that evidence. For the lay readers, courts often write very lengthy opinions to justify either departing from the law and/or the evidence. This often helps to ensure that the court’s ruling is not overturned by higher courts. A thirty-nine page opinion from the tax court is not unheard of, but it is not that common. This leaves one wondering what evidence or circumstances really impacted the court in such a manner as to cause the court to disregard the experts’ opinions.
With no firsthand knowledge of the case, I wonder if the fact that the IRS initially tried to collect $76 million from the taxpayer and only $45 million in court had anything to do with it. For sure the $76 million valuation came from an ambitious or anti-taxpayer revenue agent and that figure made it into the revenue agent’s report. Upon receiving the case, the IRS attorney no doubt got a second opinion that resulted in the $45 million value. Tax court cases are not tried before juries, but I wonder if this was the equivalent of throwing a skunk in the jury box. Could it have been enough to kill the IRS’s case from the outset?
Another interesting issue is that the government would have been better off had it not taken any actions whatsoever. In the end, the government lost the tax revenues that it paid to prosecute Garwood and the government lost the tax revenues that Garwood had already agreed to pay.
I can imagine the feelings of the IRS attorney who lost this case. I can also feel the taxpayer’s attorney’s embarrassment (pleasant surprise?) in placing the value too low. Attorneys, especially tax attorneys, seek out rules. If no rule can be found then attorneys make persuasive arguments based on similar situations or policy. This framework provides order and it facilitates the resolution of disputes. Yet, valuation issues do not fit neatly into this framework — especially when the courts are involved. Perhaps that is why valuing property for tax purposes is the most important issue faced by many tax practitioners.