| August 8, 2012 | Issue #119-2 |
Minority and marketability discounts still confuse the courts … When the owner of a long-time, family-run heating and sheet metal company began making plans for retirement, he began talking buyout strategies with his most trusted employee. They agreed on a plan whereby, for tax reasons, the owner and his wife would start giving shares to the employee and his wife in amounts equal to the then-applicable federal gift tax exclusion ($10,000). But when the latter’s marriage started falling apart, the gifts stopped, leaving the employee and his wife each owning roughly 12% of company stock. At their divorce trial, both parties’ experts agreed that approximately 35% in combined discounts for the nonmarketable, minority interests should apply; they really only disagreed on net asset value versus market and income approaches. The court also heard testimony from the husband and the owner that the entire company was worth up to $3.9 million. Despite the trial court’s express wish to find the shares’ “true market value,” it said the experts’ opinions were “not overly helpful.” In fact, it was clear from the experts that “there is no true fair market value for these shares,” the court said, and in particular, no “actual” buyer for the wife’s 12% interest. Instead of reaching any value, it ordered the parties to each take their shares—and the wife appealed. After considering the entire record, the appellate court affirmed. “It is clear that the corporation has value,” the majority opinion emphasized. “However, both experts made clear that [the] wife’s ten shares are not currently marketable separately from the corporation; thus, the evidence supports the trial court’s finding that, in and of themselves, [the] wife’s shares carry no market value, discounted or otherwise.” An impassioned dissent believed that the majority not only contravened the applicable fair market value standard and the “overwhelming evidence” that the wife’s shares had value, but it also violated the courts’ equitable imperative to “disentangle” the parties financially and, above all, to do no economic harm. Read the complete digest of In the Matter of the Marriage of Gay, 2012 Ore. App. LEXIS 622 (May 16, 2012) in the September Business Valuation Update; the court’s opinion will be posted soon at BVLaw. … and stir passionate debate among The BVWire is proud to be in its seventh year of providing the valuation community with the premier—and still complimentary!—source for actionable news, authoritative guidance, and practical resources specific to professional appraisers as well as attorneys, brokers, business owners, and more. During this tenure, nothing has quite stirred the passions and opinions of our esteemed and well-informed subscribers so much as a discussion of the discount for lack of marketability. Last week’s issue was no exception: In an attempt to create a more readable report, we followed the story on a current tax case—in which art appraisers assert what amounts to a 100% marketability discount for an impossible-to-sell (if not illegal) piece that contains a stuffed bald eagle—with an item that described a “more relevant” online series on the DLOM (read: more relevant to BV), by Chris Mercer (Mercer Capital). By our mention, we certainly did not intend to convey an endorsement of any specific method or individual. Certainly, in our co-sponsorship of the only annual summit to focus specifically on the DLOM (presented for four years running with the Hon. David Laro, Mel Abraham, Jim Hitchner, and attorneys and valuation specialists), we have always strived to present a comprehensive, impartial overview of this very challenging technical and legal subject. We also welcomed the emails from subscribers last week that pointed us to at least two current ongoing LinkedIn threads in which the DLOM is once again sparking an interesting if not enthusiastic debate among members. In the BVProfessionals group, the question of whether there can ever be a marketability discount for a 100% controlling interest has sparked nearly 150 comments in the three months that it has been active. The Valuation group is also engaged in a lively point/counterpoint with Mercer, Scott Hakala (CBIZ), and others on various aspects of Mercer’s online series. (Reminder: The LinkedIn groups require membership.) There are no requirements for a free subscription to the BVWire! For the extended future, we hope to continue the pleasure and privilege of providing responsible editorial services to the valuation profession. The BVWire editor welcomes comments, feedback, and continued inquiry. More from Judge Posner: Is the patent Judge Richard Posner (7th Circuit) apparently wants to broaden the scope of his rulings in Apple v. Motorola—first dismissing the expert damages evidence and then dismissing the case—to the entire patent system. “The cost of patenting and the cost of resolving disputes that may arise when competitors have patents are a social waste,” the judge writes, in a recent editorial for Atlantic Monthly, “Why There Are Too Many Patents in America.” After citing just a few of the problems, Posner offers a few remedial suggestions, highlighting the pharmaceutical industry, in particular, including:
Posner admits he doesn’t have the expertise to assess his proposed reforms, but insists, “both the problems and the possible solutions merit greater attention than they are receiving.” IVSC offers a ‘TIP’ on the DCF along with a discussion paper on valuing oil & gas interests The International Valuation Standards Council has just released a new technical information paper (TIP) on the discounted cash flow. The TIP discusses the application of the DCF method in the valuation of business interests and real property interests and includes illustrative examples. To order, visit the IVSC website; the cost is £15 ($23.36) per copy (plus postage and handling). Last week, the IVSC also published a discussion paper highlighting several issues that may have become “sources of inconsistency in valuations of mining, oil and gas assets,” says its release. The discussion paper seeks “the views of all industry participants on the issues raised, including operators in the sector, valuation consultants, investor groups and regulators. The responses will help the Board decide whether it needs to develop a new IVS dedicated to the extractive sector, issue technical guidance, or both.” Download the discussion paper here; responses are requested by mid-October. Finally, the board also produced a discussion paper on trade-related properties, for which it has invited input, particularly from those involved in the valuation of properties and businesses in the leisure sector. The paper may be downloaded here, with comments welcome before October 31. Houston ASA to hold 2nd annual energy conference in September The 2012 Energy Valuation Seminar, hosted by the Houston chapter of the American Society of Appraisers, “will combine fundamental energy-related valuation with insight from prominent energy industry leaders,” according to the conference announcement. Sessions range from the challenges of valuing oil and gas reserves to an update on nanotechnology, mineral leasing activity, O&G hedge fund interests, and renewable energy portfolios. The one-day event takes place on Thursday, September 13, at the Federal Reserve Branch of Dallas (in downtown Houston). For more information and to register, click here now. Note: Early bird pricing is still available until August 10! FASB invites comments on its private Last week the Financial Accounting Standards Board (FASB) released an Invitation to Comment (ITC) on its proposal Private Company Decision-Making Framework: A Framework for Evaluating Financial Accounting and Reporting Guidance for Private Companies. APB extends deadline for SME applications The Appraisal Practices Board has extended the deadline by more than a month for applying as a subject matter expert (SME) to assist in its research development of voluntary guidance on Valuing Contingent Consideration. Written applications are now requested by Sept. 6, 2012. For more information on the background and qualifications required to be considered for the SME panel, click here. BVR celebrates 10 years of BV education & training—with a raffle of fine beverages! On Aug. 13, 2002, BVR hosted the first-ever webinar in the business valuation profession, on taxaffecting S corporation earnings. Like a fine vintage, 10 years later, BVR is reaching its prime, and we’re celebrating by hosting Valuing Wineries & Breweries on August 23, featuring James Andersen (Burr Pilger Mayer). In addition to a sophisticated yet lively topic, five attendees will be selected at random to receive their choice of wine or beer from Oregon, BVR’s home base. To round out the rest of the month:
Willamette Management Associates has just posted articles from their latest quarterly Insights (Summer 2012) online. Edited by Robert Schweihs (WMA) with a focus on estate and gift tax, the articles take on such topics as the discount for embedded capital gains liability, the valuation of voting versus nonvoting stock, IRS guidance on overstatement penalties, and Schweihs’s own “value of a valuation formula.”
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