Case Law Update Reviewed by Momizat on . Insights for Your Practice Four cases are presented in this article that provide valuation, litigation support professionals, and M&A advisors insight regar Insights for Your Practice Four cases are presented in this article that provide valuation, litigation support professionals, and M&A advisors insight regar Rating: 0
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Case Law Update

Insights for Your Practice

Four cases are presented in this article that provide valuation, litigation support professionals, and M&A advisors insight regarding how courts are addressing damages claims, challenges to experts, appraisal action challenges, and claims of fraud and breach of contract in connection with M&A transactions. Although the cases are from Delaware and California, they provide insight for readers to use in their practices.

Estate of Michael Jackson v. Commissioner, (Motion to Exclude Wes Anson Testimony and Expert Report) (September 29, 2017)

Facts: 

This case was tried at a special session beginning on February 6, 2017, and the Jackson Estate moved to strike the testimony of Weston Anson, the expert retained by the Commissioner.  The Commissioner acknowledges that its expert witness, who testified about the value of some of the Estate’s assets, lied during cross-examination.  Specifically, during cross-examination Anson “did not tell the truth when he testified that he did not work on or write a valuation report for the IRS Examination Division in the third-party taxpayer audit.”  What happened was that Mr. Anson lied about working on similar issues for the IRS in a case brought by the Whitney Houston Estate and then admitted to the lie when confronted by further questions and documentary evidence.  The Jackson Estate’s motion asks for an order to strike all of Anson’s testimony, including all of his expert reports, as tainted by perjury.

Issue: Whether to grant the estate motion to strike the expert’s testimony pursuant to Tax Curt Rule 143(g) and the Tucker v. Commissioner, T.C. Memo, 2017-183 decision?

Held: No.  The Tax Court held in part that “[t]o understand Tucker fully, however, we need to look more closely at Tax Court Rule 143(g).  This rule governs expert witness reports and requires, among other things, that an expert’s report contain “the witness’s qualifications, including a list of all publications authored in the previous 10 years” and “a list of all other cases in which, during the previous four years, the witness testified as an expert at trial or by deposition.”  In a part of the Rule that has no counterpart in the Federal Rules of Civil Procedure, however, there is a mandatory sentencing provision for violations: Testimony will be excluded altogether “unless the failure is shown to be due to good cause and unless the failure does not unduly prejudice the opposing party.”  Tax Court Rule 143(g)(2).

Here, respondent also admitted that Anson omitted two items from the curriculum vitae (CV) attached to his expert reports—one case where he provided expert witness testimony at a deposition and one publication he wrote—but asserts that their omission was a mere clerical error.  The Tax Court noted that it “believe[d] him” and noted too that Anson’s CV disclosed 100 cases where he acted as an expert witness in some capacity and more than 100 publications he has written, “so the inadvertent exclusion of two is understandable and, we find, in good faith.  The Jackson Estate makes no assertion that it was unduly prejudiced by their omission.”

The Estate, however, does argue that the Commissioner violated Tax Court Rule 143(g) when it omitted from Mr. Anson’s list of qualifications his work for a company called Domain Assets, LLC (Domain Assets).  The Estate compares this to the expert’s omission of his consulting work in Tucker.  We find this case, however, to be distinguishable.  Anson’s expert report did not mention Domain Assets, but it did discuss his work for CONSOR Intellectual Asset Management, which is a d/b/a for Domain Assets.  The Court explained that “[w]e won’t read Tax Court Rule 143(g) to require the exclusion of Mr. Anson’s testimony without some reason for treating the disclosure of a d/b/a as something other than the equivalent of the disclosure of the underlying business name.”

The Jackson Estate’s next argument was that Anson’s testimony should be excluded because his lies reflect his bias in favor of the Commissioner.  But bias generally goes to the weight of testimony, not its admissibility.  See United States v. Abonce-Barrera, 257 F.3d 959, 965 (9th Cir. 2001); Charter Oak Fire Ins. Co. v. Patterson, 46 F. Supp. 3d 1361, 1374 (N.D. Ga. 2014) (citing Adams v. Lab. Corp. of Am., 760 F.3d 1322, 1332 [11th Cir. 2014]); see also Laureys v. Commissioner, 92 T.C. 101, 129 (1989) (explaining that in valuation cases, an expert may lose his usefulness when he merely becomes an advocate for a party’s position); Estate of Kollsman v. Commissioner, 113 T.C.M. 1172, 1176, 1179 (2017) (deciding to discount the weight of an expert report tainted by a conflict of interest).  Only when an expert report becomes absurd or “so far beyond the realm of usefulness” does bias make an expert report inadmissible.  See Boltar, LLC v. Commissioner, 136 T.C. 326, 335-36 (2011).  The U.S. Tax Court, on this point, stated “that isn’t the case here, so any bias that Anson’s false statements may reflect will be accounted for in the weight given to his testimony.”

