In response to last week’s item on S Corp valuations, Mark Leicester, CPA/ABV, JD, LLM writes that his analysis in Bernier was based solely on the facts and circumstances of the case.  “I did not assume that ‘retained net income is as valuable as distributed income.’ Any ‘retained net income’ was taken into consideration, particularly in regard to cash expenditures.  Nor did I assume that ‘there are no detriments to operating as an S Corp compared to a C Corp.’  My calculations assumed that all other factors between the subject S Corp and the hypothetical C Corp were equivalent. Otherwise, adjustments may be necessary and appropriate.”

Moreover, “I did not assume that ‘the same tax rates apply to capital gains as to ordinary income,’” he says, “and neither did the Court in Del. Open MRI Radiology v. Kessler.  In Bernier, the dividend tax rate and ordinary income rate were the same.  In Del. Radiology, they were not.  However, both my calculation and the Court’s in Del. Radiology were correct.  Where the tax rates are different, so are the results.”  We appreciate Mr. Leicester’s comments and apologize for confusing any assumptions in Bernier with the assumptions made by the Delaware Chancery Court in Del. Radiology.

Questions remain regarding Del. Radiology.  In particular—and within the confines of the Del. Radiology model of S Corp valuation—it is still important to ask the following questions:

• How does the Del. Chancery model distinguish between retained income (after CapEx) and distributed income?
• How does the model account for the differences between operating as an S Corp and a C Corp ?
• Does it account for any possibility but that the S Corp will continue as such into perpetuity?

For the answer to these questions and more, look for Fannon’s Guide to the Valuation of Subchapter S Corporations, by Nancy Fannon and published by BVResources; to pre-order your copy, click here.