FCG Valuation Case E-Flash Gallagher v. Commissioner

Authored by Chris D. Treharne, ASA, MCBA, BVAL of Gibraltar Business Appraisals, Inc. a member firm of FCG Issue 13:9

J Estate of Louise Paxton Gallagher, Deceased, F. Gordon Spoor, Personal Representative, Petitioner v. Commissioner of Internal Revenue, Respondent Docket No. 16853-08, T.C. Memo 2011-148, Filed June 28, 2011, Judge: James Halpern

Once again, the Tax Court was faced with having to decide between tax affecting income and not doing so for a pass-through tax entity. Although the court’s analysis resulted in a value much closer to the taxpayer’s asserted value than the IRS’s conclusion, tax affecting was rejected

The Takeaway
Having recently (May 2011) had the pleasure of having dinner with Judge Halpern and sitting next to him on appraisal conference panel the next day, I can attest to his intellect and super-engagement with respect to business valuation issues. The preceding personal characteristics make him a demanding jurist, and one who deserves great respect. The Gallagher opinion is rich in procedural analyses and valuation concepts that reflect Judge Halpern’s understanding of and involvement in the issues presented before him. Notwithstanding my respect for the judge, I disagree with the ruling’s conclusion that a business owner’s value is not diminished by cash flows (deliberately differentiating the preceding from net income) that are adversely affected by income tax liabilities associated with entity income which are paid to the government instead of contributing to the value an ownership interest. Whether the liabilities are personal or entity liabilities is irrelevant if they adversely affect entity cash flows. At the conference, the judge repeatedly said that experts have the opportunity to tell him a story, but the ending is his responsibility. If I should I appear before him, I pray that my story will justify rewriting the ending to stories like Gallagher. If I fail, the outcome will be the result of my inability to effectively tell my story to an intellectually competent and engaging judge.

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