‘Flawed’ Tax Court case sparks discussion

BVWireIssue #144-1
September 10, 2014

The Tax Court’s decision in Estate of Adell (see the August 27 issue of BVWire) includes a number of different business valuation elements, including the issue of personal goodwill. The case has prompted a discussion on BVR’s LinkedIn page (“TCM decision re Personal Goodwill”), and some of the commenters consider the decision flawed.

Pricing deal: Some of the comments center around a pricing agreement between the two business entities involved, both of which were controlled by the same person. A point was made that the court relied on historical earnings, which were overstated because the agreement was never enforced and more payments were made than required. “This is like valuing real estate on the basis of historical rent paid when the rent being paid is non-arm’s length,” comments Bob Dohmeyer (Dohmeyer Valuation Corp.).

The issue of substance versus form is mentioned by Charles Grigsby (Grigsby Forensics & Valuation), who was trained as an IRS revenue agent. He points out that while the IRS drilled “all of us RAs on substance versus form … the decision of this case did not really understand the ‘substance’ at all,” referring to the issue of salaries in the subject entities.

Revised report: There is also discussion about the fact that the estate submitted a second valuation report that failed to sway the court, with the judge saying that the first report was an “admission.” The second report did not provide “cogent proof” that the expert had made an error in the original report (filed with the Form 706), points out Sylvia Golden, BVR’s legal editor.

Former IRS business valuation and engineering territory manager Michael Gregory (Michael Gregory Consulting LLC) tells BVWire that he’s “concerned that some practitioners will read this case and believe that their reports cannot be changed once submitted.” Gregory feels that a new valuation report should be submitted when warranted and it is certainly considered by the IRS and accepted by the courts. In this case, the judge was not convinced that a mistake had been made in the first report.

Find an expanded discussion of Estate of Adell v. Commissioner, 2014 Tax Ct. Memo LEXIS 153 (Aug. 4, 2014), in the October issue of Business Valuation Update; the court’s opinion will be available soon at BVLaw.

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