A decision on this case may come as early as later in the summer of 2018.  On November 20, 2017, the U.S. Tax Court ordered that Petitioner’s Seriatim Opening Brief is due on February 28, 2018; Respondent’s Seriatim Answering Brief is due May 25, 2018; and Petitioner’s Seriatim Reply Brief is due July 09, 2018.

 

Estate of Whitney Houston v. Commissioner, Docket No. 12098-16

Update:  This case raises questions regarding the value of intellectual property.  On September 1, 2017, the parties submitted a Joint Status Report.  Judge Lauber ordered the parties to submit an additional Joint Status Report on or before December 7, 2018.  QuickRead will provide readers an update of this much anticipated case.

 

Wycoff v. Commissioner, T. C. Memo, 2017-63 (October 17, 2017)

Facts:

The issues here relate to reasonableness of compensation and propriety of deducting a management fee paid by operating companies to a subsidiary.  These are two issues that have been discussed in prior QuickRead articles and were subjects discussed at recent valuation conferences.

Jeffrey Wycoff earned a bachelor of arts degree from Ryder College in 1975.  Mr. Wycoff previously had two California State licenses: a B1 contractor’s license and a C54 tile contractor sublicense.  In 1981 he sold life insurance.  At some point between 1981 and 1985 he managed a Domino’s Pizza franchise.  From 1985 to 1991 he sold cars.  From 1991 to 1995 he managed the Better Bath of L.A. (later named Tile Pros), a construction company.

Merrie Pisanno-Wycoff earned her bachelor of arts degree in public relations from California State University, Chico, in 1980 and her doctor of philosophy degree in comparative religion from the University of Sedona.

In the early 1990s petitioners asked a chemist, Dr. Marantz, to create a chemical formula for a product that would clean tile.  Dr. Marantz developed the formula, and petitioners named the product “Zap”.  Petitioners filed a trademark application for the name “Zap”.  They also attempted to patent the formula but were advised by legal counsel that it was too simple to patent.  They subsequently decided to sell Zap using a direct response marketing model, specifically infomercials.  They had previously used direct response marketing for other products, but the marketing for many of those products was not successful.  In their experience, whether the consumer liked the product was the most important factor in determining success.  They generally expected their products to, at best, have an 18-month life cycle.

Petitioners incorporated Sirius on January 11, 1995.  They initially capitalized Sirius with funds from Tile Pros and personal credit cards.  They were the only members of Sirius’ board of directors and its only officers.  Sirius formulated, manufactured, and marketed household chemical products.  In particular, Sirius sold Zap directly to consumers using infomercials and to various retailers, including Wal-Mart, Costco, Bed Bath & Beyond, Linens ‘N Things, Walgreens, Target, Kroger, BJ’s, Sam’s Club, and several grocery stores in Salt Lake City, Utah.  Sirius also sold products that it developed, which were unrelated to Zap.  Sirius used direct response marketing, specifically “short form” television advertisements (approximately two minutes long), to market its products.

Petitioners incorporated Restore 4 on January 30, 1997.  They initially capitalized Restore 4 with funds from Sirius.  Restore 4 sold the same products as Sirius.  They incorporated Restore 4 because Sirius could not market its products using the various direct response companies, such as the Home Shopping Network and QVC.  The operating companies operated out of the same facility, and they shared a common labor force.

Restore 4 sold Zap under the name “Restore 4” (Restore 4 product).  Restore 4 owned the rights to the Restore 4 product name.  Restore 4 sold the Restore 4 product directly to consumers and through Home Depot.  Restore 4 marketed its products via “long form” television advertisements (approximately 30 minutes long) and on QVC.

On January 1, 2001, Sirius and Restore 4 elected to be subchapter S corporations, and they were subchapter S corporations at all times during 2001–03.  Petitioners were at all relevant times the sole officers and board members of the operating companies.  After the years at issue, Restore 4 merged with Sirius.

