Current Developments in Tax Valuations

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Current Developments in Tax Valuations

• March 2002

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I. Overview

• Valuation and financial advisory firm
• Established in September 1991
• Broker/dealer established September 1999
• All principals have backgrounds with regional
  investment banking firms in Houston and national
  valuation firms
• Rotan Mosle
• Underwood Neuhaus
• Lovett Mitchell Webb Garrison, Inc.
• Each principal has at least twenty-five years
  experience
• Chartered Financial Analysts and Senior Members
  of the American Society of Appraisers

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Howard Frazier Barker Elliot, Inc.
I. Overview

• One of the largest independent financial
  valuation and advisory firms in the Southwest
• Six managing directors, three vice presidents,
  nine associates and analysts and four support
  staff
• Based in Houston, HFBE has a national clientele
  base
• Valued securities of hundreds of companies in a
  broad spectrum of industries

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Valuation Services
I. Overview

• Specialize in valuing various kinds of financial
  securities such as common stock and preferred
  stock, general and limited partnership interests,
  notes, and derivative securities of private
  closely held companies
• Provide a variety of valuation opinions,
  including

Fairness opinions Sales representations Tax
and estate planning Incentive stock options
plans Employee stock ownership plans
Mergers and acquisitions values and exchange
ratios Company reorganizations and
restructuring Bankruptcy advisoryservices
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Corporate Finance and Advisory Services
I. Overview

• Strategic acquisitions and mergers
• Management and leveraged buyouts
• Acquisition searches
• Private placements of debt and equity
• Senior debt financing
• Financial restructuring and recapitalization

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II. Tax Case Update Family Limited Partnerships

• Estate of Elma M. Dailey v. Commissioner Judge
  Foley (October 2001)
• Interest considered an assignee
• Respondent used an unpublished survey
• Bajaj (respondents expert) not familiar with
  partnership agreement
• Judge allowed a 40 percent discount
• Neither expert extraordinary
• Adams v. United States Judge Fitzgerald 5th
  Circuit (August 2001)
• No discount on original case
• Tried in U.S. District Court (remanded for
  consideration of discounts)
• Rights of an assignee not clearly established in
  Texas law
• Court allowed a 20 minority discount, 10
  portfoliodiscount, and a35 marketability
  discount (53 overall discount)

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Family Limited Partnerships (contd)
II. Tax Case Update

• Helis v. United States (July 2001)
• Court of Claims
• IRS expert lacking industry knowledge (did not
  visit facility)
• Post-valuation date information
• No independent petroleum engineering report
• IRS expert disregarded
• Estates experts results averaged methodology
  differed

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Family Limited Partnerships (contd)
II. Tax Case Update

• Estate of Jones v. Commissioner Judge Cohen
  (March 2001)
• Valid legal entity
• No gift at formation
• Limited partnership interest (not assignee)
• Contrast with Estate of Nowell

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Family Limited Partnerships (contd)
II. Tax Case Update

• Knight v. Commissioner Judge Colvin (November
  2000)
• Valid legal entity
• Specified aggregate value of units
• Court allowed a 15 percent discount (44 percent
  claimed by taxpayer)

• Strangi v. Commissioner Judge Cohen with full
  Court (November 2000)
• Valid legal entity
• No gift at formation

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Family Limited Partnerships (contd)
II. Tax Case Update

• Shepherd v. Commissioner Judge Thornton with
  full Court (October 2000)
• Taxpayers transfers deemed indirect gifts
• Court allowed a 15 percent discount for lack of
  control, possibility of disagreement between
  co-owners and partition costs
• Church v. United States Judge Garcia (January
  2000)
• U.S. District Court
• First family limited partnership case to be tried
  in a federal district court
• Valid partnership agreement
• No gift at formation
• Assets not property
• Court allowed a 57.6 percent discount from NAV

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Family Limited Partnerships (contd)
II. Tax Case Update

• Kerr v. Commissioner Judge Jacobs (December
  1999)
• Tiered entity discounts
• Transfer of a limited partnership interest of
  assignee interest
• Definition of an applicable restriction under
  IRC Section 2704(b)(3)(B)
• Applicability of IRC Section 2704, in general, to
  the terms of an FLP agreement

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Adequacy of Evidence
II. Tax Case Update

• Estate of Jones v. Commissioner Judge Cohen
  (March 2001)
• Power to remove general partner in JBLP
• Reduction in discount for lack of marketability
• Knight v. Commissioner Judge Colvin (November
  2000)
• Insufficient evidence supporting
• Portfolio interest
• Minority interest
• Discount for lack of marketability

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Adequacy of Evidence (contd)
II. Tax Case Update

• Maggos v. Commissioner Judge Ruwe (April 2000)
• Rejected CAPM and WACCas analytical tools
• Rejected guideline companies
• Estate of Weinberg v. Commissioner Judge Whalen
  (February 2000)
• Calculation of minorityinterest discount
• Lack of marketability

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Built-in Capital Gains Tax
II. Tax Case Update

• Jameson v. Commissioner (September 2001)
• Strategic buyer used by IRS
• Courts approach undervalued impact of capital
  gains tax
• Remanded for further proceedings
• Estate of Jones v. Commissioner Judge Cohen
  (March 2001)
• Partnership, not corporation
• 754 election would be negotiated

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Built-in Capital Gains Tax (contd)
II. Tax Case Update

• Borgatello v. Commissioner Judge Wells (August
  2000)
• Confirms net asset methodology for non-operating
  holding companies
• Confirms built-in capital gains tax liability

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Buy/Sell and Restrictions
II. Tax Case Update

• Schwan v. Commissioner (July 2001)
• Redemption did not fix value
• Ambiguous provisions in the agreement
• Agreement not binding for estate tax purposes
• True v. Commissioner Judge Beghe (July 2001)
• Book value used in buy/sell agreement
• Motivated by testamentary concerns
• Failure to seek professional advice on appraisals
  in selecting a formula price
• Experts did not fare well
• Swing vote argument rejected
• Estate of Frank Armstrong, Jr. (January 2001)
• U.S. District Court
• Estate unsuccessfully argued that gift taxes
  reduced value of gifts

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Fractional Interests
II. Tax Case Update

• Forbes v. Commissioner Judge Thornton (March
  2001)
• IRS expert claimed a fractional discount of 18
  percent on farm land
• Estates expert claimed a 30 percent discount,
  which was sustained
• Expert reports found to be lacking

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Standard of Value
II. Tax Case Update

• Simplot v. Commissioner (May 2001)
• Tax court assigned a premium to voting stock
  specific identification of buyer
• Ninth Circuit reversed the decision
• Voting stock equal in value to non-voting stock
• Mitchell v. Commissioner (May 2001)
• Remanded back to Tax Court
• Inadequate explanation of valuation conclusions

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Standard of Value (contd)
II. Tax Case Update

• Kaufman v. Commissioner Judge Laro (March 2001)
• Reversal of Tax Court decision
• Sale of stock two months after valuation date
  good indication of value
• IRS argued that seller was uninformed
• Wall v. Commissioner Judge Beghe (March 2001)
• Burden of proof with taxpayer
• Taxpayers expert undervalued gift
• Decision in favor of IRS expert despite
  overvaluation of gift

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Discounts
II. Tax Case Update

• Janda v. Commissioner Judge Vasquez (February
  2001)
• QMDM rejected (Weinberg Case)
• IRS expert relied on subjective judgments,
  generalized studies, and use of court cases
• Court allowed 33 percent LOM discount