Prince Estate Tells IRS to ‘Kiss’ Off in Deficiency Case

i. Respondent erred in determining that Decedent's interest in 20.78 acres of undeveloped real property in Chanhassen, MN (Item 1 on Schedule A of the estate tax return) had a fair market value of $1,892,000.00 rather than the fair market value of $1,560,500.00 reported on the estate tax return and established by a qualified independent appraisal.

ii. Respondent erred in determining that Decedent's interest in 149 acres of undeveloped real property in Chanhassen, MN (Item 2 on Schedule A of the estate tax return) had a fair market value of $15,017,000.00 rather than the fair market value of $11,188,000.00 reported on the estate tax return and established by a qualified independent appraisal.

iii. Respondent erred in determining that Decedent's interest in 8.95 acres of undeveloped real property in Chanhassen, MN (Item 3 on Schedule A of the estate tax return) had a fair market value of $1,461,000.00 rather than the fair market value of $672,000.00 reported on the estate tax return and established by a qualified independent appraisal.

iv. Respondent erred in determining that Decedent's interest in 6.62 acres of undeveloped real property in Chanhassen, MN (Item 4 on Schedule A of the estate tax return) had a fair market value of $603,000.00 rather than the fair market value of $497,000.00 reported on the estate tax return and established by a qualified independent appraisal.

v. Respondent erred in determining that Decedent's interest in an industrial building located at 8020 Park Place, Chanhassen, MN (Item 5 on Schedule A of the estate tax return) had a fair market value of $840,000.00 rather than the fair market value of $600,000.00 reported on the estate tax return and established by a qualified independent appraisal.

vi. Respondent erred in determining that Decedent's interest in a vacant residential lot located at 9401 Kiowa Trail, Chanhassen, MN (Item 7 on Schedule A of the estate tax return) had a fair market value of $700,000.00 rather than the fair market value of $550,000.00 reported on the estate tax return and established by a qualified independent appraisal.

vii. Respondent erred in determining that Decedent's interest in a vacant residential lot located at 9411 Kiowa Trail, Chanhassen, MN (Item 8 on Schedule A of the estate tax return) had a fair market value of $240,000.00 rather than the fair market value of $200,000.00 reported on the estate tax return and established by a qualified independent appraisal.

viii. Respondent erred in determining that Decedent's interest in residential property located at 115 King Creek Road, Golden Valley, MN (Item 9 on Schedule A of the estate tax return) had a fair market value of $510,152.00 rather than the fair market value of $360,000.00 reported on the estate tax return and established by a qualified independent appraisal.

ix. Respondent erred in determining that Decedent's interest in residential property located at 539 Newton Avenue North, Minneapolis, MN (Item 10 on Schedule A of the estate tax return) had a fair market value of $147,915.00 rather than the fair market value of $82,000.00 reported on the estate tax return and established by a qualified independent appraisal.

i. Respondent erroneously misclassified certain personal property owned by PPE and NPGR as being owned directly by Decedent rather than by such entities.

ii. PPE. Excluding the personal property owned by PPE, Respondent erroneously determined that the fair market value of PPE was $7,601,603.00 rather than $5,102,596.35 as established by qualified independent appraisals obtained by the Estate. This overstatement of PPE's fair market value was based on Respondent's erroneous determination of the fair market value of (A) certain real estate owned by PPE and (B) PPE's. 1% interest in NPG Music Publishing, LLC (reported as Item 1 on Schedule F on the estate tax return).

iii. NPGR. Excluding the personal property owned by NPGR, Respondent erroneously determined that the fair market value of NPGR was $46,534,047.00 rather than $19,441,772.76 as established by qualified independent appraisals obtained by the Estate. This overstatement of NPGR's fair market value was based on Respondent's erroneous determination of the fair market value of (A)NPGR's interest in Decedent's recorded music catalogue and (B) certain real estate held indirectly by NPGR.

i. Schedule A, Items 1-4. With respect to the parcels identified as Items 1-4 on Schedule A of the estate tax return:

ii. Schedule A, Items 9-10. Respondent did not obtain an independent appraisal of the parcels identified as Items 9-10 on Schedule A of the estate tax return and ignored Petitioner's qualified independent appraisal of these parcels. Instead, Respondent merely asserted higher fair market values based solely on “models” prepared by an employee of Respondent who never conducted any inspection of such properties, offered no rationale behind the methodology used to establish a valuation for these parcels and, to the best of Petitioner's knowledge, is neither licensed nor otherwise qualified to value such properties.

