Valuation Implications of the Changing ESOP Litigation Landscape
The tide has started to turn with respect to litigation over ESOP valuations, speakers reported at the recent ASA ESOP Virtual Conference. There has been a major court victory and pressure from the ESOP and valuation profession, and now the DOL has committed to moving forward—hopefully— with long-awaited regulations on the valuation of company shares to be bought by an ESOP.
Vieira v. Think Tank Logistics, LLC (In re Levesque)
In this adversary Chapter 7 proceeding, the trustee sought to avoid the debtor’s transfer of his interest in two corporate entities and either recover the interests or the value of such interests from the defendants. As part of this proceeding, the court was asked to decide on two motions in limine regarding an valuation expert from each side. The motions (Daubert) asked that the experts not be allowed to testify. The court granted in part and denied in part the motions of the parties.
Bankruptcy Court (South Carolina) Grants in Part and Denies in Part Motions to Exclude Experts in Daubert Motions
In this adversary Chapter 7 proceeding, the trustee sought to avoid the debtor’s transfer of his interest in two corporate entities and either recover the interests or the value of such interests from the defendants. As part of this proceeding, the court was asked to decide on two motions in limine regarding an valuation expert from each side. The motions (Daubert) asked that the experts not be allowed to testify. The court granted in part and denied in part the motions of the parties.
Physician Shareholder Asserts Transaction Bonuses Breach Board’s Fiduciary Duties—Appeals Court Finds Them Just and Reasonable
A physician shareholder claimed that the fair market value of his one share (of 75 total shares) was undervalued when the physician practice was merged and sold to NAMM California, a company that develops and manages physician provider networks. NAMM paid $18 million in the merger, and over $12 million of that amount was paid to individual physician shareholders in the form of “transaction bonuses.” The remaining almost $6 million was paid pro rata to the shareholders. The plaintiff appealed the judgment of the California trial court, but the appellate court deemed the transaction bonuses as “just and reasonable” and affirmed the trial court.
Ghaly v. Riverside Cmty. Healthplan Med. Grp.
A physician shareholder claimed that the fair market value of his one share (of 75 total shares) was undervalued when the physician practice was merged and sold to NAMM California, a company that develops and manages physician provider networks. NAMM paid $18 million in the merger, and over $12 million of that amount was paid to individual physician shareholders in the form of “transaction bonuses.” The remaining almost $6 million was paid pro rata to the shareholders. The plaintiff appealed the judgment of the California trial court, but the appellate court deemed the transaction bonuses as “just and reasonable” and affirmed the trial court.
Bankruptcy Court Determines Fair Value Under Asset Approach With ‘Limited Evidence’ Available to It
This case involved a hotly contested battle over the fate of a Ponderosa restaurant in Michigan. The two owners, having had a falling out, pursued contentious litigation to wrest control of the restaurant from each other. Having no business valuation available to the court, the court was left with a real estate appraisal and limited evidence of assets and liabilities to determine the fair value of a 50% interest in the restaurant to be used in the buyout of one of the shareholders by the other shareholder.
Herremans v. Fedo (In re Herremans)
This case involved a hotly contested battle over the fate of a Ponderosa restaurant in Michigan. The two owners, having had a falling out, pursued contentious litigation to wrest control of the restaurant from each other. Having no business valuation available to the court, the court was left with a real estate appraisal and limited evidence of assets and liabilities to determine the fair value of a 50% interest in the restaurant to be used in the buyout of one of the shareholders by the other shareholder.
Connelly v. United States
The importance of this case was that the 8th Circuit’s decision to affirm the lower court and IRS’ inclusion of life insurance proceeds in the value of the corporation for which decedent’s stock was redeemed. This contradicted the decision of the 11th Circuit in Estate of Blount that 26 C.F.R. § 20.2031-2(f)(2) precluded the inclusion of life-insurance proceeds in the corporate value when the proceeds were used for a redemption obligation.
8th Circuit Affirms District Court—Includes Life Insurance Proceeds in Value of Redeemed Shares
The importance of this case was that the 8th Circuit’s decision to affirm the lower court and IRS’ inclusion of life insurance proceeds in the value of the corporation for which decedent’s stock was redeemed. This contradicted the decision of the 11th Circuit in Estate of Blount that 26 C.F.R. § 20.2031-2(f)(2) precluded the inclusion of life-insurance proceeds in the corporate value when the proceeds were used for a redemption obligation.
BV News and Trends May 2023
A monthly roundup of key developments of interest to business valuation experts.
