"Can I use my gift tax valuation for my marital dissolution?"

 This is a short post covering a common question: Can I use the gift tax valuation for my divorce? 

The long and short of this is no, you cannot. Although there are instances where a valuation may be used for multiple purposes, there are other situations that do not cross. 

This question came from a recent project involving a small corporation, owned by the father, that was operated by a father and son. It had a long operating history and was quite successful - a good reputation, solid profits. 

Their estate planning attorney retained me to value the stock for purposes of a gift or sale to the son. During the course of my appraisal, I was apprised of a divorce proceeding between the father and his spouse. When I told the son that my appraisal could not be used for the marital estate settlement, and that I would state this in my report, he was perplexed. 

Why exactly would the purpose of the appraisal change the value? Especially when you use the same valuation approaches in either case? 

Indeed, the value is less relevant than the process by which the value is derived. In a litigated setting, there is a higher burden of proof on the analyst. In a tax setting the analyst can feel comfortable relying on representations by management in many situations. This includes accepting as correct financial information, estimates of conditions and values for fixed assets, and representations as to personal expenses in the business. 

In a litigated setting, such as family law, these “short-cuts” are not afforded the analyst. A forensic style accounting analysis is almost mandatory in virtually every marital dissolution valuation. The analyst may not simply “rely” on the representations made by a party, but must investigate in depth herself. If this is not done, the analyst’s conclusions will be easily undermined. One need only imagine being cross-examined before a judge to see the pit-falls in making too many assumptions. 

Another key distinction to note is the applicability of valuation discounts. In California, discounts are generally not applied in marital dissolution settings regardless of the size of the interest, its control prerogatives, and its marketability. (Although there was one case that applied discounts, this case was unpublished, and therefore cannot be relied upon, and is an anomaly to boot.[1]) 

A good rule of thumb is to consider receptivity of the audience to your conclusions. If someone will actively seek to undermine your conclusions, you must support your conclusions to the best of your ability. This is not to say you should be lax in a gift or estate tax valuation, but that you should be hyper vigilant when litigation is involved.   


[1] In re Marriage of Harvey (2021) 2021 Cal. App. Unpub. LEXIS 7867; 2021 WL 5934472.

Comments

Post a Comment

Popular posts from this blog

Equity Value, MVIC, and Enterprise Value

Image
What do they mean and how they are measured? Much confusion can be avoided by clearly defining the level of value utilized in a business appraisal. The terms equity value, enterprise value (EV) and market value of invested capital (MVIC) are often bantered with no clear delineation between them. This article delineates between these levels of value and discusses the ways in which they can be measured. The importance of understand these terms, and which level of value has been measured in an appraisal, is important to comply with statutory demands and to avoid the double-counting or mis-counting of assets/liabilities in a business transaction.  Overview and Definitions Each level of value has its own specific application. Enterprise value tends to be the focus in the sale of a business. Equity value tends to be the focus in the sale/transfer of a fractional interest within a business. Market value of invested capital is typically used as a starting point to derive an equity level of...
Read more

The Valuation of Promissory Notes

Image
When it comes to promissory notes, the IRS treads heavy but carries a small stick for want of contradicting itself. In the income tax sphere, where the deduction to income resulting from the forgiveness of a loan balance to a not-for-profit entity is at issue, the IRS wants a low value. In the estate and gift tax sphere, the IRS wants a high value.  26 CRF § 20.2031-4 states the following: “The fair market value of notes, secured or unsecured, is presumed to be the amount of unpaid principal, plus interest accrued to the date of death, unless the executor establishes that the value is lower or that the notes are worthless.” In other words, the burden is on you to show that the note’s face value as of the valuation date is not reflective of its fair market value. For estate and gift tax, the primary issue is whether it is a bona fide note or a gift masquerading as a note. An unsecured promissory note at the AFR with interest only payments issued to a son will look suspicious to the ...
Read more

Section 16701 Valuations

  Section 16701 of the California Corporations Code is a relatively obscure fair value standard that applies to general partnerships. Whereas Section 2000 is a well know standard with some case law, this section remains in the shadows, as general partnerships are less common and there exists very little case law to provide guidance on this standard. I previously published a short article on Section 2000, which can be found here . Given the general understanding of Section 2000 that exists amongst valuation professionals, this article serves essentially as a compare and contrast between the two. Section 16701 provides a statutory fair value standard for general partnerships. The statute reads: The buyout price of a dissociated partner's interest is the amount that would have been distributable to the dissociating partner under subdivision (b) of Section 16807 if, on the date of dissociation, the assets of the partnership were sold at a price equal to the greater of the liquidation v...
Read more