More hints: In Peracchio v. Commissioner, (T.C. Memo 2003-280), the Tax Court discredited both experts’ determination of minority and marketability discounts for a family limited partnership (FLP) funded with $2 million in cash and securities. The court criticized the taxpayer’s experts for using benchmark averages without examining and adjusting the underlying restricted stock data to fit the facts of the case, and was even “less impressed” by the IRS expert’s “brief analysis of six [unnamed] factors that may influence” the range of the marketability discount, and his “arbitrary selection” of the midpoint.
Since the taxpayer failed to carry its burden of proof, the court settled on the 2% minority discount conceded by the IRS expert and the DLOM in his upper range. “I [wasn’t] there to investigate the facts,” Judge James Halpern told attendees at the recent ASA IRS Valuation Symposium in Los Angeles. “I’m not an expert but a neutral arbiter. You come to me. If [your client] has the burden of proof and you don’t tell a story to support it—you lose. If there is a factual question and neither side puts in [convincing] testimony, then it’s a tie, and a tie goes against the party with the burden of proof.”
Still, after so many years of listening experts’ “stories,” the neutrality of most Tax Court judges now comes with a good dose of sophistication and statistical savvy. Halpern, for instance, has taught quantitative analysis to attorneys at George Washington University. At the ASA Symposium, he presented a paper, authored by Professor Theodore S. Sims (Boston Univ. School of Law), on “Using Market Data on Discounts to Net Asset Value of Closed-End Mutual Funds in Valuing Minority Interests in [FLPs],” based on the Peracchio data. “This is what’s really going on when an appraiser says he has examined the funds, picked data points, etc.,” Halpern said, revealing his understanding of the issues and analysis, something you may want to know when assessing empirical data for your next E&G tax engagement…
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