## Facts

- Kohler Co. was a closely held family corporation; family members and affiliates owned about 96% of the shares, with the remainder held by non-family shareholders.
- The family planned a restructuring to consolidate ownership and remove outside shareholders.
- A Kohler family member died owning a substantial block of Kohler Co. common stock that was not subject to transfer restrictions at death.
- Within six months after death, Kohler Co. completed a tax-free corporate reorganization qualifying under I.R.C. § 368(a).
- In the reorganization, the estate exchanged the decedent’s original shares for new shares subject to significant transfer restrictions and a purchase option favoring the corporation or other shareholders.
- The estate elected the alternate valuation date (six months after death) under I.R.C. § 2032(a)(2).
- The estate valued the stock on the alternate valuation date as the restricted post-reorganization shares and applied discounts reflecting the restrictions.
- The IRS determined a higher value by treating the shares as if the restrictions imposed in the reorganization should be disregarded for alternate-valuation purposes, and asserted estate and gift tax deficiencies and accuracy-related penalties.

## Issues

1. Whether a post-death, tax-free reorganization under I.R.C. § 368(a) is a “sale, exchange, or other disposition” under I.R.C. § 2032(a)(1), requiring valuation at the reorganization date.
2. If the reorganization is not a disposition, whether the estate must value the property on the alternate valuation date in the form actually held then (restricted post-reorganization stock) and may reflect the transfer restrictions and purchase option in fair market value.

## Decision

- The Tax Court held that the § 368(a) reorganization was not a “disposition” for purposes of I.R.C. § 2032(a)(1) and Treas. Reg. § 20.2032-1(c)(1).
- The estate therefore valued the stock under § 2032(a)(2) as of six months after death.
- The stock had to be valued in the condition and legal form held on the alternate valuation date, including the transfer restrictions and purchase option imposed in the reorganization.
- Discounts attributable to the restrictions were allowed in determining fair market value.
- The court rejected the Commissioner’s higher valuation premised on the unrestricted pre-reorganization shares and entered decision after computations.

## Legal Principles

- Under I.R.C. § 2032(a), property disposed of within six months is valued at disposition; property not disposed of is valued at six months after death if the alternate valuation election is made.
- Treas. Reg. § 20.2032-1(c)(1) provides that certain tax-free reorganizations qualifying under I.R.C. § 368(a) do not constitute dispositions for § 2032 purposes.
- When § 2032(a)(2) applies, the property is valued as it exists on the alternate valuation date; changes in the property’s legal attributes that are effective as of that date are reflected in fair market value.
- Transfer restrictions and purchase options that are binding as of the valuation date may be considered in determining fair market value, including through appropriate discounts, when they affect a hypothetical willing buyer and willing seller.

## Conclusion

The Tax Court ruled that a post-death tax-free reorganization qualifying under § 368(a) is not a § 2032 disposition and that, with an alternate valuation election, the estate must value the stock as actually held six months after death—restricted shares—permitting valuation discounts reflecting those restrictions.


Kohler v. Commissioner, T.C. Memo. 2006-152, 92 T.C.M. (CCH) 48 (2006)