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

Quick Links to SC&H Group, LLC

Litigation Support Services

Past Articles

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
• Fairness opinions
• S Corporation tax opinions
• Annual valuation updates
• ESOP plan audits
• ESOP accounting assistance
• Company sponsor financial statement audits

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

Fair Market Value Includes Only Reasonably Foreseeable Subsequent Events

Alan Baer Revocable Trust v. U.S., Inc., 2009 WL 1451577(D. Neb.)

May 18, 2009

The owner of stock in a private, closely held, telecommunications company died in 2002. He left his shares to 23 beneficiaries through a trust, contingent on the trustee selling the stock for a profit. The remainder of the shares—plus additional assets—were to go into a qualified residual interest trust (QTIP trust) for the spouse, and for which the estate claimed a marital deduction—based on an appraisal at the owner''s death of the present value of the partnerships holding the stock, minus the contingent bequests of $41.5 million.

In determining federal estate taxes, the estate present-valued the contingent bequests, using a six-year term and a discount rate of 5%.

Parties agree on stock basis, but not company valuation.

On review, the IRS reduced the marital deduction, based on its finding that the 2002 appraisal of the partnerships was over-valued. An appraisal performed for the tax proceedings in 2006, found the partnerships to be worth only $3 million. The substantial difference was due to the fact that a joint venture agreement (the partnership's principal asset) had been in breach since 2002 (which the appraiser had not realized in the original valuation).

Both parties agreed that the decedent's basis in the stock was just over $4.8 million.

Motion for summary judgment denied.

The IRS filed a motion for summary judgment, arguing that the proper inquiry was whether the contingent bequests qualified for the marital deduction. "The underlying value of the stock relative to decedent's investment is irrelevant."

The estate argued that the contingent bequests essentially had no value, because the contingency—that the stock would sell at a profit—could not be realized. The stock's value was therefore directly at issue, because at the date of death, it amounted to less than the decedent's $4.8 million basis.

The federal district court (Nebraska) agreed that the value of an estate for federal tax purposes is a factual inquiry. As a general matter, the court added, citing Estate of Noble v. Commissioner, a fair market value determination does not include events subsequent to the valuation date, unless those events were reasonably foreseeable at the time. The essential question regarding any evidence is whether its admission would make an asserted fair market valuation more or less probable.

"The issue is whether [the company's] value can be ascertained with fair certainty, and if so, what that value is." If the estate can show that at the date of death, the contingency on which the bequests depends (selling the stock at profit during the spouse's lifetime) will never occur, then their value could be extinguished for federal estate tax purposes.

The court denied the IRS motion for summary judgment.

Back to top