Contents

• Experts Duel Over Discounts in Minority Shareholder's Divorce
• No Legitimate Business Purpose for FLP Precludes Analysis of Discounts
• Court Allows Art Collector's Estate Only 5% Fractional Interest Discount
• Damages for Lost Customer Accounts is Net Value of Lost Profits, not Fair Value
• Fair Market Value Includes Only Reasonably Foreseeable Subsequent Events
• Bankruptcy Court Cannot Just 'Split the Difference' in Divergent Discount Rates
• New FLP Case: Taxpayer's First Asset Transfer Merits Discount, But Not Second

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ESOPs as a Liquidity Event

The credit crunch and recession that the United States has endured during the past 12 to 18 months has created a difficult environment for owners of small and middle-market companies to sell their businesses. Although signs of economic recovery are on the horizon, the M&A markets remain sluggish. Despite the current market conditions, Employee Stock Ownership Plans (ESOPs) remain a viable strategy for business owners who desire either a full or partial liquidity event. An ESOP is a qualified retirement plan that primarily invests in the stock of the employer company. Thus, an ESOP can be used by a business owner to "create" an internal buyer of company stock. In addition, ESOPs can create substantial tax benefits for both the corporation and selling shareholder.

As an ESOP-owned company, SC&H has the real world experience necessary to help our clients navigate the unique aspects of an ESOP. We rely on the specialized knowledge of our professionals to serve ESOP clients nationwide, assisting selling shareholders, plan sponsors and trustees in establishing and maintaining well designed ESOPs. Our services cover both the initial ESOP transaction as well as annual compliance issues and include all of the following:

• Pre-transaction valuations
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If you are considering your options for a liquidity event, an ESOP may be the most beneficial vehicle to realize the highest level of after-tax proceeds. If you, or one of your clients, may benefit from considering an ESOP as an exit strategy, please contact one of our ESOP professionals by email at esopvaluation@scandh.com or call (410) 403-1500 or (800) 832-3008.

Valuations Insights, Fourth Quarter, 2009

Court Allows Art Collector's Estate Only 5% Fractional Interest Discount

Stone v. United States, 2009 WL 766497 (C.A. 9 (Cal.))

March 24, 2009

The estate of a private art collector appealed the district court decision to grant only a 5% fractional interest discount for its undivided 50% interest in a nineteen-painting group of master works.

A focus on the burden of proof.

The appellate court agreed that a fractional interest is valued "at the price on which a hypothetical willing buyer and willing seller would agree, and this may often reflect a discount based on fractional ownership."

The estate bears the burden of proof. In this case the expert appraiser did not have specific experience in the art market (for which data is sparse, making experience more critical). Instead the expert's opinion was based on fractional interests in the real estate market. The district court did not find that fractional interest in art could not be valued or had no value; instead, it envisioned a hypothetical market that included some discount to the fair market value, and found that the appraiser's data were not sufficient to meet the estate's burden to prove this amount was 36% (or even %44, as it had originally claimed).

The Ninth Circuit rejected the appeal, saying, "We cannot say that the district court clearly erred in adopting the government's 5% discount rate."

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