Wednesday, December 10, 2014
The U.S. Court of Appeals for the Ninth Circuit reversed and remanded the Tax Court’s determination of a partnership’s value as a going concern in Estate of Natalie B. Giustina v. Commissioner, No. 12-71747 (Dec. 5, 2014). While this decision is not published, it is useful to illustrate how the Ninth Circuit reviews the Tax Court’s valuation and methodology, which, in this case, was found to be “in clear error.”
The Tax Court held that there was a 25 percent likelihood that the partnership would be liquidated. It then applied a 25 percent weight to an asset-based valuation and a 75 percent weight to the partnership as a going concern. Furthermore, the Tax Court concluded an owner of a limited liability interest in the partnership could not unilaterally force liquidation, but could form a two-thirds voting bloc. The court assigned a 25 percent probability that this voting bloc could occur. The Ninth Circuit found this conclusion to contradict the evidence in the record.
The Ninth Circuit declared there was clear error in the Tax Court’s inability to amply explain its basis for cutting in half the estate’s company-specific risk premium. It criticized the Tax Court for failing to consider the wealth a potential buyer would need to sufficiently assuage risk through diversification.
See Dawn S. Markowitz, Tax Court’s Valuation is “Clear Error”, Wealth Management, Dec. 9, 2014.
Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.