Days of Our Lives

The human adventure is a rich tapestry of experiences, both profound and profane. We created art, music, and literature to express our joys. We build families to give and receive love, and communities to give and receive support. And we shared the wisdom of philosophers from the Stoics to Martin Luther King, Jr. to help us understand it and makes sense of it all.

Sometimes, though, the human experience is a bit less grand. A little more grimy. Sometimes it involves backstabbing, betrayal, and blackmail. That’s why courts exist, and prosecutors, and lawyers, and judges. And while you may think most tax disputes turn on dry interpretations of dense legalese, the Tax Court sees its fair share of human disappointment and failure. Which brings us to this week’s story . . . .

Kaleb Pierce describes himself as an entrepreneur from the start, always looking to make money any way he could. He started his first business – an ice cream truck – at age 16 and skipped college to keep the money train running. Eventually, he married and became a father. His wife, who was breastfeeding their child, would often forget which side she fed from. In a flash of inspiration, she imagined a rubber bracelet with one side reading “left,” and the other side reading “right,” to remind her. They named the product “milk bands” and launched a company to exhibit them at baby products trade shows.

The milk bands didn’t make the Pierces rich. But they found another product they liked, a nursing cover called Hooter Hiders. They decided to knock off Hooter Hiders under the name Udder Covers. That move ultimately led to a series of cheap baby product knockoffs and a scammy “free, just pay shipping” business model with an inflated shipping price that covered the cost of shipping and the product.

Eventually, trouble arrived in paradise. Hooter Hiders sued Pierce for patent infringement and illegal marketing practices. And someone installed a keylogger on Pierce’s computer, which revealed his affair with an employee. That person – who turned out to be a different employee – sent Pierce a demand: pay $100,000 by the next week, or they would blow the whistle to his wife. To Pierce’s credit, he didn’t pay. He immediately ‘fessed up to his wife, notified the FBI of the blackmail, and watched his reputation as a family man swirl down the drain.

Just after the scandal broke, Pierce and his wife decided some planning was in order. They gave 48.8% of the business to two trusts and sold the remainder to a new LLC in exchange for a note. They hired an appraiser, who valued the gifts at $4.88 million each, and filed appropriate gift tax returns. Those returns got audited, leading to a trip to the courthouse. By then, Pierce had submitted a second appraisal valuing the gifts at $3.91 million, while the IRS expert claimed they were worth $5.78 million.

Ar The Court’s decision came down to a straightforward “battle of the appraisers.” Both parties agreed to a discounted cash flow method. At that point, the Court walked through 21 pages of dry interpretation and dense legalese. This includes “tax affecting” using the Delaware Chancery Court method, “discounting through the weighted average cost of capital formula,” and even a “cost of equity capital analysis based on the Kroll cost of capital navigator.” Trust me, I read this stuff so you don’t have to.

Lots of lessons here. Don’t rip off peoples’ inspirations. Don’t cheat your customers with cheap crappy products. Don’t cheat your spouse, either! I can’t help with those problems. But if you do get caught in the wringer, I can help make the tax hit less painful.