If I have a complaint about the stunning weekend just completed Far Above those “waves of blue” (which didn’t kick up much, notwithstanding dire warnings from National Weather Service), it’s the simultaneous scheduling of the Sherwoods with Cornelliana Night. C’mon, Alumni and Development, I couldn’t be in two places at once.

If all this is meaningless to you, my dear reader, I’m truly sorry. There are memories that are worth far more than the price of admission.

Anyway, I take the title of a record album (vinyl, so you know how long ago that was) by the Cornell a capellists The Sherwoods to revisit yet another Tax Court oldie-but-goody, Estate of Natale B. Giustina, Deceased, Laraway Michael Giustina, Executor, 2016 T. C. Memo. 114, filed 6/13/16.

Laraway escaped the chops, but got hit with a substantial deficiency on the valuation of his late parent’s 41.128% interest in the FLP, which held the Oregon timberland that comprised the family fortune.

For the skinny on that one, see my blogpost “Such Rarefied Heights of Pure Mathematics,” 6/25/11.

Well, Laraway wasn’t a happy woodsman after being administered the slug by Judge Morrison, so off to Ninth Circuit he ran.

The Ninth Circuiteers remanded Laraway, wanting Tax Court to elaborate on the single-asset risk premium and the going-concernedness of the FLP. See my blogpost “Such Rarefied Heights of Pure Mathematics – Part Deux,” 2/27/15, leaving Judge Morrison desperately seeking settlement.

The parties disoblige him.

Judge Morrison is clearly peeved; judges don’t like being reversed, especially in capital letters. “The Ninth Circuit’s opinion ended with the words ‘REVERSED and REMANDED for recalculation of valuation’.” 2016 T. C. Memo. 114, at p. 8.

OK, says Judge Morrison. First, any investor (our friend the hypothetical creature, see Reg. 20.2031-1(b)) will diversify. There shouldn’t be much premium on the price for the single-asset, because anyone buying in will have other assets elsewhere, so a collapse in the forest (whether or not anyone hears it) will be offset by gains in the ocean (or sky, or Cloud).

More elegantly, “Risk is not preferred by investors.  Richard A. Brealey, Stewart C. Myers, & Franklin Allen, Principles of Corporate Finance 182 (8th ed. 2006) (“Most investors dislike uncertainty”.).  They require a premium to bear it.  However, some of the risk associated with an asset (the “unique risk”) can be eliminated through diversification (1) if the owner of the asset also owns other assets, (2) if the risks of the other assets are not associated with the asset in question, and (3) if the other assets are great enough in value.” 2016 T. C. Memo. 114, at p. 10.

And the 25% possibility that the FLP would dissolve, itself dissolves when Judge Morrison examines Laraway’s and his kinfolks desire to keep their forests primeval and chop them down slowly, replanting as they go. Laraway and kinfolk must approve any buyer; any buyer who claims to love trees but wants to sell out the Giustina arboreal splendor would be shown to the door.

And Judge Morrison again quotes the experts on corporate finance above-cited.

“For 25 years, Larry [that’s Laraway to you] Giustina and James Giustina had run the partnership as an operating business.  The record suggests that these two men would refuse to permit someone who is not interested in having the partnership continue its business to become a limited partner.  Thus, we believe that they would not permit a multiple-owner investment entity to become a limited partner. Such an entity seeks to increase the returns on its investments.  Brealey, Myers, & Allen, supra, at 182 (“Most investors like high expected returns”.).  If such an entity owned the 41% limited-partner interest, it would attempt to have the partnership discontinue its operations and dissolve.  (At dissolution it would get 41% of the value of the partnership’s assets, or 41% of $150.68 million.  In contrast to the $150.68 million that would be received by all the partners from dissolving the partnership, the value of the cashflows from the partnership’s continued operations would be only $33.8 million (according to the estate’s expert), $51.7 million (according to our first opinion), or $65.76 million (according to the IRS’s expert).  These values are 22%, 34%, and 44%, respectively, of the $150.68 million that would be realized by dissolving the partnership.)” 2016 T. C. Memo. 114, at pp. 14-15.

Got a clue for you, Judge, and the Three Wise Men you quote. Investors don’t want high “expected” returns. They want high ACTUAL returns.

Anyway, why buy a lawsuit, except at a really steep discount?

So, after yet another mix-and-match, Judge Morrison’s rarefied mathematics yield good news for Laraway and Cousin Jim and the gang.

“In our first opinion we valued the 41% limited-partner interest at $27,454,115.  After making the two changes discussed in this supplemental opinion (eliminating any weight attributed to the value of the partnership’s assets and applying the 3.5% partnership-specific risk premium), our valuation changes to $13,954,730.” 2016 T. C. Memo. at p. 16.

Judge Morrison has a table to show the good news.

Keep it up, Laraway, and you’ll end up with IRS owing you money.