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BV News and Trends December 2021

A monthly roundup of key developments of interest to business valuation experts.

More jabs at the proposed billionaire tax

Although it could give a lot of work to appraisers, the proposed billionaire tax is an example of “really bad tax law,” says the dean of valuation, Aswath Damodaran (New York University Stern School of Business).

Damodaran on proposed billionaire tax

“A boon for appraisers and accountants,” but it is one of the worst tax proposals ever, says Aswath Damodaran (New York University Stern School of Business), in an appearance on CNBC.

Recap of recent BV cases of note

A number of recent cases have emerged that contain various valuation issues.

Iowa Supreme Court Allows Reduction in Value for Transaction Costs but Refuses to Allow a Reduction for Built-In Capital Gains Tax

This case was decided, on appeal, under the Iowa “election-to-purchase-in-lieu-of-dissolution statute.” The Iowa Supreme Court decided that, because the parties’ experts had “both included transaction costs in their valuations under a net asset approach, the district court’s failure to reduce the asset values to account for the costs to liquidate the corporation’s assets warranted reversal.” Additionally, since there was no evidence of an intention to liquidate the company or its assets, the court declined to adjust for the built-in gains tax consequences urged by the majority shareholder.

Guge v. Kassel Enters.

This case was decided, on appeal, under the Iowa “election-to-purchase-in-lieu-of-dissolution statute.” The court decided that, because the parties’ experts had “both included transaction costs in their valuations under a net asset approach, the district court’s failure to reduce the asset values to account for the costs to liquidate the corporation’s assets warranted reversal.” Additionally, since there was no evidence of an intention to liquidate the company or its assets, the court declined to adjust for the built-in gains tax consequences urged by the majority shareholder.

Tax Court’s Exelon ruling, turning on compromised appraisals, withstands appeal

In 2016, Tax Court Judge Laro ruled on the legitimacy of a series of Section 1031 transactions involving Exelon, an Illinois-based energy giant.

Appeals Court Upholds Tax Court’s Section 1031 Decision Pivoting on ‘Tainted Appraisals’

Appeals court upholds Tax Court’s ruling that taxpayer’s transactions do not represent section 1031 like-kind exchanges because taxpayer never assumed ownership of replacement plants; improper input from taxpayer’s law firm tainted appraisals used to show otherwise; accuracy penalty is justified.

Exelon Corp. v. Commissioner

Appeals court upholds Tax Court’s ruling that taxpayer’s transactions do not represent section 1031 like-kind exchanges because taxpayer never assumed ownership of replacement plants; improper input from taxpayer’s law firm tainted appraisals used to show otherwise; accuracy penalty is justified.

Compromised Asset Appraisals Undo Like-Kind Tax Plan

Tax Court says taxpayer’s transactions fail to meet Section 1031 requirements for income tax deferral; legal advisor’s ongoing interference with appraisal process compromised asset appraisals undergirding transactions to the point they became “useless.”

Key Tax Ruling From Ohio Supreme Court Concerning Pass-Through Entity

Ohio Supreme Court says tax provision imposing state income tax on capital gain realized by nonresident investor in pass-through entity violates taxpayer’s due process rights barring showing taxpayer’s activities are “unitary with” those of the business.

Compromised Asset Appraisals Undo Like-Kind Tax Plan

Tax Court says taxpayer’s transactions fail to meet Section 1031 requirements for income tax deferral; legal advisor’s ongoing interference with appraisal process compromised asset appraisals undergirding transactions to the point they became “useless.”

Exelon Corp. v. Commissioner

Tax Court says taxpayer’s transactions fail to meet Section 1031 requirements for income tax deferral; legal advisor’s ongoing interference with appraisal process compromised asset appraisals undergirding transactions to the point they became “useless.”

Key Tax Ruling From Ohio Supreme Court Concerning Pass-Through Entity

Ohio Supreme Court says tax provision imposing state income tax on capital gain realized by nonresident investor in pass-through entity violates taxpayer’s due process rights barring showing taxpayer’s activities are “unitary with” those of the business.

Corrigan v. Testa

Ohio Supreme Court says tax provision imposing state income tax on capital gain realized by nonresident investor in pass-through entity violates taxpayer’s due process rights barring showing taxpayer’s activities are “unitary with” those of the business.

Ohio Appeals Court Clarifies Provision on Tax Affecting at Divorce

Appeals court says consideration of tax consequences related to owner-spouse’s business is “too speculative” because owner has no plan to sell in near future; trial court improperly assumed current tax rates and business interests would remain constant.

Nieman v. Nieman

Appeals court says consideration of tax consequences related to owner-spouse’s business is “too speculative” because owner has no plan to sell in near future; trial court improperly assumed current tax rates and business interests would remain constant.

Use of Asset-Level Deductions Hinges on Business Strategy

State’s high court strikes down district court’s fair value determination, finding reliance on prior law prohibiting use of deductions was misguided where company pursued strategy of selling off real estate and other assets at time of triggering event.

Valuations Bolster IRS’s Transferee Liability Claim

In transferee liability case, Tax Court finds IRS proved petitioner was liable for causing company’s fraudulent asset transfers and benefitted from intermediary company’s fraudulent transfer; valuations showed company was insolvent at time of transfers.

Utah Resources International, Inc. v. Mark Technologies Corp.

State’s high court strikes down district court’s fair value determination, finding reliance on prior law prohibiting use of deductions was misguided where company pursued strategy of selling off real estate and other assets at time of triggering event.

Cullifer v. Commissioner

In transferee liability case, Tax Court finds IRS proved petitioner was liable for causing company’s fraudulent asset transfers and benefitted from intermediary company’s fraudulent transfer; valuations showed company was insolvent at time of transfers.

10 takeaways from Estate of Richmond

Ignoring Accountant’s Advice, Taxpayers Botch Investment Strategy

Tax Court finds taxpayers engaged in “prohibited transactions” under IRC Section 4975(c(1)(B) when making personal guaranties on a promissory note to a company they had bought via IRAs for purposes of deferring until retirement any income tax liability on ...

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