Mr. Wycoff was primarily responsible for all operations of the operating companies.  His principal duties included: negotiating contracts, overseeing advertising purchases and content, managing the operating companies’ finances, selling the products to retailers, and overseeing other employees’ work.  In short, Mr. Wycoff performed all managerial tasks for the operating companies.  He also referred to himself as the national sales manager and product spokesman because of his duties in selling the products and overseeing advertisements.

On August 18, 2000, Robert Boespflug of Marshall & Stevens ESOP Capital Strategies Group (Marshall & Stevens) gave a presentation to Barry Marlin, petitioners’ attorney at the time.  The presentation outlined how the operating companies and petitioners could purportedly reduce their income tax liabilities by way of a series of transactions (collectively, Marshall & Stevens transaction) using a subchapter S corporation, a deferred compensation plan, and an ESOP.  Petitioners did not attend this presentation.  During the presentation, Mr. Boespflug’s PowerPoint slides represented that the objectives of the Marshall & Stevens transaction were to: (1) “reduce corporate income tax liability”; (2) “defer income/reduce personal income tax liability of owners”; (3) “get equity ownership/special benefits in the hands of key people”; (4) “provide broad-based incentives to rank and file”; and (5) “create tax advantaged structure in preparation of future asset sale”.  Marshall & Stevens’ PowerPoint slides also represented that the proposed steps of the transaction were as follows:

Step One:  Form a new subchapter S corporation (SMC);

Step Two:  Create deferred compensation benefits for key employees of operating entities;

Step Three:  Adopt ESOP/401(k) plan;

Step Four:  Sell new SMC stock to ESOP/401(k) for $1000 promissory note;

Step Five:  Pay management fee from each operating entity to SMC.  Adopt management contracts;

Step Six:  Manage the new assets in the SMC; fund the deferred compensation benefits and ESOP/401(k) plans.

After the presentation, Mr. Marlin and Roland Attenborough, an attorney with Reish and Luftman hired by Marshall and Stevens to develop the portion of the Marshall and Stevens transaction with respect to the ESOP, met with Mr. Wycoff to discuss the transaction.  After the meeting, Mr. Wycoff instructed Mr. Marlin to review the transaction.  Mr. Marlin’s review consisted solely of discussions with two accounting firms.  Mr. Marlin did not provide petitioners with a written legal opinion.  On the basis of Mr. Marlin’s limited review, petitioners decided to implement the transaction, and on August 28, 2000, petitioners, on behalf of Sirius, executed a contract with Marshall and Stevens to implement the Marshall and Stevens transaction for a fee of $50,000.  The contract contained the following disclaimer:

The parties acknowledge that the S management corporation and KSOP strategy is an aggressive tax planning program and that the client has been advised of this fact, has been advised to and has had the opportunity to seek independent legal and tax counsel with respect thereto, and does hereby accept the risk that the IRS may challenge and/or disqualify any aspect of the program.

On October 19, 2000, Mr. Attenborough incorporated Albion Management, Inc. (Albion), and appointed petitioners as Albion’s directors.  Albion then designated Mr. Wycoff as its president, Dr. Pisanno-Wycoff as its secretary, and Janie Emaus as its chief financial officer.  Petitioners have held their positions with Albion ever since.  Albion then issued 10,000 shares of stock and sold 2,500 of those shares to Mr. Wycoff for $250 and 7,500 of those shares to Dr. Pisanno Wycoff for $750.  Albion also elected to be taxed as a subchapter S corporation.

The parties also formed a Rabbi Trust that capped contribution to 80% of the management fees paid to Albion.

A key issue in the case involves the compensation.  On October 30, 2000, the operating companies entered into management agreements with Albion.  The agreements did not specify the particular services that Albion employees would provide.  Under these agreements the operating companies agreed to purchase management services from Albion for 20% of their respective gross receipts.

To determine the management fee, Mr. Marlin, Mr. Attenborough, Mr. Boespflug, and Mr. Wycoff held a meeting where Mr. Wycoff described the services that Albion would provide to the operating companies.  Petitioners did not hire an adviser familiar with petitioners’ business model to assist with determining the amount of the management fee or to advise with respect to reasonable compensation.  Mr. Marlin, Mr. Attenborough, Mr. Boespflug, and Mr. Wycoff had no experience determining reasonable compensation.  On the basis of Mr. Wycoff’s information, however, Mr. Marlin, Mr. Attenborough, and Mr. Boespflug calculated that an appropriate management fee was 20% of the operating companies’ gross receipts.

