In Uncategorized on 08/19/2019 at 16:55

Appraisal aficionados will enjoy two from Tax Court today. We begin with Houston, and the high-priced part of town known as River Oaks, wherein stood the celebrated Harry Hanszen House, now or formerly the abode of Robert G. Taylor, II, 2019 T. C. Memo. 102, filed 8/19/19. Judge Paris gets this tale of Hurricane Ike and the havoc it wrought in Baja Oklahoma.

While I’ll spare you Judge Paris’ three-page broker’s set-up, I especially lament the destruction of RGTII’s “…6,889 bottles of wine stored in the basement, and approximately half were submerged.  A dedicated computer with customized wine database software, a bar code labeler and a scanner, and a work station were destroyed in the basement flood.” 2019 T. C. Memo. 102, at p. 10.

What a bummer.

Then there was mold, asbestos, the real estate market collapse of the Black ’08… as Grandma would have said, don’t ask.

RGTII originally went with his CPA’s appraisal of before and after, but supplemented with a local broker whose 30 years of experience sufficiently impressed Judge Paris to allow in both the broker’s report and her testimony.

But that doesn’t help, as all that a casualty loss involves is actual physical damage. “A competent appraisal must recognize the ‘effects of any general market decline affecting undamaged as well as damaged property which may occur simultaneously with the casualty’ so that any deduction will be ‘limited to the actual loss resulting from damage to the property.’” 2019 T. C. Memo. 102, at pp. 24-25, citing Reg. 1.165-7(a)(2)(i).

The flooded basement, mold and asbestos, plus the Black ’08 crash, and popular perceptions thereof, played too great a role in RGTII’s expert’s valuation. But though the CPA flunks as valuer, CPA does help RGTII escape the Section 6662 chops.

Next up is the trees and the forests of Oregon, in which was situated the world-class sawmills of the late Aaron U. Jones. So we have Estate of Aaron U. Jones, Donor, Deceased, Rebecca L. Jones and Dale A. Riddle, Personal Representatives, 2019 T. C. 101, filed 8/19/19, Judge Pugh at the cutting edge (sorry, guys).

The late Aaron U. had a LLC to do the forestry and his S Corp to do the sawing, and they swapped cash back and forth. The documentation apparently passed muster. Now the question is the worth of the interests the late Aaron U. gifted to his nearest and dearest before he became the late Aaron U.

Here we have Schwab and Reilly, dueling valuers, Schwartz for IRS and Reilly (apparently a professional sawmill valuer with over 100 woodpushers under his belt) for the estate. Schwab’s expertise is closely-helds.

Reilly’s valuation is the better. He harkens back to our old friends the late Natale and his heir Laraway Guistina (see my blogpost “Into the Woods,” 2/16/16), and uses an income approach rather than Schwab’s net asset valuation.

These lumber outfits both grow and hold timber (assets) and sell wood, so they’re both investment vehicles and operating businesses.  And the S Corp and the LLC are essentially two arms of the same enterprise. Moreover, Reilly takes tax effects into account in valuing the same.

“While respondent objects vociferously in his brief to petitioner’s tax affecting, his experts are notably silent.  The only mention comes in Mr. Schwab’s rebuttal report, in which he argues that Mr. Reilly’s tax-affecting was improper, not because SJTC pays no entity level tax, but because SJTC is a natural resources holding company and therefore its ‘rate of return is closer to the property rates of Return’.  They do not offer any defense of respondent’s proposed zero tax rate. Thus, we do not have a fight between valuation experts but a fight between lawyers.” 2019 T. C. Memo. 101, at p. 39.

If you buy an S Corp, you’re buying the flowthrough of tax incidents. That’s worth something.

“We find on the record before us that Mr. Reilly has more accurately taken into account the tax consequences of SJTC’s flowthrough status for purposes of estimating what a willing buyer and willing seller might conclude regarding its value.  His adjustments include a reduction in the total tax burden by imputing the burden of the current tax that an owner might owe on the entity’s earnings and the benefit of a future dividend tax avoided that an owner might enjoy.  We are mindful that the science of valuing closely held companies usually results in a ‘gross terminal logical inexactitude’ in the words of Winston Churchill.” 2019 T. C. Memo. 101, at p. 41.

If you’re a valuation geek, read these. And even if you’re not, there’s useful material here.


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