Following on the heels of the pro-taxpayer decision in Estate of Black v. Comm’r (see last week’s BVWire™), comes another taxpayer victory in the Estate of Shurtz v. Comm’r (T.C. Memo, Jan. 2010). The “win” was based on a well-planned, well-managed family limited partnership (FLP), essentially funded with 750 acres of prime Mississippi timberland plus a 16% limited partnership interest in the timber’s operating company. Unfortunately for appraisers, the trial battle over marketability discounts didn’t make it into the Tax Court’s published opinion, which—after deciding the Sec. 2036(a) issue in the taxpayer’s favor, simply held that no further taxes were due.
Mercer insights on the marketability discounts. Fortunately, Matt Crow, the new President of Mercer Capital (Memphis, TN) was the appraiser for the Shurtz estate, which submitted the same appraisal to the Tax Court that Crow performed six years earlier, with the estate’s tax return. He tells BVWire that the parties stipulated to the underlying net asset values and their minority discounts were similar. “But, our marketability discounts were anything but similar,” he says. Crow applied a 50% discount to the estate’s 16% LP interest in the timber company and a 30% marketability discount to its FLP interest. The IRS expert applied a 10% discount to both. “As a result, our valuation of the estate's interest in [the FLP] was less than half the amount determined by the IRS expert.”
“It wouldn't surprise you to learn we used the Quantitative Marketability Discount Model (QMDM),” Crow adds, “modeling the partner level cash flows over a reasonable holding period and discounting them at a premium rate of return to compensate for lack of marketability—the same shareholder-level, discounted cash flow modeling we've done thousands of times.” The IRS expert relied on the Bajaj studies along with the “usual” restricted stock and pre-IPO studies, with primary support from FMV Opinions data, focusing on comparing the subject interests with the FMV data on market-to-book ratios and dividends per share. “I rebutted the Service's expert report and he rebutted mine,” Crow reports. “In the end, the judge accepted the estate's return, and thus our valuation, as submitted.”
Why the court didn’t report the valuation decision remains a mystery. “But as the old saying goes,” Crow says, “silence means approval.” Look for the complete case digest of Estate of Black in a forthcoming (April 2010) Business Valuation Update™; the full-text of the court’s opinion will be available soon at BVLaw™