iii. Schedule A, Items 7-8. In determining the asserted fair market value of the parcels identified as Items 7-8 on Schedule A of the estate tax return, Respondent erroneously based the valuation of these properties on the price they were sold at after Decedent's death without considering changes in market conditions. Petitioner's qualified independent appraisals of Items 7-8 submitted with the estate tax return were correctly based on the circumstances existing at the time of Decedent's death.

iv. Schedule A, Item 5. Petitioner determined the fair market value of the real estate identified as Item 5 on Schedule A of the estate tax return based on a qualified independent appraisal.

i. With respect to PPE's interest in real estate located at 7801 Audubon Road, Chanhassen, Minnesota (“Audubon Road”):

ii. PPE also owned an interest in the Galpin Property, discussed in paragraph 7.b.i, above. With respect to the parcel of the Galpin Property owned by PPE:

iii. Respondent erroneously increased the fair market value of certain residential real estate owned by PPE based on the sale of such property after Decedent's death without considering changes in market conditions. Petitioner's qualified independent appraisal of such property submitted with the estate tax return was correctly based on the circumstances existing at the time of Decedent's death.

iv. Respondent erroneously adjusted the value of PPE's .1% interest in NPGMP based on Respondent's proposed increase to the total fair market value of NPGMP (see paragraph 7.f, below). Petitioner properly included such interest in the value of PPE based on .1% of the fair market value of NPGMP as reported on the estate tax return, subject to the adjustment to such interest noted in paragraph 7.f.iii, below.

v.Respondent improperly adjusted the value of PPE to exclude all personal property owned by PPE. Petitioner properly included music memorabilia, studio equipment and certain vehicles owned by PPE in the fair market value of PPE as reported on the estate tax return.

i. The Music Catalogue appraisal obtained by Respondent (“IRS Music Appraisal”) overstates the value of the Music Catalogue due to a number of errors and oversights, including but not limited to: (A) artificially inflating pre-death cash flows produced by the Music Catalogue through multiple errors including but not limited to (I) double counting certain receipts, (II) presenting cash flows in a manner that cannot be reconciled with source royalty statements, and (III) failing to cash advances to the time periods they were actually received; (B) failing to account for income taxes generated by the Music Catalogue; (C) relying on unrealistically high growth assumptions and unrealistically low cost assumptions; and (D) generally failing to provide support for adjustments and assumptions made throughout the appraisal report.

ii. The IRS Music Appraisal further overstates the fair market value of the Writer's and Publisher's Shares of Music Compositions by inexplicably applying a terminal growth rate for Decedent's music publishing rights twice the terminal growth rate it applies to the recorded music rights, despite utilizing significantly lower growth projections for music publishing royalties than for recorded music royalties in its cash flow projections.

i. Petitioner relied on qualified independent appraisals to determine the fair market value of (A) an indirect interest in certain real estate owned by NPGR and (B) NPGR's interest in Decedent's music catalogue (see paragraph 7.d, above).

ii. Respondent erroneously valued NPGR's indirect interest in certain real estate based on a sales price nearly three years after Decedent's death and failed to account for post-death improvements to such property or changes in market conditions during such time period.

iii. Respondent erroneously increased the value of an uncollectible receivable owned by NPGR to its face value, while simultaneously increasing Decedent's taxable gifts by the full amount advanced, thereby improperly including duplicative proposed adjustments in the Notice of Deficiency.

iv. Respondent improperly adjusted the value of NPGR to exclude all personal property owned by NPGR (see paragraph 7.i, below).

i. The Estate obtained a qualified independent appraisal of the real estate owned by NPGMP, which appraisal was inexplicably disregarded by Respondent in favor of Respondent's own internal calculation of asserted value. Respondent provided no independent appraisal of such property and no explanation for either the rationale behind the methodology in this calculation of value or the reason for disregarding the judgement and opinion of the Estate's qualified independent real estate appraiser.

ii. The Estate's valuation of NPGMP's Publisher's Share of Music Compositions was accurate and was based on a qualified appraisal prepared by a qualified independent appraiser with substantial expertise in valuing music catalogues (see paragraph 7.d, above).

