Tax Court Issues Supplemental Opinion in Estate of Giustina v Commissioner Reviewed by Momizat on . Moving Forward when Valuing Asset-Intensive Operating Companies In this article, Heidi Walker, the author, revisits the Tax Court and Ninth Circuit’s unpublishe Moving Forward when Valuing Asset-Intensive Operating Companies In this article, Heidi Walker, the author, revisits the Tax Court and Ninth Circuit’s unpublishe Rating: 0
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Tax Court Issues Supplemental Opinion in Estate of Giustina v Commissioner

Moving Forward when Valuing Asset-Intensive Operating Companies

In this article, Heidi Walker, the author, revisits the Tax Court and Ninth Circuit’s unpublished decision in Estate of Giustina and the Supplemental Memorandum Opinion issued by the U.S. Tax Court this past year.

[su_pullquote align=”right”]Resources:

The Three Valuation Approaches—Challenges and Issues

Discounts on Family Limited Partnership—The IRS is Challenging the Appropriateness of Discounts When Preparing a Valuation

Current Update in Valuations

Intermediate Business Valuation Training Center


Business valuation professionals have followed the Estate of Giustina v. Commissioner case closely since the Tax Court’s first opinion in 2011,[1] and even more closely after a December 2014 unpublished opinion by the Ninth Circuit Court of Appeals sent the case back to the Tax Court to reconsider its weighting of the Asset-based Approach for a noncontrolling limited partnership interest, and its reduction in the estate’s partnership-specific risk premium.

On June 13, 2016, the Tax Court issued its Supplemental Memorandum Opinion.[2]  In addition to being a huge win for the taxpayer, the decision provides insight to appraisers valuing noncontrolling interests in operating companies that also have significant asset value as to how the Tax Court might view similar situations in the future.

In this article, we revisit the first opinion and the remand, and summarize the supplemental opinion and its impact on how business appraisers might approach asset-intensive operating companies.

The Tax Court Case


The decedent, through a revocable trust, owned a 41.128% interest in Giustina Land and Timber Company (Subject Interest), a family-owned limited partnership (LP).  The LP owned 48,000 acres of timberland in Oregon.  The estate set forth a value of $12.7 million based on an appraisal by a national valuation firm.  The Internal Revenue Service (IRS) said the interest was worth $35.7 million, and also assessed an accuracy related penalty under IRC Section 6662 of just over $2.5 million.  The taxpayer appealed and the matter proceeded to the U.S. Tax Court.

At trial, the estate hired a new expert who valued the interest at $13 million, while the IRS came down to $33.5 million.  A significant gap remained.


As a preliminary matter, the Tax Court ruled that the two valuation methods most appropriate and helpful in this case were: the discounted cash flow method (DCF), which would value the LP on a going concern basis using the expected cash flows from continued timberland operations; and the net asset value method (NAV), which would value the LP under a liquidation premise of value and assume the timberland was liquidated.

The experts agreed that the value of the timberland was $143 million, which included a 40% discount related to expected delays in selling the large tracts.  However, they differed on the weights that should be accorded to each method, and on certain critical assumptions in the DCF method.

DCF Method

The Tax Court rejected the IRS expert’s DCF method, finding an inconsistency between the cash flow estimates and calculation of minority interest value, finding unrealistic the assumption that operating expenses would remain fixed despite three percent annual revenue increases, and disagreeing with reliance on the most recent year of cash flow rather than an extended period.

The Tax Court accepted the estate’s expert’s DCF, which was based on cash flow projections extrapolated from actual results for five years prior to the valuation date, but made two key adjustments: 1) it lowered the company-specific risk premium from 3.5% to 1.75%, noting that while the LP’s assets lacked diversification, investors would minimize this risk by diversifying the portfolio; and 2) citing Gross v. Commissioner,[3] it denied the 25% reduction for income taxes, stating that it contradicted the expert’s reliance on a pretax rate of return.[4]

After all adjustments, the Tax Court concluded a total equity value on a marketable, noncontrolling basis using the DCF method of $51.7 million.  The IRS expert’s 25% discount for lack of marketability (DLOM) was accepted in favor of the 35% DLOM determined by the estate’s expert.  While both used restricted stock data, the estate’s expert relied more on pre-IPO studies but did not sufficiently rebut the IRS expert’s accusation that the data overstated the discount.

