TIDBITS TO THINK ABOUT AS YEAR END APPROACHES:
It's a great time to make gifts of business interests, securities and real estate. These transfers must be complete by December 31 to be valid for 2011.
If you are awarding stock options to your employees, remember that IRC 409A requires that a business valuation be prepared upon the issuance of the options.
If you are selling a business and you recently converted from a C-Corp to an S-Corp, you will need to have a business valuation to calculate the built-in capital gains tax that might be owed.
Don't be penny wise and pound foolish! If you are selling or buying a business, it is in your best interest to get a business valuation completed so that you don't leave potentially millions of dollars on the table.
Is a Buy-Sell at Book Value Unconscionable, When FMV is 60x Greater?
Estate of Cohen v. Booth Computers, 2011 WL 2694288 (N.J. Super)(July 13, 2011)
A father created an income-producing partnership on behalf of his three grown children, funded in part with Palm Beach property originally purchased for $750,000. In keeping with its closely held nature, the partnership agreement provided that, on a partner's divorce or death, the remaining partners "shall" repurchase the divorced/deceased partner's shares at the "true value" of the partnership, defined as "net book value" based on the most recent financial statement, plus $50,000.
In 1997, one of the partners died, and the partnership paid the estate $97,650 for the decedent's interest, based on the buyout provision. By the time one of the two remaining partners died in 2007, the oceanfront property had appreciated to $45 million. An appraiser for the deceased partner's estate estimated the "full" or fair market value of the partnership at just over $23 million, based on the net asset approach, which, when added to the appraised value of all the partnership's properties, exceeded $68 million.Read More...
CPAs Differ by More than 50% on Fair Value of Firm
Peterson v. Jackson, 2011 WL 14519606 (Utah App.)(April 14, 2011)
When three shareholders in a CPA firm couldn't agree on a buyout price for a departing partner, they sought judicial dissolution and appraisal under the applicable statutory scheme (Utah). At trial, the partnership's expert used the market, income, and asset approaches to reach a range of value from $581,000 to $713,000 for the entire firm, but then rejected all but the asset approach to value the shareholder's 37.6% interest at just over $224,000.
In contrast, the departing shareholder's expert assigned zero weight to the asset approach and under a combined capitalization of cash flow and market approach, reached a total value in excess of $1.26 million. After adding a pro-rata portion of undistributed cash and declining to deduct the value of personal goodwill (due to a non-compete), he valued the departing shareholder's interest at $505,000. The trial court also heard evidence that one of the partners had bought into the practice in 2001 at a multiple of 90% of gross sales-which, when applied to the departing partner's shares, would have yielded a value of nearly $518,000.Read More...
Divorce Roundup: the Challenges of Valuing 'Main Street' Businesses
A summary of recent divorce cases shows courts still concerned with inputs, assumptions, and discounts in the valuation of small to midsize private businesses:
In Kapadia v. Kapadia, 2011WL 1849407 (Ohio App. 8 Dist.)(May 12, 2011), the wife owned 47.2% in a local chain of 13 sandwich shops. At trial, the husband's expert valued her interest at $1.6 million, compared to the wife's expert, who said it was worth $1.0 million. The difference: The wife's expert characterized the business as a "grilled sub sandwich" business akin to those in mall and airport food courts, but the husband's expert compared it to a national franchise such as Subway or Quiznos. Read More...
Tax Court Rejects Market Approach, Refines Income Approach in Valuing FLP
Estate of Giustina v. Commissioner, T.C. Memo. 2011-141, 2011 WL 2516168 (U.S. Tax Court)(June 22, 2011)
To value the estate's minority interest in a family limited partnership (FLP) that held large tracts of timberland, the Tax Court ruled that there were only two appropriate methods: the discounted cash flow (DCF) and net asset value (NAV). The court also accepted the parties' stipulation that the NAV of the partnership's property was $143 million, which included a 40% discount for the inherent delays in selling the assets.Read More...
Tax Court Upholds Defined-Value Clause
Hendrix v. Commissioner, T.C. Memo 2011-133, 2011 WL 2457401 (U.S. Tax Court)(June 15, 2011)
A wealthy Texas couple wanted to transfer non-voting stock in their private S corporation to their three adult daughters (through trusts) and also to a charitable foundation. Because the stock was difficult to value, their attorney suggested that instead of gifting percentages, they use a formula clause to establish a dollar value at the time of the transfer, which would also fix the value of the stock transfer for federal gift tax purposes.
Three times appraised. After retaining a reputable appraiser to estimate the value of the non-voting stock (at nearly $37 per share), the couple transferred nearly 288,000 shares pursuant to a defined-value formula clause. The daughters' trusts retained the same appraiser, and the foundation, represented by independent counsel, also required the donors to obtain an independent review of the appraisal and to assume responsibility for any additional tax liabilities. The foundation and trustees subsequently allocated the transfers amongst themselves according to the $37 per-share value. Read More...
