The most recent “must-read” decision from the U.S. Tax Court, Estate of Gallagher v. Commissioner
, T.C. Memo. 2011-148 (June 28, 2011), takes on nearly every aspect of private company appraisal—from discounts to the DCF, the applicability of the guideline public company method to the proper calculation of WACC. A digest of the court’s exhaustive opinion (by Judge Halpern
) will be in the next Business Valuation Update
; because this is such a dense, detailed decision, we’ve made it available as the latest among BVR’s free downloads
. Some highlights of the case, which valued a decedent’s 15% interest in a privately held newspaper publishing company:
- The IRS expert applied a 17% minority discount, based on the inverse of control premium data; the taxpayer’s appraiser applied none, reasoning that his DCF analysis already accounted for minority-based cash flows. The court applied a 23% minority discount, based on the low-end of the control premium range.
- The IRS expert applied a 30% marketability discount based on restricted stock studies; the taxpayer’s expert applied a 31% DLOM based on the same plus pre-IPO studies. “We have previously disregarded expert’s conclusions as to marketability discounts for stock with holding periods of more than 2 years when based upon the above-referenced studies,” the court said. But since both appraisers relied on them, it accepted the studies as a “benchmark” to apply a 31% DLOM.
- The IRS valued the company at $40.9 million, the taxpayer at $28.2 million. After crafting its own, item-by-item DCF analysis, the court valued the company at $32.6 million.
- Judge Halpern recently warned appraisers that he failed to see the justification for tax-affecting (see BVWire # 104-4). Sure enough—in rejecting tax-affected adjustments by the taxpayer’s expert—“we will not impose an unjustified fictitious corporate tax rate burden on [the company’s] future earnings,” he ruled.
- Overall, the court found the IRS appraiser’s approaches and adjustments more persuasive, faulting the taxpayer’s expert numerous times (we counted at least 14) for failing to adequately explain his methods and conclusions.
Predictably, the case is also creating some buzz in the BV blogosphere. Attorney Paul Hood’s post takes the Tax Court to task on several issues, including its resistance to tax-affecting. Peter J. Reilly focuses more on the professionals in Forbes.com, saying the taxpayer’s appraiser “could have used more words, less math.”
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