| October 3, 2012 | Issue #121-1 |
5th Circuit confirms discounted FLP values in Keller and the importance of observing state law Last week, the U.S. Court of Appeals for the 5th Circuit affirmed the federal district court’s decision in Keller v. United States (S.D. Tex. 2009). Appraisers may recall that the Keller case concerned a wealthy Texas widow who formed a family limited partnership (FLP), but, at her death in 2000, had failed to fund it with $250 million in corporate bonds. Concluding that they should abandon the FLP, her advisers caused her estate to pay over $147 million in taxes; then, a year later, after attending a professional seminar on Texas partnership law, one adviser believed he could finalize the FLP transfers. Lacking the liquid assets to pay its taxes, the estate took a retroactive loan from the FLP and then sued for a refund for its tax overpayment plus a $30 million deduction for the interest payments made on the loan. At trial, the district court held that the widow’s intent to form and fund the FLP effectively established the partnership. It also found she created the FLP for legitimate, nontax business purposes. Accordingly, the court upheld the combined 47.5% discounts on the value of the FLP assets, particularly commending the estate’s appraiser, Robert Reilly of Willamette Management Associates, for using “the correct standard” to determine their fair market value. It also upheld the estate’s deductions for the loan as a “necessary administrative expense.” On appeal, the 5th Circuit confirmed all aspects of the decision, noting in particular that “an estate is entitled to a discount on the value of [a partnership] interest to reflect restrictions on the interest’s transferability.” Under “well-established” principles of state law, the court also affirmed that the “intent of an owner to make an asset partnership property” is dispositive. "We are very pleased that the 5th Circuit upheld the decedent’s intent and ruled the FLP was formed and funded,” the estate’s attorney, William Cousins III (Meadows, Collier, Reed, Cousins, Crouch & Ungerman), tells BVWire. “This is a testament to the tenacity of the family and its advisors through almost a decade of litigation." We’ll have the complete digest of Keller v. United States, No. 10-41311 (Sept. 25, 2012) in the November Business Valuation Update; the court’s opinion will be posted soon at BVLaw. ‘Dividend cliff’ will cause stock prices to drop by up to 18%, Damodaran predicts “A sharp correction is ahead for stocks collectively and especially so for high dividend paying stocks,” predicts Professor Aswath Damodaran (NYU Stern School of Business), if, on Jan. 1, 2013, certain provisions of the federal tax code are allowed to return to pre-2003 levels—thereby pushing the domestic economy over the so-called “fiscal cliff.” (For more dire predictions generally, see yesterday’s release from the Tax Policy Center of the Urban Institute/Brookings Institution, “Toppling Off the Fiscal Cliff: Whose Taxes Rise and How Much?”). In particular, Damodaran takes a look at what would happen should the current 15% tax rate on corporate dividends revert to an ordinary income tax rate. Working with “real numbers”—including expected stock returns and the resulting equity risk premia and risk-free rates—Damodaran ultimately concludes the fiscal cliff will cause stocks with a 4% dividend yield to suffer an 18% price drop. By comparison, stocks with a 0% dividend yield will see prices drop by “only” 7%. ”I may be overly pessimistic, but the ‘dividend cliff’ scares me and I am planning for the eventuality that the tax code will change drastically on January 1, 2013,” he concludes. To read his complete analysis, which also notes the “weak links” in his assumptions and invites readers to test their own on the accompanying spreadsheets, visit the professor’s recent blog post at Musings on Markets. PE deals slowed over the summer Despite record-breaking heat this past summer, PE deal activity stayed relatively cool, according to the data pulled from PitchBook’s 2H 2012 Private Equity Fundraising Report 3Q (requires free registration). In fact, private equity and venture capital investment recorded their third consecutive quarterly drop, with 342 deals totaling $58 billion completed in 3Q. At the same time, the energy and information technology sectors were the exceptions, with both recording modest upticks in investment activity. On the brighter side, PE firms closed 28 funds totaling $35 billion in capital commitments during the quarter, making it the third best quarter in the last three years for PE fundraising. Exit activity also shows a warming trend, with 135 exits in 3Q 2012. This week’s webinar captures growing oil and gas industry On October 4, join Richard Miller (Richard J. Miller & Associates) for Valuing Oil & Gas Properties, a discussion of how to identify and value energy-producing properties using the most common methods, as adapted for the particular complexities of this vital, fast-growing industry. In response to last week’s article recommending a “caveat” when using public company data to value private firms, Rob Schlegel responds:
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European speakers will address international standards, business combinations and impairment testing, markets and financial risk, and more. The admission to the conference is free, but attendees must register in advance at the OIV website. Finally, at its most recent meeting, the IVSC’s professional board completed its deliberation on last year’s Competency Framework exposure draft. The final Competency Framework—which comprises a “first step towards promoting common standards of competency and ethical behavior” among valuation professionals, the board says—is now available to download from the IVSC website; hard copies are also at the IVSC bookstore. The Appraisal Standards Board (ASB) is moving forward with its work plan to examine potential revisions for the 2014-15 edition of the Uniform Standards of Professional Appraisal Practice (USPAP), including its recently published Second Exposure Draft of proposed revisions for the 2014-15 edition of USPAP. The ASB is still encouraging stakeholders to submit written comments on the proposed revisions by Oct. 5, 2012. In addition, the board will be taking comments from attendees at its next public meeting on Friday, October 12, in Washington, D.C., from 9 a.m. until noon. For registration information, click here. On Monday, the Financial Accounting Standards Board (FASB) released Accounting Standards Update No. 2012-04—Technical Corrections and Improvements. The ASU covers a wide range of amendments to correct and clarify the FASB’s codification project, including those that link precodification source literature and guidance to their new place in the codification’s format. Many of the amendments are nonsubstantive in nature, but some specifically identify “when the use of fair value should be linked to the definition of fair value in Topic 820, Fair Value Measurement [formerly FAS 157],” according to the ASU summary. Effective dates: For public entities, the amendments in ASU 2012-04 will be effective for fiscal periods beginning after Dec. 15, 2012; for public or nonpublic entities, the amendments will be effective for fiscal periods beginning after Dec. 15, 2013. Spotlight on healthcare valuation at AICPA industry conference Healthcare regulations, technology, and proposed political reforms have been in the spotlight in recent years, with the upcoming presidential election turning up the heat and intensity of focus. Valuation analysts who currently practice in this complex, specialized niche (or who want to expand their current practices) will want to attend the 2012 AICPA National Healthcare Industry Conference, which takes place post-election on November 15 and 16 in Las Vegas. Valuation track sessions include:
Preferred pricing for the conference is available until October 15; to read the complete agenda and register, click here.
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