There is an increasing number of opportunities for analysts in valuing promissory notes, says Chris Mercer (Mercer Capital) during the recent AICPA Forensic & Valuation Services Conference. As a result of many years of estate planning, there are “thousands and thousands of promissory notes out there” that are “coming of age,” he observes.
One method: Mercer was an expert in a 1996 estate tax case, Estate of Crosby, in which a U.S. District Court considered the valuation of a note held by an individual and payable by Champion International, a publicly traded company. The court rejected the valuation approach the IRS expert used and accepted the valuation by Mercer (at $3.6 million), whose analysis reflected greater detail in consideration of factors affecting the note. His method was to use the yield on Champion’s publicly traded debt as the “base” and then add to it based on the specific characteristics of the debt, much like adding company-specific risk to a discount rate. Mercer said he would be doing a white paper on this topic in the near future.
The full court opinion in the 1996 case, Estate of Verna Mae Crosby v. U.S.A., 77 AFTR2d Par. 96-541 (S.D. Miss 1996), is available at BVLaw.
Extra: Using publicly traded corporate debt as a proxy is not the only method for valuing small private promissory notes. See our coverage of an alternate method that the IRS is using.
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