Case Law Update: Real Estate Appraisal and Government Contracts

A closer look at real estate appraisal and government contracts

A wife sells her portion of interest in a law firm in an arm’s length transaction and the timing and circumstances are questioned with regard to marital property. Adhering to cost accounting standards within government contracts and real estate valuation issues are reviewed in the latest Case Law Update.

Government Contracts

2013 U.S. App. LEXIS 9389
May 9, 2013
Judge Lourie
United States Court of Appeals for the Federal Circuit

Appellant, a government contractor, challenged the determination of appellee U.S. Secretary of Defense that the contractor failed to comply with Cost Accounting Standards (CAS) 412 based upon the contractor’s use of a partial-year asset valuation in computing its retirement plan forward pricing rates. The contractor appealed the decision of the Armed Services Board of Contract Appeals, which upheld the Secretary’s determination.  The contractor contended that its use of a partial-year asset valuation and subsequent blended rate in its retirement plan forward pricing rate were not actuarial assumptions and did not violate CAS 412. 

The appellate court held that both the midyear market value and the subsequent blended rate were actuarial assumptions as estimates of future conditions affecting pension cost, and that the contractor’s use of midyear market values and the subsequent blended rate for the base year thus violated CAS 412. 

The contractor’s decision to use a day other than the first day of the year, combined with blending that value with a pro-rated growth rate, effectively substituted a new rate and base date in place of the original growth rate from the first day of the year, and the use of the midyear value and the resulting blended rate did not reflect long-term trends to avoid distortions caused by short-term fluctuations.  The decision upholding the secretary’s determination of non-compliance was affirmed. 

In re Kendall
2013 Bankr. LEXIS 1890
May 7, 2013
Judge Cornish
United States Bankruptcy Appellate Panel for the Tenth Circuit

Appellants, transferees of property from a debtor, sought review of an order from the United States Bankruptcy Court for the District of Colorado, which avoided transfers in favor of appellee Chapter 7 trustee pursuant to 11 U.S.C.S. § 548 and the Colorado Uniform Fraudulent Transfers Act (CUFTA), Colo. Rev. Stat. §§ 38-8-101 to 112 (2012).  The court  authorized the Trustee to pursue recovery of the assets under 11 U.S.C.S. § 550(d). 

Transferees argued that the bankruptcy court erred in determining the value of the debtor’s business based on a liquidation premise rather than “going concern” basis and also using the liquidation value to conclude the debtor was insolvent at the time he made the transfers. The panel disagreed, finding that the transferees misunderstood the significance of the debtor’s alleged insolvency.

Even assuming that the business should have been valued on a going concern premise and that it would result in a determination that debtor was solvent, insolvency was only one of the badges of fraud considered in analyzing whether a transfer was actually fraudulent under 11 U.S.C.S. § 548(a)(1)(A). Further, insolvency was only one type of “fragile financial condition” that satisfied § 548(a)(1)(B). As the transferees did not refute the other badges of fraud, even if the court erroneously found that debtor was insolvent, the other badges of fraud sufficiently supported the court’s conclusion that the transfers were actually fraudulent. 

With respect to § 548(a)(1)(B), even without a finding of insolvency, the court found that the trustee established the existence of the alternative fraudulent financial conditions.  The bankruptcy court’s order was affirmed. 

Troyer v. Troyer
2013 Ind. App. LEXIS 197
April 30, 2013
Judge Crone
Court of Appeals of Indiana

Wife, a law practitioner, sold her interest in a law firm to a fellow partner  in an arm’s-length transaction.  The transaction occurred, almost a year before the husband placed a value on the firm for purposes of inclusion in marital assets. The court found that wife’s sale of her interest in the firm, prior to the settling of the marital estate, was neither wasteful nor foolish. Accordingly, the trial court did not abuse its discretion concluding wife did not dissipate marital assets.  The judgment was reversed in part and affirmed in part and the case was remanded back to the trial court. 

Allen Davis v. Commissioner
2013 U.S. App. LEXIS 9850
May 16, 2013
Judge Ripple
United States Court of Appeals for the Eleventh Circuit 

This Service issued a “whipsaw” deficiency notice to the taxpayer and corporation. The issue before the Tax Court was whether petitioner, an individual taxpayer, should have included the value of shares he received from exercising an option in gross income and, if the options were compensation, whether the compensation was reasonable and deductible by the corporation awarding the options.  Tax Court sustained the IRS’s deficiency notice and upheld plaintiff taxpayer corporation’s deductions. The individual taxpayer  appealed. To ensure consistent treatment of the transaction, the commissioner appealed as to the corporation. The appeals were consolidated.

On appeal, the commissioner argued that the individual’s exercise of the option generated ordinary income for him and permitted a corresponding deduction for the taxpayer corporation or that the exercise of the option generated capital gains income and no corresponding deduction for the taxpayer corporation.

Inter alia, the appellate court held that the Tax Court’s finding that the corporation granted the option in connection with the individual’s performance of services was not clearly erroneous, as ample evidence supported finding that the option for the purpose of retaining his services; though the option passed through the individual’s ex-wife, as it was initially granted in connection with his performance of services. Accordingly, it was not shielded by 26 U.S.C.S. § 1041. The court was tasked with valuing the shares the individual taxpayer received in their cashless sale, so it was reasonable to use the parties’ own valuation of the shares on the exercise date in assessing fair market value.  The appellate court affirmed the judgment of the Tax Court.

Think Tank Software v. Chester
2013 Ind. App. LEXIS 210
May 7, 2013
Judge Sharpnack
Court of Appeals of Indiana 

In a trade secrets case, an economist –with experience as a professor of finance– was qualified as an expert witness under Ind. R. Evid. 702(a) on economics and business valuation matters; moreover, his use of both the benchmark method for calculating damages and the yardstick approach to calculate general profit erosion were based on scientifically valid, reliable theories under Rule 702(b). Accordingly, his testimony was admissible. The doctrine of law of the case did not bar the admission of his testimony because he addressed questions not conclusively decided in an earlier appeal.  The case was reversed and remanded. 

[author] [author_image timthumb=’on’]http://m.c.lnkd.licdn.com/mpr/mpr/shrink_200_200/p/8/000/282/157/0812af2.jpg[/author_image] [author_info]Peter Agrapides, MBA, CVA, is shareholder of Western Valuation Advisors, a Salt Lake City-based valuation advisory firm.[/author_info] [/author]