Revenues declined and by 2003 the ESOP portion of the KSOP was terminated.

Respondent issued a notice of deficiency to petitioners on July 15, 2009.  Respondent disallowed the following deductions for management fees that the operating companies reported paying to Albion:

Company                     2001                2002                2003

Sirius                           $8,413,486      $1,214,003      $35,069

Restore 4                     $2,536,815      $321,564         $226,317

Petitioners timely petitioned this Court.

Issue: (1) Whether Mr. Wycoff’s compensation from Albion was reasonable and (2) whether the management fees that Sirius, Restore 4, Safety Tubs, and Soapworks paid to Albion were arm’s-length fees within the meaning of section 482.

Held: Decision for Respondent.  With regard to the Notice of Deficiency, Petitioners contended that the notice of deficiency should no longer be presumed correct.  Petitioners contended that the expert reports by Mr. Dupler and Mr. Burns were credible evidence or that respondent had through his own concessions and expert reports established that his determination in the notice of deficiency was erroneous because respondent’s primary position entitled petitioners to deduct some management fees, while the notice of deficiency disallowed the reduction for all management fees.

Respondent advances four arguments as to why petitioners’ claimed deductions for management fees that the operating companies paid to Albion under the compensation agreement should be reduced.  Respondent’s primary argument was that the operating companies did not substantiate the management fees beyond the amounts that Albion reported paying for wages and for payroll taxes.

Alternatively respondent contended that petitioners are entitled to deduct only the portions of the management fees that are considered reasonable compensation.  See sec. 162(a)(1).  Respondent also argued that the management fees should be reallocated under section 482 or, to the extent the management fees constitute unreasonable compensation, the transaction should be recharacterized as distributions to petitioners.  Petitioners contended that the inquiries under section 162 and section 482 are substantially the same and that under either Code provision they are entitled to deduct the management fees.

On brief, respondent conceded that Albion is not a sham entity and should not be disregarded.  Respondent asks us to determine Mr. Wycoff’s reasonable compensation under section 162.  However, the management fees that the operating companies paid to Albion were before the Court and not Mr. Wycoff’s reasonable compensation.  Because respondent conceded that Albion was not a sham entity, we will focus our analysis on section 482 and the proper arm’s-length amounts of the management fees.  Although a section 482 analysis may required the U.S. Tax Court to determine Albion’s costs, including Mr. Wycoff’s reasonable compensation.  The U.S. Tax Court observed that Albion is entitled to charge the operating companies an arm’s-length price for its services that may be higher than the salaries Albion paid.

The parties disputed the best method for determining an arm’s-length result.  Petitioners contended that the Court should accept Mr. Burns’ analysis, which applies four different methods that all reach a result of 15% to 16% of the operating companies’ revenues as a management fee.  Respondent contended that the CPM that Mr. Nunes applied is best method for reaching an arm’s-length result because data of comparable transactions was unavailable and Mr. Nunes’ determination ensured that Albion would receive the same profit or loss as companies providing similar services.  Accordingly, the Court noted that it must determine the most reliable method for calculating an arm’s-length management fee and did so by analyzing the expert reports.

Mr. Burns’ first method was to look at comparable companies and compare the salaries of the CEOs.  He selected 16 pharmaceutical companies as comparable corporations.  The Court wrote “we disagree that pharmaceutical companies are comparable to the operating companies … There is no evidence to support the claim that pharmaceutical companies are comparable to the operating companies other than Mr. Burns’ opinion, and we do not find that opinion to be credible.  Mr. Burns did not select any company that manufactures cleaning products, and he included only two companies that distributed cleaning products as comparable to the operating companies.  Accordingly, we find this method unreliable.”

As for the remaining part of the analysis, the Court held:

Mr. Burns’ next method for determining the management fee was to calculate the fee as if Albion were a consulting firm.  He considered the hourly rate of CEO compensation of six consulting firms, and after calculating the number of hours Mr. Wycoff worked, Mr. Burns determined that Albion was entitled to 15.9% of net sales for a management fee.  However, Mr. Burns’ report is devoid of any analysis of how these six consulting companies compare to Albion and the services it provided.  Additionally, Mr. Wycoff did not maintain time logs of the work he performed and for which entity.  Other than his testimony, which we find exaggerated and not credible, there is no evidence in the record to support Mr. Wycoff’s hours.

