8th Circuit confirms Holman and use of buy-sell price as a discount “floor” for FLPs Remember Holman v. Commissioner (May 2008), in which the taxpayers gifted substantial holdings of Dell stock into a highly restricted family limited partnership (FLP)? The Tax Court agreed with the IRS, finding the transfer restrictions were merely tax avoidance devices and should be disregarded for valuation purposed under IRC Sec. 2703. Further, the Tax Court adopted the IRS expert’s valuation of the FLP interests, finding the restrictive buy-back provisions placed a natural limit or “cap” on any marketability discounts. In other words, if potential buyers of a limited partner’s shares demanded too great a discount relative to the then-prevailing price of Dell stock, then the remaining partners (acting as “economically rational insiders’) would have a clear incentive to step in and buy the shares at a lesser discount. The taxpayers appealed, arguing the Tax Court’s rationale violated the fair market value standard by asking what the FLP (or its particular family members) would do when faced with a buy-back situation. The taxpayers also contested the application of Sec. 2703, claiming the FLP’s transfer restrictions were a bona fide business arrangement, comparable to an arm’s length agreement entered into by unrelated parties. Despite a strong dissent by a single judge, the majority of the U.S. Court of Appeals for the Eighth Circuit disagreed, confirming the Tax Court’s decision and the IRS’s use of Sec. 2703 as a weapon against FLPs, at least in the gift tax context. The complete case is available as a free download here. Another issue when buy-sell agreements are present: can they bind the non-shareholder, non-signing spouse? In a case of first impression, the Texas Court of Appeals considered a buy-sell agreement that purported to bind shareholders and their spouses in the event of divorce. As a further complication, the husband had signed an employment agreement with the private medical association—but neither he nor his wife had signed the shareholders’ agreement. This unsigned agreement limited the value of a divorcing shareholder’s interest to the equity buy-in price (in this instance, a mere $11,000 for a 25% share in a business with an estimated $3 million to $5 million book value). In a pre-trial hearing, the trial court precluded the wife’s expert’s testimony about the husband’s share in the P.A. ($794,300 book value to $1.1 million fair market value) and ruled the buy-sell agreement was binding. The wife appealed, citing Texas cases in which partnership buy-sells were just one of many valuation factors to consider. But these cases concerned partnerships, the Court of Appeals held, and they did not address the specific event of a partner’s divorce. In this case, the medical association was akin to a private, closely held corporation, and even though the wife didn’t sign the shareholders’ agreement, it offered evidence of market value—as did the prior buy-outs of three former members, all at the $11,000 contractual price. The marital community owned an interest in the shares of the association, the court held, as part of its reasoning, “and not an interest in the association as an ‘ongoing business’.” Read the full case digest of Mendell v. Mendell (Tex. App., March 18, 2010), in the May 2010 Business Valuation Update™, when we’ll also post the court’s full opinion at BVLaw™. Have an opinion about the effect of buy-sell agreements in divorce? Contact the BVWire editor. Free podcast and upcoming seminar with Peter Mahler on fair value in corporation dissolution cases Peter Mahler and the Hon. Ira Warshawsky will be presenting “Current Issues in New York Fair Value Shareholder Proceedings” at the FAE/BVR Business Valuation Conference on May 17th in New York City. Mahler was recently featured in “Fair Value with Peter Mahler, Esq,” a podcast in which he was interviewed by Mark S. Gottlieb. Among other points, he stressed key considerations when using fair value:
Click here for the complete podcast. BV research grants available now from KPMG'S Global Valuation Institute KPMG’s Global Valuation Institute (GVI) has issued a call for research proposals “to bridge academic research with practice excellence by funding relevant research on current valuation matters affecting companies, investors and regulators.” Individuals, groups or organizations that meet the research criteria can receive funding up to $5,000. Research topics include: Valuations for Regulatory Purposes (e.g., financial reporting, tax)
Strategic Valuations
For more information click here. 2010 Duff & Phelps data expands prior cost of capital measures with distressed and delisted analyses The Duff & Phelps Risk Premium Report 2010 is now available. Co-authored by Roger Grabowski and David King, the 2010 Report provides updated risk premium data based on average returns through December 31, 2009. In addition to posting historical equity risk premiums (ERPs) and size premiums for 25 size-ranked portfolios using eight alternative measures of company size, this year’s compilation expands on prior cost of capital measures, particularly for small target companies, by including rate of return adjustments for distressed and delisted companies. Order the2010 Duff & Phelps Risk Premium Report here and receive the free exclusive complimentary Cost of Capital Reader. CPE opportunities: reminder on upcoming control Brad Pursel, Mark Edwards and Andrew Fargason will examine issues in “Control Premiums: Applications and Analysis,” a BVR teleconference next Thursday, April 29. To find more information or to register for this presentation, click here. How does private capital think? So much of value creation in private companies remains hidden behind a veil of secrecy, or myth—and that’s one of the reasons some of the private capital research conducted by John Paglia, Rob Slee, and others is so enjoyable. John has just released a new survey of private business owners and investors that includes cost of capital expectations for many business decisions including acquisition, financing, and internal investment. Results are free to any one who participates so BVWire readers might want to take a moment now. Morningstar enters valuation services market Morningstar, Inc. just announced the launch of Morningstar Valuation Services to provide valuation of businesses, specific securities, and intangibles. They hope to leverage Morningstar’s proprietary techniques for analyzing securities and the cost of capital expertise of Ibbotson Associates. According to yesterday’s press release, “valuation consulting is a natural extension of the cost of capital research and litigation support work Ibbotson has been doing for more than 20 years.” Alfonso Ventoso is the Director of Valuation Services for Morningstar.
To ensure this email is delivered to your inbox, Copyright © 2010 by Business Valuation Resources, LLC
|
|