ES NPA Holding, LLC v. Comm’r
The Tax Court ruled that the class C units were a profits interest because, when applying the fair market value of the LLC at the time of receipt, the partner would not receive any proceeds from a liquidation at that time. Any proceeds in excess of fair market value would be speculative. No accuracy penalty was appropriate either.
On Liquidation Tax Matters, Partner Would Not Receive Any Proceeds, Interest Received Would Be Nontaxable Profits Interest
The Tax Court ruled that the class C units were a profits interest because, when applying the fair market value of the LLC at the time of receipt, the partner would not receive any proceeds from a liquidation at that time. Any proceeds in excess of fair market value would be speculative. No accuracy penalty was appropriate either.
Financial Expert Guide for Family Law Judges and Attorneys, National Edition
April 2023 PDF, Softcover (413 pages)
John Tatlock, Kevin Yeanoplos, Ron Seigneur
Business Valuation Resources, LLC
Have you tried Abbott’s passive appreciation calculator?
In last week’s BVWire, we mentioned that Dr. Ashok Abbott (West Virginia University) has developed an online application that produces a passive appreciation factor on a national level for businesses in the retail sector.
Court do-over to figure passive appreciation for divorce
In an Ohio divorce case, the trial court made an award to the wife based on the full fair market value of the husband’s business.
Maher v. Cmejrek
The wife appealed the trial court’s decisions as to the values of the husband’s interests in his various medical practices and clinics and challenged the trial court’s determination of the husband’s income for support purposes. The appellate court affirmed the values of the medical practices and clinics and remanded the determination of income for support purposes for recalculation.
Indiana Appellate Court Affirms Valuation of Medical Practice Interests of Husband but Remands for Recalculation of Husband’s Income for Child Support
The wife appealed the trial court’s decisions as to the values of the husband’s interests in his various medical practices and clinics and challenged the trial court’s determination of the husband’s income for support purposes. The appellate court affirmed the values of the medical practices and clinics and remanded the determination of income for support purposes for recalculation.
The Walsh v. Preston ESOP Case—Is It a Victory or an Escape?
Commentary from BVR’s legal editor on an important ESOP valuation case.
Tax Court (Grudgingly) Allows Tax Affecting Under the SEAM Method
This was a gift tax valuation case the U.S. Tax Court decided. Gifts of minority interests in The Biltmore Co. were made from the its shareholders, the Cecils, to their children and grandchildren. The IRS audited the gift tax returns and assessed deficiencies for reporting too low fair market values of the gifts of The Biltmore Co. stock. Both sides presented experts to value the gifted interests. The experts agreed that the cash flows should be tax affected. The court accepted the tax affecting while allowing that it was not an admission by the Tax Court that tax affecting should apply in all cases. The Tax Court made changes to the values presented and cobbled together a final value that resulted in refunds to the taxpayers/petitioners.
Estate of Cecil v. Comm’r
This was a gift tax valuation case the U.S. Tax Court decided. Gifts of minority interests in The Biltmore Co. were made from the its shareholders, the Cecils, to their children and grandchildren. The IRS audited the gift tax returns and assessed deficiencies for reporting too low fair market values of the gifts of The Biltmore Co. stock. Both sides presented experts to value the gifted interests. The experts agreed that the cash flows should be tax affected. The court accepted the tax affecting while allowing that it was not an admission by the Tax Court that tax affecting should apply in all cases. The Tax Court made changes to the values presented and cobbled together a final value that resulted in refunds to the taxpayers/petitioners.
IRS hits taxpayer with gross valuation misstatement penalty
Easement cases before the Tax Court can offer some interesting insights and guidance to BV professionals.
BVResearch Pro adds another issue of the ASA’s BV Review
Among many other resources, the BVResearch Pro platform contains the full archive of the Business Valuation Review going back to 1982.
BVLaw Review: The Top Valuation Cases of 2022
Here is our pick for the most noteworthy valuation cases that emerged over the past year. They include state and federal court decisions covering many areas of law that enhanced our understanding of valuation issues as they arose in a litigation setting.
Ohio Appellate Court Remands Value of Businesses for Determination of Active Appreciation
This matter involved cross-appeals from a divorce decree in Trumbull County, Ohio. The focus of this digest relates to cross-appeals relating to the values of the husband’s businesses and the matter of active appreciation on those businesses.
Fordeley v. Fordeley
This matter involved cross-appeals from a divorce decree in Trumbull County, Ohio. The focus of this digest relates to cross-appeals relating to the values of the husband’s businesses and the matter of active appreciation on those businesses.