BV trivia question: Which Tax Court judge has taught quantitative analysis to lawyers? (Hint—think Peracchio)
More hints: In Peracchio v. Commissioner, (T.C. Memo 2003-280), the Tax Court wasn’t pleased with either expert’s determination of minority and marketability discounts for a family limited partnership (FLP) funded with over $2 million in cash and securities. In particular, the court criticized the taxpayers’ experts for using benchmark averages without examining and adjusting the restricted data to fit the entity and facts of the case. The court was even “less impressed” by the IRS expert’s “brief analysis of six [unnamed] factors ‘that may influence the size of the marketability discount’” and produced a range of 5% to 25%, and his “arbitrary selection of the midpoint of that range (15 percent) as his suggested discount.”
In the end, since the taxpayer failed to carry its burden of proof, the court settled on the 2% minority discount conceded by the IRS expert and a 25% DLOM based on his upper range. “I [wasn’t] there to investigate the facts,” Judge James Halpern told attendees at the recent ASA IRS Valuation Symposium in Los Angeles. “I’m not an expert but a neutral arbiter. You come to me. If [your client] has the burden of proof and you don’t tell a story to support it—you lose. If there is a factual question and neither side puts in [convincing] testimony, then it’s a tie, and a tie goes against the party with the burden of proof.”
Still, after so many years of listening experts’ “stories,” the neutrality of most Tax Court judges now comes with a good dose of sophistication and statistical savvy. Halpern, for instance, has taught quantitative analysis to attorneys at George Washington University. At the ASA Symposium, he presented a paper, authored by Professor Theodore S. Sims (Boston Univ. School of Law), on “Using Market Data on Discounts to Net Asset Value of Closed-End Mutual Funds in Valuing Minority Interests in [FLPs],” based on the Peracchio data. “This is what’s really going on when an appraiser says he has examined the funds, picked data points, etc.,” Halpern said, revealing his understanding of the issues and analysis, something you may want to know when assessing empirical data for your next E&G tax engagement…