Business Valuation Quarterly Brief - Q3 2026

Summary

In Lewis v. Commissioner, the Tax Court determined the value of taxable gifts arising from the early termination of a QTIP trust created under Clotilde McDougall’s will. Clotilde’s estate consisted primarily of her interest in a real estate business inherited from her father. However, the opinion does not provide a detailed breakdown of the trust’s assets as of the valuation date. The parties stipulated that those assets were worth $117,604,143; their underlying value was therefore not the valuation issue before the court.

Clotilde’s husband, Bruce, was entitled to the trust’s income for life, had a qualified right to principal for health, maintenance and support, and held a limited testamentary power of appointment. Their children, Linda and Peter, held remainder interests. In 2016, the three agreed to terminate the trust and distribute all $117.6 million to Bruce. In McDougall v. Commissioner (2024), the Tax Court had already held that the children made taxable gifts by surrendering valuable rights for nothing in return. This decision addressed the value of those gifts: what Linda and Peter would have been entitled to receive had they not agreed to give everything to Bruce.

Two valuation experts addressed the beneficiaries’ interests. Petitioners’ expert David Eckstein, accepted in business valuation, intangible asset valuation, and valuation of economic interests, used DCF analyses under three scenarios. IRS expert David Fuller, accepted in business valuation and intangible asset valuation, valued Bruce’s income interest and subtracted it from the trust’s net asset value to derive the remainder interests. The opinion identifies no professional valuation designations for either expert.

The court addressed four principal valuation disputes: Bruce’s limited power of appointment, the impact of §2207A reimbursement obligations, whether §7520 tables determined the beneficiaries’ entitlements, and the appropriate life-expectancy assumption for Bruce. It ultimately held that each child made a gift of $35,141,321.

Practical Notes for Business Valuators

• Identify exactly what is being valued. The $117.6 million asset value was stipulated. The experts were not determining the value of the underlying real estate business or the trust’s total assets; they were valuing the beneficiaries’ economic interests in that known pool to determine what Linda and Peter surrendered.
• Determine the legal rights before valuing them. Eckstein’s Scenario III produced remainder interests of only $156,000 each, largely because Bruce’s limited power of appointment created a remote probability that Linda and Peter would ultimately receive trust property. The court found the scenario unhelpful because its treatment of those rights was inconsistent with how Washington law would implement Clotilde’s expressed intent. A mathematically valid valuation model cannot cure an incorrect legal premise.
• A known total value can reveal consistency problems. After correcting an initial discount-rate allocation error, Eckstein valued the two remainder interests at $53.21 million each and Bruce’s term interest at $11.19 million, for a total of $117.6 million. He then increased the remainder-interest discount rate by 400–600 basis points for lack of marketability and control, reducing each to $37.48 million and leaving the interests collectively $37.6 million below the known asset value.
• Make sure reconciliation does not reverse the adjustment. Eckstein subsequently allocated the $37.6 million shortfall proportionately among the interests. As he acknowledged at trial, that allocation effectively undid the DLOC/DLOM adjustments that had created the shortfall. The court did not ultimately decide whether those discounts were appropriate. Still, the episode illustrates an important model-integrity check: an adjustment and the subsequent reconciliation should tell a consistent economic story.
• Be cautious when modifying population-based actuarial assumptions. Eckstein used the Social Security life table as a baseline but treated Bruce, then 85, as though he were 80, relying on his high income and reported above-average health. The court reasoned that selectively adjusting a population-based estimate for some individual characteristics, without adequately considering the others, can introduce bias and is “methodologically questionable.”
• Professional judgment has boundaries. Eckstein had not interviewed Bruce, reviewed his medical records, or consulted an actuary. The court emphasized that he was a valuation expert—not an actuary—and rejected the contention that determining Bruce’s individualized life expectancy was therefore simply an exercise of his valuation professional judgment.
• Do not assume a federal tax valuation table determines the underlying property rights. The court held that §7520 did not dictate what Linda and Peter would have received upon termination because that entitlement was first a question of state law. A trustee might use §7520 for guidance, but the federal tables did not determine the beneficiaries’ rights under Clotilde’s will.

Concept/Rules Summary

QTIP — Qualified Terminable Interest Property. QTIP rules allow qualifying property left for a surviving spouse to receive the estate-tax marital deduction even though the spouse does not receive unrestricted ownership. The surviving spouse generally receives a qualifying income interest for life, while the first spouse can control the property’s ultimate disposition. The property is generally included later in the surviving spouse’s estate, preserving the principle that the marital deduction defers rather than eliminates transfer taxation. Clotilde’s estate made a QTIP election for the Residuary Trust.

