Contrasting Murphy with Jelke

BVWireIssue #70-4
July 23, 2008

Peter Mahler (Farrell Fritz, P.C., New York City) provided the BVWire with the following insight into built-in gains and the recent Murphy decision:

The discount for built-in gains has captured much interest and controversy in the courts and business valuation community in recent years.  All this attention, including that generated by last year's important 11th Circuit decision in Jelke v. Commissioner (see the January 2008 issue of the Business Valuation Update, available as a Free Download here), has centered on estate and gift tax matters utilizing a fair market value standard.  A recent valuation decision by a New York trial judge grapples with the BIG discount in a very different setting, arising out of a buy-out in a shareholder oppression case, where by statute, the court must value the company under a fair value standard which assumes a going concern and where, as a matter of policy, the courts are loathe to give the acquiring majority shareholders a "windfall" based on speculative future liabilities.  In this case of apparent first impression involving a real estate holding company, Murphy v. U.S. Dredging Corp., the court reconciles the competing considerations by deducting the present value of the tax based on an assumed 19-year holding period based on a number of evidentiary factors reflecting the controlling shareholders' actual investment plans.  To that extent, Murphy parts ways with Jelke's "arbitrary assumption" of liquidation as of the valuation date requiring a 100% discount, and is an important reminder that discounts under the fair market value and fair value standards can differ.

Read Mr. Mahler’s full article in the August issue of the Business Valuation Update, and view his blog on business dissolution and other disputes here.

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