Mr. Burns’ third method for determining the management fee was to review an executive compensation survey.  Although the survey includes companies that considered themselves cleaning, polishing, and sanitary preparations companies with revenue of $22.5 million, Mr. Burns’ report does not identify which companies he included.  Mr. Burns’ fourth method for calculating the management fee was an independent investor test, which included companies from the same company classification as the executive survey.  He determined that these companies earned a median return on tangible net worth ranged from 8.3% to 14.4%.  For the operating companies to earn a similar return, Mr. Burns’ determined that a management fee of 14% was reasonable.  We find both Mr. Burns’ executive survey compensation method and independent investor method unreliable.  Under both methods, Mr. Burns did not identify the companies he used for these tests.  We note that respondent’s expert also used data from various company classifications and found that some of the companies in particular classifications were not comparable to the operating companies.

 

Gardner v. Commissioner, T.C. Memo, 2017-165 (August 24, 2017)

Facts:

Petitioner, an avid big-game hunter, took this advice to heart.  In 2006 he opted to downsize his trophy collection by donating to an ecological foundation many of his less desirable hunting specimens.  Relying on an appraisal, he claimed under section 170 a charitable contribution deduction of $1,425,900.  Because that amount exceeded the maximum allowable as a deduction for 2006, see sec. 170(d)(1)(A), he later carried the balance of the deduction to 2007 and 2008.

The Internal Revenue Service (IRS or respondent) selected petitioner’s 2006–2008 returns for examination.  It determined that the value of the hunting specimens he had contributed was, at most, $163,045.  The IRS accordingly determined deficiencies of $137,647 for 2007 and $274,228 for 2008.

None of these 177 specimens was of “record book” quality.  Certain hunting organizations maintain record books of big-game kills using proprietary scoring systems.  A specimen may qualify for listing in record books on the basis of the animal’s size or other features, or the animal’s unusual provenance.  The two most prominent record books are compiled by the Safari Club International (SCI) and the Boone and Crockett Club, respectively.  At the time petitioner selected the 177 specimens for donation to DEF, he appears to have had three kills ranked in the SCI record book.  But he did not select any specimen from those kills for contribution to DEF.

Petitioner engaged Dr. Fullington to appraise the 177 specimens, agreeing to pay $125 per specimen for a total of $22,125.  Dr. Fullington’s report dated April 19, 2006, used the “replacement cost” method to determine the FMV of these items.  He estimated what it would cost to replace each item with a specimen of like quality by tallying up the expected out-of-pocket expenses for traveling to the hunting site, being on safari for the requisite number of days, killing the animal, removing and preserving the given body part, shipping it back to the United States, and defraying the taxidermy costs of stuffing, mounting, or otherwise preparing the item for display.  He considered such factors as “the prorated unit cost, shipping fees, taxidermy fees, and permit/trophy fees.”  At the time he drafted his appraisal, Dr. Fullington knew that petitioner intended to claim a charitable contribution deduction for the 177 items.

Dr. Fullington’s report, which was attached to petitioner’s 2006 Federal income tax return, contains a separate sheet for each of the 177 specimens.  Each sheet includes a photograph of the specimen.  Below the photograph is a summary that lists the State or foreign country in which the animal was killed (if known) and provides an estimate of the specimen’s quality (invariably described as “excellent”).  The summary included no other information about the specimen’s “provenance.”

At the bottom of each sheet was Dr. Fullington’s appraisal of the specimen’s value.  Using his “replacement cost” approach, he valued the tanned skin of a Central Asian sheep at $75,600 on the theory that it would cost that much to bag another similar sheep.  On the same theory he valued a European mount of the horns of a desert bighorn sheep at $56,800.  According to Dr. Fullington, the FMV of the 177 specimens was $1,425,900.

Dr. Fullington also arranged to have the specimens delivered to DEF, apparently during March 2006.  In a letter dated April 26, 2006, DEF thanked petitioner for his “contribution of 177 trophy animals.”  (Petitioner did not in fact donate 177 trophy animals; by his admission, the 177 specimens would have come from far – 8 [*8] fewer than 177 animals.)  Petitioner has never visited DEF and does not know whether DEF ever exhibited any of the items.  Petitioner did not call any witness from DEF to testify.  The evidence established that the 177 specimens “had been subsequently dispersed”; DEF apparently put the donated specimens in storage and later sold them or gave them away.

Dr. Fullington did not testify at trial.  Because the 177 donated specimens had been dispersed to unknown locations and were no longer accessible, none of the experts who testified at trial was able to conduct a physical inspection to assess the specimens’ quality.  The experts’ quality assessments thus had to be based on Dr. Fullington’s photographs, which were small in size and of poor resolution.