Despite weights for the DCF method of 30% concluded by the estate’s expert and 20% concluded by the IRS expert, the Tax Court gave the method a 75% weight reflecting the probability that the LP would continue based on its history of acquiring and retaining assets, and the limitation of the Subject Interest in achieving the necessary two-thirds majority vote to force a sale of the LP.  In explaining why they put any weight on the NAV, the Court reasoned that a hypothetical buyer of the Subject Interest would “seek the maximum economic advantage from the asset,” which in this case was a sale of the timberland as opposed to continued operations.  The Tax Court said, “We are uncertain how many partners would share the view that the timberland should be sold,” but that this uncertainty does not prevent estimating the probability of a sale.  It cited authority that allowed for such speculation, quoting a 1995 tax law review article which said, “The entire valuation process is a boundless subjective inquiry.”

NAV Method

The NAV of the LP was $150.7 million, which included $143 million for the timberland plus $7.7 million of other assets.  The Tax Court gave a 25% weight to the NAV method.  The Tax Court rejected a discount for lack of control against the NAV method (the IRS expert had applied 12%) on the basis that the 25% weighting of the methodology already considered the ability of the interest holder to impact the sale of the LP.  It also did not apply a DLOM, as the underlying timber value already considered a 40% discount related to its sale.

Other Methods Rejected

The estate’s expert also used two other methods, both of which were rejected by the Tax Court.  With respect to the capitalization-of-distributions method, it found that “the cash earned by the partnership is a more reliable indicator of value than the cash distributed to the partners.”  It found the asset-accumulation method to be a “hybrid” of the asset method that had already been accepted by the Tax Court.

Both experts also applied the guideline publicly traded company method (GPC).  According to the Tax Court, “neither expert appropriately considered that the other companies have assets other than timberland…and that they earn income from sources other than timber sales.”  Given this, and the fact that other methods are available (specifically the DCF and NAV methods already deemed appropriate), the Tax Court rejected the GPC method.

Value Conclusion

The value of the interest was thus 75% of the Tax Court’s DCF value of $51.7 million (net of a 25% DLOM), plus 25% of the NAV value of $150.7 million, or $66.75 million.  The Subject Interest was found to be worth $27.45 million.  This was a substantial victory for the IRS given its value position at trial of $33.5 million.  The estate appealed the decision to the U.S. Court of Appeals for the Ninth Circuit.

Accuracy-Related Penalties

In considering the accuracy-related penalties, the Tax Court found that the estate’s executor reasonably relied in good faith on the original appraisal, despite its use of the market and income approaches and exclusion of NAV.  Given that the LP had been operating for over 15 years, the Tax Court found that it was reasonable to conclude that it would not liquidate.  As such, although the appraised value was less than 50% of the value ultimately determined by the Tax Court, and was technically “substantially” understated, it dismissed the penalties.

The Court of Appeals

In June 2012, the estate appealed the Tax Court’s conclusion that the interest was worth $27.5 million, rather than $13 million as put forth by the estate.

With respect to the weight given to the NAV method, the Court of Appeals found clear error in assuming the likelihood was 25% that either: 1) the hypothetical buyer would be admitted as a limited partner and then seek dissolution of the partnership or removal of the general partners who just admitted him, or convince at least two limited partners to liquidate (despite such a sale never having been discussed); or 2) the existing limited partners, collectively owning two-thirds of the partnership, would seek dissolution.  Citing Estate of Simplot v. Commissioner,[5] the Court of Appeals said the Tax Court engaged in “imaginary scenarios” as to who the buyer for the interest might be, how long they would wait for a return on investment, and what voting combinations they might be able to impact.  The Court of Appeals remanded to the Tax Court to recalculate the value of the estate based on the LP’s value as a going concern.

The Court of Appeals found that the Tax Court erred in not sufficiently explaining why it cut in half the estate’s expert’s partnership-specific risk premium.  While recognizing that asset diversification could reduce risk, the Tax Court should have considered the amount of wealth needed by a potential buyer to adequately reduce risk through diversification.

The Court of Appeals found no clear error in the Tax Court using non-tax-affected cash flows for the going concern portion of its valuation, citing that the estate itself admitted that “tax-affecting is…an unsettled matter of law.”  The Court of Appeals also found no clear error with respect to the 25% DLOM rather than the estate’s 35%, noting acknowledgement by the estate’s expert that such discounts typically range between 25% and 35%.