iii. The Estate reported the total fair market value of NPGMP as $21,016,896.48 on the estate tax return. After filing the estate tax return, Petitioner became aware of two additional accounts owned by NPGMP as well as additional accounts payable for which NPGMP was the obligor and disclosed these assets and liabilities to Respondent. The net additional value of these additional assets and liabilities accounts is $143,562.00, resulting in an appropriate fair market value for NPGMP of $21,160,468.48.

i. The valuation of all such personal property was based on a qualified appraisal prepared by a qualified independent appraiser with substantial experience in valuing the types of personal property owned by Decedent.

ii. The appraisal that Respondent obtained for Decedent's personal property (“IRS TPP Appraisal”) erroneously overstated the value of such property due to a number of errors and oversights, including but not limited to: (A) employing inconsistent appraisal methodologies throughout the report, in violation of the Uniform Standards of Professional Appraisal Practice; (B) utilizing inappropriate comparable sales data to support higher valuation conclusions while ignoring directly relevant comparable sales data for Decedent; (C) failing to utilize specialized appraisers with the education and experience necessary to appraise Decedent's diverse catalogue of personal property; (D) failing to include a proper market analysis; (E) providing vague or inaccurate descriptions; and (F) double counting certain items.

iii. In addition to the defects noted above, the IRS TPP Appraisal improperly included certain items that the Estate could not monetize as personal property, including but not limited to: (A) real estate fixtures; (B) a tour bus owned by a third party; (C) Decedent's passport; and (D) a Grammy award.

iv. As previously noted, Respondent failed to allocate Decedent's personal property among the entities that owned such property. In particular, with respect to PPE:

i. Petitioner has incurred and will continue to incur substantial expenses in conjunction with administering Decedent's estate, including expenses in connection with this and other litigation matters and in defending claims asserted by others.

ii. Petitioner has deducted state estate taxes paid to date, and interest thereon. The Estate owes additional state estate tax to the State of Minnesota and will be entitled to a deduction under I.R.C. § 2058 for the payment of such taxes and a deduction for any interest paid thereon under I.R.C. § 2053. If any estate tax deficiency is ultimately determined to be due in this case, the Estate will also be entitled to a deduction for the additional state death taxes and interest thereon under I.R.C. §§ 2053 and 2058.

i. All valuations contained in Decedent's estate tax return were accurate and were based upon qualified appraisals by qualified independent appraisers who had extensive experience in valuing the types of assets owned by Decedent. Additionally, Petitioner made a good faith investigation with respect to the valuation of all assets reported on the estate tax return and reasonably relied on the appraisals in valuing the Estate's assets. If any underpayment occurred, it was based on reasonable cause, with Petitioner acting reasonably and in good faith with respect to each such valuation.

ii. If any additional estate tax is ultimately determined to be due, no portion of any such additional estate tax is attributable to the willful or negligent failure to follow laws, rules or regulations or any other conduct that justifies application of any penalty. To assist in the preparation of Decedent's estate tax return, Petitioner retained well qualified and experienced attorneys to prepare Decedent's estate tax return with the assistance of qualified, independent and experienced appraisers. Said parties were instructed to prepare and did prepare a complete and accurate return.

iii. Respondent overstates the asserted penalty with respect to Decedent's personal property if a penalty is determined to be applicable. Decedent's personal property was included on the estate tax return on Schedule F and within the fair market value of entities owned by Decedent based on the ownership of such property (see paragraph 7.i.iv, above). In calculating penalties, Respondent failed to account for the personal property reported on the estate tax return within the fair market value of PPE, resulting in an asserted penalty calculated partially on Respondent's own erroneous misclassification of assets. As Respondent has not asserted a penalty for the Estate's valuation of PPE, it would be inappropriate to impose a penalty with respect to personal property properly owned by PPE and properly reported on the estate tax return as such.

iv. In light of the foregoing facts, the qualified independent appraisals submitted with the estate tax return, the supplemental qualified independent appraisal of Audubon Road and the extensive documentation and information provided by the Estate during audit, and the provisions of I.R.C. § 6664, an accuracy-related penalty is not applicable in this case, and therefore, the Estate is not liable for the asserted addition to tax under I.R.C. § 6662(g) or the alternatively asserted addition to the tax under I.R.C. § 6662(c).