Issue: Whether the gifts should be valued based on comparable sales or replacement cost, for which petitioner advocated?

Held: Decision for respondent.  Respondent offered and we recognized Forrest Ketner as an expert in taxidermy and the appraisal of taxidermy items.  He has been involved with the taxidermy trade for more than 30 years.  He owns and operates a business that stuffs and mounts birds, fish, and small and large mammals for display or study.  He is a licensed taxidermist, has taught taxidermy classes, and has authored books on the subject.

Since 2013 Mr. Ketner has been a certified appraiser specializing in taxidermy items.  He has conducted at least 20 appraisals for insurance purposes and for valuing trophy mount donations.  He has been retained to conduct taxidermy appraisals by museums, State and local governments, and the IRS.  He is the only expert that we recognized at trial as an expert in taxidermy and the appraisal of taxidermy items.

Mr. Ketner prepared an appraisal report that used the Market Approach to determine the FMV of the 177 animal specimens.  On the assumption that each specimen was in excellent condition, as Dr. Fullington had asserted, Mr. Ketner determined the aggregate FMV of the 177 specimens to be $41,140.  Examining the photographs, however, Mr. Ketner observed what he believed to be defects in many items.  Taking these defects into account, he reduced his appraised value to $34,240.

Mr. Ketner’s testimony, which we found credible and convincing, characterized the donated specimens as consisting mostly of “remnants and scraps” of a trophy collection.  “It’s what’s left over when you’re one mounting an animal,” or what is “not needed for what’s hanging on the wall.”  His report noted that the specimens included 29 partial skins or backskins, which are portions of the hide left over after a shoulder mount.  Many of the skulls, tails, and hooves were likewise left-over items.  He appraised 19 tanned skins at a low value, noting their advanced age at the time of donation, which likely rendered them unable to hold stitches for purposes of mounting.  He noted that 10 of the antlers compared unfavorably in size with most antler trophies available for purchase on the open market.  He ascribed a low value to two full American bear skins because of visible patches of missing fur.

To derive comparables for the 177 donated specimens, Mr. Ketner consulted market data from bricks-and-mortar auction houses, online auction sites (such as eBay), and other websites specializing in hunting specimens similar to those involved here.  He opined that there “has always been a market” for such items.

Historically, “[t]axidermists would buy, sell, swap, or trade these items as they were needed…to complete projects, or to mount for their own collections.”  More recently, with the proliferation of online auction sites, buyers and sellers include the general public rather than just the taxidermist community.  The market for such items now is “wide open,” with few if any barriers to entry.  For each of the 177 specimens, Mr. Ketner sought to identify the best available comparables on the basis of size and quality.  For some items he found as many as 10 or 20 comparables, in which event, he selected one in the middle.  For some items he found only two comparables; in that case he generally took the average.  All in all, he found 504 comparables for the 177 specimens.  He acknowledged that all but four of his comparables were from years after 2006, but credibly testified that they were nevertheless similar because “[t]he market hasn’t changed much in the last 10 years.”  In his rebuttal report he made adjustments to account for differences in value characteristics between these comparables and the 177 donated specimens to arrive at his final FMV determination.

Petitioner’s first two experts were Anibal Rodriguez and Victor Wiener.  Neither assigned a dollar value to the 177 specimens; rather, each sought only to defend “replacement cost” as the proper valuation methodology.  The thrust of their testimony was that Mr. Ketner’s Market Approach could not capture the FMV of the 177 specimens because they were museum-quality pieces uniquely valuable for research.  Neither Mr. Rodriguez nor Mr. Wiener provided any factual support for this theory, and we found their testimony wholly unreliable.

Mr. Rodriguez retired after 37 years as a technical consultant in the anthropology division of the American Museum of Natural History in New York.  He is neither an appraiser nor a taxidermist.  He has never hunted animals and has never bought or sold items like those at issue here.  We recognized him as an expert museum technician familiar with the manner of assembling museum collections.  Mr. Rodriguez testified that the most desirable hunting specimens for a museum collection would be “fully documented specimens that were not compromised by chemical treatments and had the proper licenses and known provenance.”  Given the demands of anthropological research, Mr. Rodriguez stated that a reputable museum would normally accept donations of animal specimens only if they were accompanied by detailed provenance information, including the precise location where the animal was hunted, the nature of that habitat, the method by which the animal was hunted, and the health of the animal at the time it was taken.  “Museums curate these materials,” he stated, “and make them available to researchers as needed.”

