The remarkable story of how the Pohlad family ended up in a nine-figure fight with the Internal Revenue Service over the late Carl Pohlad’s estate isn’t that remarkable at all.
It’s called estate planning.
Not that the three sons of Carl Pohlad actually planned for a very public dispute with the IRS, one that makes them look like they tried to game the tax code.
In fact, the only thing really remarkable here is the sheer size involved, as the IRS is looking for $121 million in additional estate taxes just related to Carl Pohlad’s ownership in the Minnesota Twins. The clear outlines of a sensible estate plan, one that any number of business owners would have, are visible in what’s publicly available in U.S. Tax Court filings.
“Estate planning involves tax planning, but it also involves the transition of operations of businesses from one generation to the next,” said Jim Pohlad, with his two brothers the executors of his father’s estate, in a brief telephone conversation. “We did that on a careful, planned basis.”
Carl Pohlad, a banker and investor best known in the latter part of his career as principal owner of the Minnesota Twins, died in 2009. His three sons, as executors of his estate, filed the estate’s tax return but were hit this spring with a “deficiency notice” from the IRS for underpaid estate taxes.
That meant they had to resolve the deficiency through negotiation by June 6 or file a petition with the U.S. Tax Court contesting the IRS’s position that the estate owes many millions more in additional taxes. When early June rolled around with no resolution, they filed their petition.
Even though there’s a list of things in dispute with the IRS, including how to treat a block of cemetery plots, this is really all about the chasm between what the IRS thinks Carl Pohlad’s Minnesota Twins ownership stake was worth in January 2009 — $293 million — and the $24 million value the estate’s tax return put on his Twins equity.
Carl Pohlad owned his Twins equity in several pieces. At the time of his death he owned a 52.2 percent nonvoting interest in MT Sports LLC, which in turn owned a 99 percent, nonvoting interest in Minnesota Twins LLC. He also owned a 95.5 percent equity interest in Twins Sports Inc., the managing member of the Minnesota Twins LLC.
In a limited liability company like Minnesota Twins LLC, the managing member is in charge, and usually has authority to borrow money, hire and fire employees and take other actions that the non-managing members have no right to do. But Carl Pohlad owned only 10 percent of Twins Sports’ voting shares, with the rest equally split between Jim and his two brothers.
Sure, there were three separate companies and multiple classes of equity, but as such things go in the ownership of a family business, this structure for the Twins is not particularly artful. What it meant is that at the end of Carl Pohlad’s life, he owned the majority of the franchise but did not control it.
Jim Pohlad said he can’t precisely recall when control was transferred, calling it a “gradual” process, but the impact on value with Carl giving up control was huge.
Valuation experts have no trouble looking at the fair-market values of publicly listed securities, but the job is much more complicated with investments in privately held firms.
And in the cases of non-controlling stakes in privately held businesses, they routinely apply what’s called a discount for lack of marketability, which reflects how difficult it can be to turn any illiquid private company investment into cash, and a discount for lack of control, meaning control of the company.
Is it common for patriarchs to pass control to heirs as part of minimizing the value of a taxable estate?
“Absolutely,” said Bob Strachota, president of the Shenehon Co., a leading business valuation firm in Minneapolis. “It’s not only a strategy that they employed, it’s a strategy that everyone today is doing.”
Strachota counts the Pohlad interests as a past client and he declined to discuss the current dispute, but he did outline how family-held businesses can minimize the amount of tax liability.
“Timing is also really important,” he said. “Many people sort of act like they’re going to live forever. But markets go in cycles.”
Carl Pohlad died less than four months after Lehman Brothers had filed for bankruptcy protection and the credit markets had all but seized. Asset values had been plummeting, and the Pohlad tax court filing indicates that by far the largest asset transfer in the recent past was in 2008.
As Strachota observed, “Crises can actually present opportunities for estate planning.”
Jim Pohlad explained that “you can’t just look up in the Wall Street Journal and figure out the value of things like the Twins,” adding that he and his brothers relied on their valuation experts in wrapping up the estate.
In the case of the Twins equity that expert was Dean Polenz, a director in the forensic and valuation services practice of Grant Thornton in Milwaukee. Is it possible to threaten, cajole, spin or otherwise influence a seasoned valuation expert working for a major international firm into dropping his estimate? To get assets purportedly worth $293 million valued at $24 million it’s not.
When this is settled, the final number won’t be public, but it’s my guess it’s going to be much closer to the position of the Pohlads than the IRS.
The Pohlad estate plan seems to have called for at least some negotiation with the IRS. Jim Pohlad said he knew full well that the IRS was going to review the return from his father’s sizable and complex estate. The family has made “substantial progress” with the IRS, he said, and added that he’s “optimistic” that the dispute with the IRS can now be quickly settled.
Of course, anyone knowing that they will end up horse-trading with the tax authorities anyway would be sorely tempted to treat an estate’s tax return as an opening offer.
In a curious way Jim Pohlad and his two brothers are honoring the legacy of their father in their settlement discussions with the IRS.
You can confirm this with many people who did a deal with Carl Pohlad, because he certainly was one guy who really liked to negotiate.