Dollar-for-dollar capital gains discount wins another court

BVWireIssue #107-3
August 17, 2011

Mississippi’s business statutes prohibit assessing minority and marketability discounts in statutory fair value actions. Accordingly, the expert for a family held investment firm appropriately revised an underlying real property appraisal to remove its minority discount in a suit by dissenting shareholders, the federal district court (N.D. Miss) held.

At the same time, the federal court found that the expert’s dollar-for-dollar discount for embedded capital gains tax liability “must be taken into account” to determine “actual fair value of the shares in this case,” which he said were worth $225,000. This value lay primarily in farmland, which the firm’s founder purchased in the 1940s for about $20,000. Thus, in a sale to a prospective buyer, either the company would incur substantial capital gains tax liability before dispersing the shareholder proceeds, the court said, “or the buyer would…pay a reduced price because he’d later have to incur the tax liability to sell the property.” Even from a fairness standpoint, “it only makes sense to include the built-in capital gains tax liability when valuing the corporation based on its assets,” the court emphasized, citing Estate of Dunn v. Commissioner, 301 P.3d 339 (5th Cir. 2002).

Query for appraisers: Didn’t Dunn (and also Jelke, in the 11th Circuit) accept a dollar-for-dollar discount in the context of a fair market value appraisal of a holding company? Should the different valuation standard in this case make a difference? Email your comments to the editor. And look for complete digest of Dawkins v. Hickman Family Corp., 2011 WL 2436537 (June 13, 2011), in the Sept. Business Valuation Update; the court’s opinion will be posted soon at BVLaw.

Please let us know if you have any comments about this article or enhancements you would like to see.