Mr. Rodriguez opined that the specimens petitioner donated to DEF would be “incredibly valuable to museum collections.”  That was assertedly so because of their “high quality and known points of origin and other information associated with them.”  We found this assertion devoid of any factual foundation.  On cross-examination, Mr. Rodriguez admitted that the Fullington report was his sole source for provenance information about the 177 specimens.  That report does not establish the “high quality” of the specimens; the photographs often show the contrary.  That report is likewise weak on “provenance”:  It lists merely the State or country of the kill followed by the word “unknown.”  It includes no details regarding the geographical coordinates, climate, or vegetation of the place where the animal was killed, nor any indication as to the health of the animal.  It includes no “other information associated with” the specimens.  It has no information as to whether the animals were hunted pursuant to “proper licenses,” or whether records or certificates of authenticity exist for any of the specimens.  And it makes clear that many of the specimens (including tanned skins) had been subject to chemicals as part of the taxidermy process.

In short, Mr. Rodriguez assumed what he had undertaken to prove.  He testified as to what features museum-quality hunting specimens should display.  He then asserted, with no factual basis whatsoever, that petitioner’s 177 specimens displayed those features.

Mr. Weiner’s report was also given little weight.  The third expert’s report, Atcheson, a tour operator, was likewise given no weight.  With respect to Atcheson’s formula, the Tax Court opined that “for determining ‘replacement cost’” unacceptable because it took no account of the personal pleasure petitioner derived from his safaris.  (“[T]he recreational big game hunter receives a quid pro quo, the pleasure of pursuing his hobby, so all the costs of the hunting trip cannot be attributed to the animal that is killed.”)

In conclusion, the U.S. Tax Court opined here that “[r]eplacement cost may be a relevant measure of value “where the property is unique, the market is limited, and there is no evidence of comparable sales.”  Robson, 73 T.C.M. (CCH) at 2576 (citing Estate of Palmer v. Commissioner, 839 F.2d 420, 424 (8th Cir. 1988), rev’g 86 T.C. 66 (1986)).  For us to eschew comparable sales in favor of replacement cost, the taxpayer must establish, not only the absence of an active market for comparable items, but also a “probative correlation” between replacement cost and FMV.  Rainier Cos. v. Commissioner, T.C. Memo. 1977-351, 36 T.C.M. (CCH) 1404, 1405-1406 (citing Rev. Proc. 66-49, 1966-2 C.B. 1257); see also Crocker v. Commissioner, T.C. Memo. 1998-204, 75 T.C.M. (CCH) 2414, 2442.

Mr. Ketner’s written and oral testimony persuaded us that the 177 donated items were neither world-class trophies nor museum-quality research specimens, but were mostly “remnants, leftovers, and scraps” of the collection displayed in petitioner’s trophy room.  Petitioner’s own testimony indicated that he wished to “downsize” his collection by deaccessioning unwanted items.  Although his experts asserted that all specimens were of “excellent” quality, they offered no factual backing for that assertion and admitted that Dr. Fullington’s photographs often indicated the opposite.  And although petitioner had participated in several record hunts, not a single specimen that he selected for donation to DEF was of record-book quality.

In short, the 177 specimens were clearly commodities, not collectibles.  For commodities such as these, the determination of FMV will generally be based on market prices for similar items.

 

Carlos Omes, as Personal Representative of the Estate of Alejandro Olmes v. Ultra Enterprises, Inc., FLA No. 3D16-338 Lower Tribunal No. 12-40288 (August 23, 2017)

Facts:

This is an appraisal action case.  The plaintiff passed away on the eve of trial and the action was prosecuted by the personal representative of the estate.

Alex Omes and Russell Faibisch founded Ultra Enterprises, Inc. (UEI) for the purpose of holding the intellectual property of the Ultra Music Festival (Ultra), founded in 2002.  UEI owns the trademarks and licenses associated with Ultra.  UEI used other corporate entities for producing the music festival, licensing, and promotion.  Festival Productions and Ticket Junkie were two of these entities.  UEI held no stock in either entity but Omes was a shareholder in both.  Omes and Russell were the only two partners of UEI until 2005, when they brought in Russell’s brother, Charles Faibisch, who also brought with him a much needed cash infusion.  The three signed a Memorandum of Understanding (MOU) in 2005.  That document joined Charles as a shareholder, gave him 300 shares, set forth the general duties of each person, and stated an “intent” that Omes and Russell be co-managers.  Omes served as President and Russell as chairman of the Board of Directors.

