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NEW JERSEY COURT USES VALUATION DISCOUNT TO PUNISH “BAD BOY”

Introduction Richard and Steven Parker are brothers who ran a flower business in Scotch Plains, New Jersey.  Richard is the President of Parker Interior Plantscapes (“PIP”), which installs and services plants and flowers in commercial settings.  Steven is the President of Parker Wholesale Florists (“PWF”), which is a garden center.  Each are vice presidents of […] More...

Dell Appraisal Spawns a Multitude of Valuation Approaches

February 2017 | Issue 84 Introduction A Delaware Chancery appraisal case involving computer company Dell Inc. gave rise to a multitude of valuation measurements.  It is instructive to see how the court sorted through them in coming up with its final appraisal conclusion.  The case is In re Appraisal of Dell Inc., 2016 Del. Ch. LEXIS […] More...

Future Expected Investment Strategy Determines Value of FLP Interest

January 2016 | Issue 83 The estate of Helen P. Richmond held a 23.44% interest in Pearson Holding Co. (“PHC”), a family investment company.  The estate valued this holding at $3,150,000, later adjusted to $5,046,000.  The IRS valued it at $7,330,000.  This difference of opinion was aired in US Tax Court in a case called Estate […] More...

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Divore Valuation Shaped by Estate Tax Valuation Principles

November, 2008 | Issue 29

A recent New York Appellate Court decision on the valuation, for matrimonial purposes, of an investment holding company was largely shaped by recent court decisions made in estate tax cases. In Wechsler v. Wechsler, 2008 WL 463582 (N.Y. 1 Dept., Oct 21, 2008), the court concluded that a privately-owned C corporation that functioned as an asset holding company should be valued by deducting the amount of the company’s latent or “trapped-in” capital gains taxes from the baseline value of the company’s securities portfolio as of the valuation date. In so doing, the Appellate Court reversed the opinion of the trial court below.

As of the valuation date, the company in question, Wechsler & Co., Inc., had a securities portfolio with a market value of $71 million. Both sides agreed that the proper way to value the company was by measurement of its net asset value. They agreed on the baseline pretax value of $71 million, but disagreed as to how to account for the state and local capital gains taxes that would have been due upon the ultimate liquidation of the portfolio.

Husband’s Position
Both the neutral expert and the Husband’s expert urged the court to apply an estate tax case, Dunn v. Commissioner (5th Cir. 2002). Under that holding, the court should assume a sale of the company on the valuation date and reduce its baseline value by 42% of the gain, that percentage being the combined state and federal capital gains tax rate that the portfolio would be subject to.

Wife’s Position
The Wife’s expert, on the other hand, offered the Tax Court’s decision in Jelke v. Commissioner (2005), another estate tax case, which rejected a dollar-for-dollar discount for embedded taxes. At the time, Jelke was on appeal to the Eleventh Circuit. The heart of the Wife’s expert’s argument was that the portfolio was not going to be liquidated on the valuation date, and therefore the taxes would not be due on that date, and that therefore using a dollar-for-dollar deduction would overstate the amount of the tax burden.

The Decision
The New York Appellate Court, in a split decision, finally opted for the Husband’s argument, ruling that the trial court should have adopted the dollar-for-dollar approach of the Fifth Circuit in Dunn. Its reasoning was similar to that ultimately used by the Eleventh Circuit Court in Jelke, where, in reversing the Tax Court, it also adopted the dollar-for-dollar discount for embedded taxes, concluding that it had “the virtue of simplicity.”