Very little has been written about the valuation of self-canceling installment notes (SCINs), but they figure very prominently in a pending Tax Court case.
At the recent ASA Advanced Business Valuation Conference in San Antonio, William Frazier, ASA (Stout Risius Ross) talked about the Estate of William M. Davidson. According to Frazier, the case doesn’t have a court date yet, but the IRS has filed a petition claiming that the estate is undervalued and that it owes up to $2 billion in taxes (yes, billion).
William Davidson is the late owner of the Detroit Pistons, Tampa Bay Lightning, and Guardian Industries (one of the country’s largest private companies). In addition to the undervaluation allegation, the IRS is questioning the SCIN technique of selling assets to heirs based on a payment schedule that includes a provision that cancels the payments when the seller dies. The IRS says Davidson made errors in figuring his life expectancy, which caused the heirs to pay much less than fair market value.
If the Davidson estate prevails with the SCIN issue in Tax Court, “you’ll see more of these being used,” says Frazier. Stay tuned!
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