The item on Astleford v. Commissioner in last week’s BVWire™ added to the buzz already building around the case—the first in a long time in which the Tax Court decides valuation issues in the context of a family limited partnership (FLP). On the practical side, Owen Fiore (Kooskia, ID) points to the end result of the decision, which reviewed appraised values related to transfers of agriculture (1,187 acres of farmland), a 50% general partnership (GP) interest along with three 30% limited partnership (LP) interests. “Per the Tax Court, the total combined discounts equaled nearly 85%,” Fiore says. First, the court permitted an effective discount of over 20% for market absorption on the real estate; then a 30% discount on the 50% GP interest; and then a more than 35% combined discount on the LP gifts. “It may have taken the taxpayer four appraisers—and the IRS two,” Fiore says, “and it may have taken the Tax Court to say ‘okay’ to layered discounts, but it is a great result just on that score.”
On the technical side, Ted Israel (Eckhoff Accountancy Corp.) points to an interesting “methodology disconnect” in the case. The Tax Court combined the discounts for lack of control and marketability related to the GP interest, but it estimated them separately for the LP interests. Further, in the court’s treatment of data used to develop the partnership discounts, it rejected better data from RELPs because there’s not enough of it, but accepted the more abundant REIT data. “This reasoning first appeared in McCord v. Comm’r (2003),” Israel observes, “that an absence of comparable data can be overcome by an abundance of incomparable data.” There are also far less cumbersome ways to apply REIT data to real estate discount cases than the method the court uses, he says. (Hint: The Mergerstat®/BVR Contol Premium Study™ includes REIT takeover transactions.) Israel’s complete analysis of Astleford appears in the next (June 2008) Business Valuation Update™. To download a copy of his previous article, “REIT or Wrong: Using REIT Data to Value Privately Held Real Estate Limited Partnerships,” originally published in Valuation Strategies (July/Aug. 2005), click here.
Finally, in his current, online discussion of Astleford, Mel Abraham makes an interesting point related to the court’s calculation of “layered” discounts. If, at the first level of ownership (the 50% GP interest, which comprised 16% of the total asset portfolio), the court has already made adjustments for lack of marketability and control, then at the second or FLP level, these assets might be more akin to owning a marketable security. “Under a McCord analysis,” Abraham says, “you might look at that and say at some point, some portion of the portfolio is a marketable security piece and the rest is attributable to real estate, and you might get a slightly different result.” To listen to his free, 40-minute e-audio presentation, go to ValuationEducation.com and click on “Latest e-Alert” and then on “Current Issue.” (And just a reminder—the full-text of the courts’ opinions in Astleford, McCord—along with more than 2,700 federal and state valuation-specific cases—are available to subscribers of BVLaw™.)