During his lecture on Standards of Value at the recent AICPA/AAML National Conference on Divorce, Jay Fishman discussed AICPA SSVS 1’s requirement that valuation analysts disclose events that occur subsequent to the valuation date only if the event was "known, knowable or foreseeable." At the same time, "the lawyers and the judges want to know what happened," says Fishman. But putting in an unforeseeable subsequent event "taints the whole process," he says. How do you explain that the “unknowable” subsequent event does not affect the valuation analysis? Fishman's solution: If there is a significant change in circumstance after the valuation date, "instead of trying to taint [the report] by referring to a subsequent event, we'll just try to do an updated valuation."
What do the courts say? Speaking at the NYSCCPA Business Valuation conference last month, Judge David Laro confirmed that per the U.S. Supreme Court landmark, Ithaca Trust Co. v. United States (1929), the valuation of property for Federal tax purposes is made as of the valuation date without regard to subsequent events. However, the reality is that “judges use subsequent events to determine value,” Laro said. How can they get away with it? The Federal Rules of Evidence (enacted after Ithaca) added relevancy to the judge’s discretionary admission of facts related to the valuation. If the subsequent events were foreseeable, “then they are relevant,” Laro explained, and they are also admissible—at least in the Second Circuit.
Other federal circuits abide by the “bright line” Ithaca Trust rule, while still others admit subsequent events only to support direct proof of value as of the valuation date. If this sounds confusing—you may want to review Estate of Noble v. Commissioner, a 2005 Tax Court memorandum, authored by Laro, which discusses unforeseeable events in the admission of a sale that took place fourteen months after the valuation date:
An event occurring after a valuation date may affect the fair market value of property as of the valuation date if the event was reasonably foreseeable as of that earlier date…An event occurring after a valuation date, even if unforeseeable as of the valuation date, also may be probative of the earlier valuation to the extent that it is relevant to establishing the amount that a hypothetical willing buyer would have paid a hypothetical willing seller for the subject property as of the valuation date…Unforeseeable subsequent events which fall within this latter category include evidence, such as we have here, ‘of actual sales prices received for property after the date [in question], so long as the sale occurred within a reasonable time ... and no intervening events drastically changed the value of the property.’ [citations omitted]
“Valuation is a prophecy,” Laro told his New York audience, citing Rev. Ruling 59-60. The rightness (or wrongness) of a valuation doesn’t turn on the outcome of the prophecy—but “on the reasonableness of the prophecy at the time it was made.” Reminder: Estate of Noble (along with over 2,700 federal and state court BV cases) are all available at BVLaw.
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