Court adopts 47.5% combined discounts in latest FLP case

With the help of longtime financial and legal advisors, a wealthy Texas widow established a family limited partnership (FLP), to be funded with $250 million in corporate investment bonds. Just days after signing the formal papers, however--and before she could transfer the assets--the 90 year-old died, and her advisors “stood down,” believing the failure to fund was fatal to the FLP. A year later, they read Church v. U.S., 2000 WL 206374 (W.D.Tex.), in which an FLP succeeded even though the founder died days before funding.Based on Church, the family advisors completed the transfer of FLP assets, claiming an estate tax refund for its discounted values.

In a resounding victory for the estate and its appraiser Robert Reilly (Willamette Management Associates), the federal district court in  Keller v. U.S., 2009 WL 2601611 (S.D. Tex.) (Aug. 20, 2009) approved the FLP and discounted its assets for lack of marketability and lack of control at combined rate of 47.5%. The court also discredited the government’s undiscounted appraisal, finding that it violated the fair market value (FMV) standard by considering “real” (rather than hypothetical) buyers and sellers--and speculating as to subsequent events.

 “This was a very fact-intensive decision,” comments Steve Akers (Bessemer Trust, Dallas) for Wealth Strategies Journal 2.0 and the ACTEC. The planner’s “very careful and detailed” efforts to establish the FLP and the decedent’s clear intent to convey the $250 million prior to her unexpected death established a legitimate purpose and adequate consideration. Moreover, “this is now the eighth case in which taxpayers have survived a §2036 attack,” Akers writes, naming Church, Stone, Kimball, Bongard, Schutt, Mirowski, and Miller.  By comparison, in Holman (see BVWire™ #69-1), the court approved a mere 12.5% discount to an FLP transfer, because the partnership could buy-out a departing partner’s shares “at some price” between the discounted and market values. (The taxpayers have since appealed, arguing improper application of the FMV standard.)

Where can you get the good and bad FLP cases? The Keller decision now joins all of the leading FLP precedents at BVLaw™, the only “one-stop,” fully searchable database of over 3,000 valuation-specific decisions from federal and state courts, including tax matters, divorce, securities litigation, economic damages, statutory fair value, and more. 

What’s the one critical question to ask management?

Consider the following recent comments by courts on the importance of conducting management interviews to verify financial data and provide credible support for expert value conclusions:

  • “An expert must independently verify facts given to him, rather than accepting [them] at the word of ... counsel.” MDG Int’l v. Aussie Gold, Inc., 2009 WL 1916728 (S.D. Ind.).
  • “[The expert] did not independently verify the source and accuracy of the data. [He] did cross-check the information against other documents, but the bottom line is that [he] never talked to anyone at [the company] to verify the accuracy of the information in any of the documents he reviewed. [His] information was received solely from…counsel.” Lyman v. St. Jude Medical, Inc., 2008 WL 2224352 (Wisc.).
  • “[The taxpayer’s appraiser] spent 3-1/2 days at the company and interviewed 12 employees, spending considerable time with 6 of them, including…the President and Chairman of the Board and…the General Counsel.”  By contrast, “[the government’s appraiser] met with…management just once, for about 2-1/2 hours.” Kohler v. Comm’r., 2006 Tax Ct. Memo LEXIS 156.
  • [The magistrate] found Wife’s expert…to be credible because he utilized financial statements, considered the performance of the company since the last analysis, and interviewed management to learn what has happened behind the numbers and to obtain other key data and information that are not contained in the financial statements.” Anzalone v. Anzalone, 2003 Pa. Super. LEXIS 3716.

Do you know the one, critical question to ask management? “What’s the worst conceivable thing that could happen to this company externally?”, says Warren Miller (Beckmill Research). Join Miller and Russell Hodson (Hewlett Packard) on Wednesday, September 30th to find out the next most important question—and all the key follow-up points—during BVR’s 100-minute teleconference, “Using Management Interviews to Uncover What Really Matters.” Participants can receive two CPE credits. To register, click here.