The case was reversed and remanded to the Tax Court for recalculation of the valuation.

Tax Court’s Implementation of the Remand

In its Supplemental Memorandum Opinion, the Tax Court:

  • Adjusted its valuation of the LP interest, giving no weight to the value of the assets owned by the partnership; and
  • Provided further explanation for originally reducing the partnership-specific risk premium, but ultimately found that the reduction was inconsistent with the Ninth Circuit’s opinion and adjusted the premium back to 3.5%.

In following the Ninth Circuit’s directive to “recalculate the value of the Estate based on the partnership’s value as a going concern,” the Tax Court assigned a 100% weight to the cash flows, stating:

“In our view, the going concern value is the present value of the cashflows the partnership would receive if it were to continue its operations.”  

With respect to the partnership-specific risk premium, the Tax Court looked to the LP’s partnership agreement, which allowed that a hypothetical buyer for the interest be either: (a) another limited partner, or (b) a person receiving approval of the two general partners.  None of the other limited partners is an entity with multiple owners such as a publicly traded corporation, a real-estate investment trust, or a hedge fund and, as such, the record did not support the notion that these buyers had enough assets to diversify the risk in question.  Likewise, the Tax Court concluded that the two general partners would not permit a multiple-owner investment entity to become a limited partner because such an entity would likely seek to increase the returns on its investment by attempting to have the partnership discontinue operations and dissolve.  Based on these facts, the Tax Court found that a hypothetical buyer would be unable to diversify the partnership-specific risk inherent in the Subject Interest and adjusted the partnership-specific risk premium back to 3.5%.

The result of these two adjustments reduced the value of the Subject Interest from $27.45 million to $13.95 million, a far cry from the $150.7 million NAV of the LP.


Appraisers are often tasked with determining the fair market value of noncontrolling interests in operating entities where cash flow value is significantly less than asset value.  The Ninth Circuit clearly equated the Asset Approach with liquidation, concluding that the weightings of the methods must mirror the likelihood of liquidation.  In other words, asset value is virtually, or in this case entirely, meaningless unless a hypothetical buyer can access it.

The final decision is consistent with Rev. Ruling 59-60, which perfectly captures the appropriateness of placing significant weight on the Asset Approach for asset holding companies, while considering the comparatively low cash flows of some operating companies with otherwise significant underlying assets in Section 5, as follows:

“Earnings may be the most important criterion of value in some cases whereas asset value will receive primary consideration in others.  In general, the appraiser will accord primary consideration to earnings when valuing stocks of companies which sell products or services to the public; conversely, in the investment or holding type of company, the appraiser may accord the greatest weight to the assets underlying the security to be valued.”

Previously published in MHP Estate & Gift Valuation Insights, Issue 16, December 2016

[1] Estate of Natale Giustina et al., v. Commissioner, T.C. Memo. 2011-141 (June 22, 2011).

[2] Estate of Natale Giustina et al., v. Commissioner, T.C. Memo. 2016-114 (June 13, 2016).

[3] Gross v. Commissioner, T.C. Memo. 1999-254, aff’d. 272 F. 3d 333 (6th Cir. 2001).

[4] To date, no one has persuaded the Tax Court that, in fact, pass-through entity interest holders do pay income taxes, and those taxes do affect the value of their interest.  For more information see Meyers, Harrison & Pia’s own Nancy Fannon, CPA, ABV, ASA, MCBA, along with Keith Sellers, CPA, ABV, CVA, PhD (University of Denver) book, Taxes and Value: The Ongoing Research and Analysis Relating to the S Corporation Valuation Puzzle, published by Business Valuation Resources (, and also available at

[5] Estate of Simplot v. Commissioner, 249 F.3d 1191, 1195 (9th Cir. 2001).

Heidi P. Walker, CPA, ABV, ASA, is a Managing Director in the Portland, Maine office of Meyers, Harrison & Pia Valuation and Litigation Support, LLC. She has performed numerous valuations of business interests for both litigation and non-litigation purposes, including matrimonial dissolutions, shareholder disputes, estate and gift tax planning and filing, employee stock ownership plans, business damages, buy-sell agreements, mergers and acquisitions, and breach of contract. She has significant experience as a jointly-retained financial expert in litigation.
Ms. Walker can be contacted at: (207) 775-5111 or by e-mail to:

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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