Valuing closely held businesses. (Estates, Trusts & Gifts).

The Ninth Circuit recently decided two cases dealing with the fair market value (FMV) of two separate closely held businesses; see Estate of Simplot and Estate of Mitchell, 5/14/01. The court stressed that the Tax Court's interpretation of minority shareholder motivations was not on point in determining value. The appellate court also declared once again that splitting the experts' opinions in half equated to incomplete conclusions of law.

In Simplot, Richard Simplot owned minority interests in both voting and nonvoting stock in his family-owned business. In finding that the voting shares had the potential for more influence and control than the nonvoting shares, the Tax Court valued the voting stock at $215,539 per share, and $3,417 per share for the nonvoting. The estate had valued both classes of stock at $2,650 per share. The Ninth Circuit found the Tax Court's speculation as to the potential influence and control of the voting shares to be incorrect, and reprimanded the Tax Court for creating imaginary scenarios as to the prospective buyer's identity.

The Ninth Circuit dealt with a similar issue when valuing Paul Mitchell's interest in his successful haircare products company. The Tax Court had straddled the range of values created by the taxpayer's and the government's experts, stating that its determination of value was within the range of the expert's testimony. The Ninth Circuit rejected this decision.

Earlier this year, in Morrissey (3/15/01), the Ninth Circuit rebuked the lower court when it ignored the market approach of valuation. Finding that there were, in fact, separate sales of stock close to the valuation date and that those sales were arm's--length transactions, the Tax Court ignored the evidence without good reason.

Conclusion

The Ninth Circuit will uphold the "willing buyer/willing seller" standard in defining FMV in estate tax cases. Valuation experts and attorneys alike need to ensure that valuation conclusions are supported with facts, and not some speculation of perceived influence and control. Actual transactions speak louder than hypothetical estimates, and, as is stated in Rev. Rul. 59-60, should be accorded more weight. Finally, the expert needs to be able to teach the trial court. Often in Tax Court, the expert's testimony is significantly truncated; therefore, expert opinions and their reports need to stand on their own.

FROM ROBERT A. MATHERS, J.D., CPA, ABV, CLIFTON GUNDERSON LLP, OSHKOSH, WI (NOT ASSOCIATED WITH AFAI)