How the best expert witnesses got to the top—and stay there

Litigation consulting continues to be a strong revenue source for many business valuation practices. In his current online newsletter, John Borrowman  (Borrowman Baker, Franklin, TN) talks to some of the most highly regarded expert witness in the BV community to see how they stay at the peak of their game—and on top of attorney referral lists. Some key takeaways:

Be yourself. “I liked [the work] right away,” says Neil Beaton. “My very first case was a damage analysis. My boss at the time told me it's really formal and that I needed to be really careful and not to joke. I got in there and couldn't help myself. So, I cracked a pretty good joke that got everyone laughing, including the judge. It went over pretty well. At that point, I figured there was nothing that could go wrong. If I could pass that test, I was going to be pretty good at it.”

Don’t stress the ‘hurry up and wait’ of trial. “There's nothing you can do about it, other than take it all with a grain of salt,” says Gary Trugman. “If you're going to do this kind of stuff, you have to understand that this is the life you're asking for.”

Earn trust. “When I started, I would tell the lawyer, ‘I think the [other] guy is doing this and it's wrong’,” says Jay Fishman. “And he or she would have to get up and represent that to the judge. If I was right—and thank goodness I was right more often than I wasn't—I earned their trust and they paid more attention to me.”

Don’t take it personally. “I don't know whether I love to hate litigation, or hate to love it,” Chris Mercer says. “It's just one of those things. It's a different kind of business. It's not for everyone. A good expert witness has to have objectivity and a thick skin.”

To read all the experts’ answers, click here. While you’re there, check out the additional Borrowman articles, including “Could the BV Talent Shortage Return?”, which examines what smart firms are doing now to retain the best.

California court considers new rule against double dipping

The husband owned a produce company in California, valued at $5.6 million, ostensibly under the capitalization/excess earnings method. After a marriage of “long duration and substantial standard of living,” the trial court awarded the wife $20,000 per month in spousal support plus half ($2.8 million) of the business. The husband appealed, urging a blanket prohibition against double dipping—i.e., using the same stream of earnings to determine business value/property division and also support.

In Blazer v. Blazer (No. DR 38292, Aug. 25, 2009), the California Court of Appeals discusses the excess earnings method and, in particular, the myriad ways to distinguish personal from enterprise goodwill. It also considers the double-dipping precedent from other jurisdictions as well as its own cases concerning pension divisions. In the end, the court sidesteps the issue by finding insufficient proof that the husband’s expert in fact valued the business by capitalizing his future income stream. Moreover, “the earnings of an ongoing business…do not always derive solely from the personal efforts of its operator, nor is there evidence that such is the case here.” The court explicitly confirmed the equity of the spousal award in this case as well as the trial court’s implicit determination that there was no double counting of the husband’s income.

Thus, the question remains open in California and elsewhere—especially for cases concerning owners of a professional firm or solo practice whose interests are valued under the excess earnings method. Look for a full summary of Blazer and our continuing analysis of double dipping in the November Business Valuation Update™.
Divorce conference: The next best thing to being there

BVR’s 2nd Annual Summit on Business Valuation in Divorce, co-sponsored by NACVA and ASA, starts Thursday in Chicago. The best minds in BV will all be there—including top-flight attorneys, judges, and valuation analysts—to discuss the latest case law, best practices, and current methodology in marital dissolution.

Can’t get to Chicago? Then do the next best thing and tune into BVR’s special rebroadcast of the Summit’s two leading sessions: "The View from the Bench" and "What Lawyers Expect from their Financial Experts."  In each, moderator Jay Fishman will lead panel discussions on best practices for working with an attorney and presenting a credible, unassailable opinion to a judge or jury. Attendees will have access to a complete video of each session anytime during a full-day viewing window (from 5:00am-4:00pm PT to 8:00am-7:00pm ET) on Friday, September 25. Register now for the recast, here.

Pluris Valuation licenses securities valuation data to IDC

Interactive Data Corporation (IDC)—the provider of financial market data, analytics and related solutions—is now offering daily valuations for Municipal Auction Rate Securities (ARS), including Student Loan Auction Rate Securities (SLARS), from Pluris Valuation Advisors, LLC, a specialist in market-based valuations of illiquid securities. “Since the auctions for these securities began to fail last year, we have generated monthly and quarterly valuation reports based on ARS transactions, including daily valuations for SLARS in the secondary markets,” says Espen Robak, Pluris president. Congrats to Espen!  For more information, visit IDC.


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