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June 2017 | Issue 86 Background Constellis Group,  Inc. is a private security firm.  In December 2013, the Company formed an Employee Stock Ownership Plan (“ESOP”), which purchased 100% of Constellis’s voting stock.  Wilmington Trust NA was named Trustee of the ESOP.  Less than a year after the ESOP was created, the ESOP sold all […] More...


March 2017 | Issue 85 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.  […] 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...

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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 of Helen P. Richmond v. Commissioner, T.C. Memo. 2014-26 (February 11, 2014).

The Estate’s Position

PHC was incorporated in Delaware in 1928.  It is a subchapter C corporation.  Its investment approach is to preserve and grow capital, and to maximize dividend income for the family shareholders.  The turnover of PHC’s holdings over the years had been low, averaging 1.4% a year.  As a result, the value of its portfolio had grown to consist more and more of untaxed appreciation.  As of December 2005, 87.5% of the value of PHC’s $52,159,000 portfolio consisted of appreciation on which capital gain tax had not yet been paid.

The estate’s valuation expert valued the decedent’s interest in PHC by relying primarily on the capitalization-of-dividends method, an income approach.  In making his calculation, the estate’s expert assumed that dividends would grow 5 % per annum and that an investor would require an annual return (discount rate) of 10.25% per annum.  This produced a value of $5,049,000.

Petitioner’s expert also performed an asset based analysis.  He began with the net asset value of the portfolio.  He reduced this by deducting 100% of the BICG tax.  He then applied an 8% discount for lack of control and a 35.6% discount for lack of marketability.  These adjustments produced a value for the decedent’s PHC interest of $4,722,000.

The Commissioner’s Position

The IRS used an asset approach to value the estate’s PHC holding.  It began with the net asset value.  The appraiser then applied a 6% discount to adjust for the fact that the decedent held only a minority interest.  He then applied a discount of 36% for the lack of marketability of the PHC shares and for the BICG tax.  The result was a valuation of the decedent’s PHC interest of $7,330,000.

The Court’s Reasoning

The court pointed out that the parties principally disagreed on two issues, (1) the proper valuation method to be used, either the capitalization of dividends approach or the net asset value approach (NAV), and (2) the appropriate discounts if the NAV approach is used.

The Tax Court Judge stated at the outset that he favored the net asset value approach to valuing a company like this.  His reasons included the fact that the dividend capitalization approach requires a reliance on projected dividend streams far into the future.  He was also concerned about the sensitivity of the method to the choice of the capitalization rate.

He also felt that the capitalization of dividends method ignores the most concrete and reliable value data available; the actual market prices of the publicly-traded securities that make up PHC’s portfolio.  He felt that it was unreasonable to assume that the only thing that a potential investor would consider in valuing PHC would be the present value of its dividend stream.


The parties agreed that regardless of which valuation method one started with, there must be discounts applied to account for the BICG tax, the lack of marketability of PHC’s non-traded shares, and the lack of control inherent in decedent’s 23.44% interest.  The most interesting discussion concerned the BICG tax.  The estate’s expert argued that the present full amount of the tax should be deducted from net asset value.  The court disagreed with this approach, because a prospective BICG is not the same as a debt that is due immediately.  A 100% discount illogically treats a potential liability that is susceptible of indefinite postponement the same as if it were an accrued liability due immediately.

The Conclusion

The court finally came to an approach which relied on the calculation of the present value of the cost of paying off the BICG liability in the future. He employed a 20 to 30 year holding period and discount rates ranging from 7% to10.25%, settling finally on a value “comfortably within” the range of values produced by this calculation, at about 15% of net asset value.

Discounts for lack of control and marketability of 7.75% and 32.1% respectively were arrived at through conventional means, producing a value of $6,504,000 for decedent’s interest in PHC.