As Ultra became more successful, the record indicates that Omes began using his Ultra contacts and influence to set up side deals for himself.  This situation progressed to the point where Russell became concerned that Omes was diminishing the value and uniqueness of Ultra by using his Ultra connections and reputation to compete with Ultra on the side.  In August 2010, the UEI Board of Directors removed Omes as President, citing self-dealing at UEI’s expense and failure to communicate and share equally in corporate decision-making.  Russell became President.  Omes then became a minority shareholder at 30%, without office.

On July 11, 2012, because of Omes’s continuing actions, the Board of Directors, by unanimous written consent, recommended that the shareholders amend the articles of incorporation to prohibit self-dealing and competition with UEI by UEI shareholders, and to provide UEI with the right to redeem the shares of, inter alia, a shareholder who has competed with UEI.  Also on July 11, 2012, those shareholders owning a majority of the common stock of UEI (70%) accepted the recommendation of the Board of Directors and amended the articles to so provide.  The shareholders did this by a written consent.  Following the amendment, on the same day, the directors of UEI voted unanimously to redeem Omes’s shares based on his self-dealing and competing personal businesses.  Omes was notified that same day of the Board’s actions and of his right to appraisal to determine the value of his shares.  The form provided to Omes explained that in order to exercise his appraisal rights, he needed to return the documents, an Exercise of Appraisal Rights form and Stock Power form, on or before August 20, 2012.  On August 20, 2012, Omes served Ultra with his Exercise of Appraisal Rights form, which stated that Omes exercised his appraisal rights and tendered his stock but did not accept UEI’s valuation of $1,200 per share.  Omes instead offered a counter-valuation of $111,111.11 per share.  UEI then ceased doing business with Ticket Junkie and Festival Productions and contracted with entities having no connection with Omes.  Omes then filed the underlying suit against UEI, and Russell and Charles Faibisch, and Adam Russakoff as individuals, invoking the appraisal process while at the same instance objecting to it.

Issue: Whether the trial court erred accepting the $1,200/share appraisal value?  Not dissolving the corporation?  Not placing the estate’s PR in the Board and requiring that a vote be taken?

Held: The appellate court affirmed the trial court.  The trial court, after taking evidence and hearing argument of the parties, concluded that: 1) the appraisal process was properly invoked, and found in favor of UEI; 2) dissolution was not available as a remedy where there was no deadlock between directors; 3) the appraisal value of Omes’s stock by Omes’s appraiser was rejected by the trial court as without realistic basis, and the appraisal of Omes’s stock by UEI’s appraiser was adopted by the trial court as supported by competent substantial evidence.

As for the procedures used to amend the articles of incorporation, the appellate court observed that section 607.0704, Florida Statutes (2016), provides that, unless otherwise provided in the articles of incorporation, a majority of the shareholders of a corporation can take action without a meeting, without prior notice, and without a vote.  The only requirement is that notice must be given to shareholders who have not consented in writing, or who were not entitled to vote, within ten days.  Here, the Board supplied Omes with the notice the same day the action occurred.

Finally, the Estate PR’s claims of corporate error are barred; by electing to participate in the appraisal process and returning the duly signed Exercise of Appraisal Rights and Stock Power forms, the trial court properly found that Omes lost all rights as a shareholder pursuant to section 607.1323(1), and instead became entitled to payment of fair value for the shares.  This action was deemed “dispositive of the appeal.”

Roberto H Castro, JD, MST, MBA, CVA, CPVA, CMEA, BCMHV, is an appraiser of closely held businesses, machinery and equipment and Managing Member of Central Washington Appraisal, Economics & Forensics, LLC. Mr. Castro is also an attorney with a focus on business and succession planning with offices in Wenatchee and Chelan, WA. In addition, he is Technical Editor of QuickRead and writes case law columns for The Value Examiner.

Mr. Castro can be contacted at (509) 679-3668 or by e-mail to either rcastro@cwa-appraisal.com or rcastro@rcastrolaw.com.

The National Association of Certified Valuators and Analysts (NACVA) supports the users of business and intangible asset valuation services and financial forensic services, including damages determinations of all kinds and fraud detection and prevention, by training and certifying financial professionals in these disciplines.

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