In Uncategorized on 10/24/2019 at 16:50

I’ve gotten a lot of blogfodder from William Cavallaro, Donor, 2019 T. C. Memo. 144, filed 10/24/19. The last time around, Wm was jousting with IRS and their expert Mr B about $29.7 million Bill supposedly gifted his offspring when he and they merged their respective C Corps, and they got the intangibles in the wrong outfit. Wm claims Mr B was $6.9 million too high.

1 Cir bucked Judge Gustafson’s initial take back to him, because he said Wm had to prove his number was right. No, said 1 Cir, he has to prove IRS’ (Mr B’s) number was wrong.

Wm of course tries to retry the case, revive old theories that went down at first, and wildcard in new ones. Why not, says I. The worst that happens is what happens to Wm. Turns out Mr B got it wrong to the tune of $6.9 million in Wm’s favor. But that’s all.

I give Wm’s trusty attorney a Taishoff “Good Try, Second Class.”

First, the C Corp that Judge Gustafson found owned the intangibles is a finding that cannot be disturbed. Law of the case; 1 Cir didn’t disturb that finding, so can’t relitigate it.

Second, Mr B might have been mistaken, but he wasn’t biased. And some of what Mr B found caused IRS to back off in Wm’s favor. So Mr B doesn’t get tossed entirely.

Third, Mr B’s calculation of profit and his calculations of discounted cashflow aren’t arbitrary, since these methods are commonly used to value closely-held businesses.

Where Mr B’s numbers fall down is the 90th percentile he used vs the 88.3rd percentile profitability that Wm claims he should have used.

“The Cavallaros demonstrated (and the Commissioner acknowledged) that ‘[t]he RMA data on which he purports to rely reflect that a profit margin of 7.5% would place Camelot in the 88.3rd percentile’, not the 90th.  The Cavallaros and the Commissioner subsequently corresponded about how Mr. B. had arrived at the 7.5% value, and it became clear that Mr. B had attempted to extrapolate the 90th percentile through a method that was not statistically reliable.  Mr. B apparently believed that the underlying data was unavailable, so in his attempt to arrive at the 90th percentile, he employed a method that was not statistically correct.  He knew only the mean profit margin from the RMA data, 4.1%.  He assumed that the mean profit margin would not be that far off from the median or 50th percentile, so he inferred that the theoretical 100th percentile would be 8.2% and that the 90th percentile would be 7.38% (making the 7.5% figure that he employed in the profit reallocation calculation greater than his inferred 90th percentile).” 2019 T. C. Memo. 144, at p. 23. (Name omitted).

Wm’s trusty attorney yells ”deceptive and erroneous” and Judge Gustafson should toss Mr B entirely. IRS tries to save the game, claiming all Mr B did was try to make out Wm’s C Corp as a “top performer,” not anything specific. Judge Gustafson isn’t buying either.

Mr B insisted on 90th percentile throughout. But IRS caves that an adjustment must be made, dropping the value of what Wm gave the kids to $6.9 million less than what IRS and Mr B claimed.

As for the wildcards, 1 Cir wasn’t buying and neither is Judge Gustafson. With arguments and proof, as with much else, “use it or lose it” is the rule. Wm’s team went all-in on who owned the intangibles. If they had other stuff, they should have put in argument and evidence in support thereof, but didn’t.

1 Cir said Judge Gustafson had wide latitude. He isn’t going to toss Mr B (except for the percentiles) or let Wm retry this case. He did sustain the error alleged as to Mr B’s percentiles, and did find the correct amount of tax due, by reducing the amount claimed by IRS by the $6.9 figure.

Now go do a beancount.


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