Life/Income Interest and Remainder Interest. A life or income interest provides economic benefits during the beneficiary’s lifetime; Bruce was entitled to the trust’s net income at least annually and potentially certain principal distributions. A remainder interest represents the economic interest in property following the preceding interest. Linda and Peter held the remainder interests. The timing and likelihood of future benefits therefore affect the relative economic values of these interests.

IRC §7520 and Actuarial Tables. Section 7520 generally provides standardized present-value calculations for specified federal tax purposes involving annuities, life estates, terms of years, remainders, and reversions. The calculations use prescribed interest rates and actuarial factors based, among other things, on the life beneficiary’s age. For October 2016, the applicable §7520 interest rate was 1.6%.

The IRS argued that §7520 should determine the remainder interests. The court disagreed—but importantly, not because it accepted the taxpayers’ argument that the interests were too restricted for the tables. Instead, the court held that the amount each beneficiary was entitled to receive upon termination was first a matter of Washington property law. Section 7520 applies “for purposes of” the Internal Revenue Code; it did not dictate the rights created by Clotilde’s will.

IRC §§2519 and 2207A — QTIP Disposition and Tax Reimbursement. If a surviving spouse disposes of a qualifying QTIP income interest during life, §2519 can treat the spouse as transferring the other interests in the QTIP property. Section 2207A permits the spouse to recover the resulting transfer tax from those who receive the property. The regulations therefore employ mechanics similar to a net gift: the reimbursement obligation reduces the value effectively transferred.

That mattered here because the court asked what Linda and Peter would have received had they not surrendered their rights. Had they received their terminating distributions, they would also have incurred obligations to reimburse Bruce for the resulting gift tax. Accordingly, what they gave up was their distribution net of the §2207A liability they avoided.

How the Court Reached $35.141 Million

The final number deserves explanation because $35,141,321 was not an independently derived valuation the court selected from the competing expert opinions.

Fuller’s baseline analysis valued each child’s remainder interest at $49,197,850. Applying the 40% gift-tax/net-gift mechanics produces:

$49,197,850 ÷ 1.40 = $35,141,321.

The IRS had conceded that if both (1) §7520 did not determine the value and (2) §2207A reduced the gifts, then each child’s gift was worth no more than $35,141,321. The court ultimately decided both issues in Eckstein’s favor.

Meanwhile, after the court rejected Eckstein’s five-year life-expectancy adjustment and used Bruce’s actual age, Eckstein’s alternative Scenario II produced a higher indication of $37.4 million per child. Because the conditions underlying the IRS’s concession had been satisfied, the court held the IRS to its lower figure and concluded that each gift was $35,141,321.

Thus, the $35.141 million conclusion should not be read as the court’s wholesale adoption of Fuller’s methodology.

Context and Contribution

The case does not introduce a new valuation method. DCF and present-value techniques for valuing split economic interests are established. Nor did the court ultimately decide whether DLOC/DLOM should apply to these remainder interests.

The case does, however, provide an unusually transparent example of the interaction among legal rights, tax obligations, DCF modeling, discount-rate adjustments, model reconciliation, and actuarial assumptions.

Perhaps its most consequential valuation contribution is the court’s treatment of individualized adjustments to actuarial data. The court did more than find Eckstein’s particular evidence insufficient. It explained why standard actuarial tables work through the law of large numbers and why adjusting their estimates for some, but not all, subject-specific factors can itself introduce bias. It then held that Bruce’s life expectancy should be determined using his actual age rather than treating him as five years younger.

Lewis is a Tax Court Memorandum opinion and should not be read as establishing that actuarial tables can never be adjusted for individual circumstances. Nor did the court specify precisely what evidence would be sufficient to support such a departure. But it provides a meaningful judicial framework for evaluating one: What subject-specific evidence supports the adjustment? Have potentially offsetting factors been adequately investigated? And does the expert possess—or obtain—the specialized expertise necessary to adjust?

Why It Matters

Lewis contains several lessons that extend beyond QTIP trusts.

First, valuation follows the legal rights being valued. An expert must understand those rights before modeling their economics. Second, a known total asset value can expose inconsistencies in the valuation of component interests—and a reconciliation should not mechanically undo the very adjustment it is intended to accommodate. Third, departing from standardized empirical assumptions requires support commensurate with the departure.

Most notably, the court’s actuarial discussion cautions against a tempting form of valuation judgment: identifying one characteristic that makes the subject different from the population underlying a benchmark and adjusting for it without comprehensively considering the other characteristics that could point in the opposite direction.

In that sense, Lewis reaches well beyond mortality tables. Making a benchmark more subject-specific does not necessarily make it more accurate.