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For What It’s Worth: A Classic Example of… – August 2014

“For What It’s Worth” is a monthly newsletter written by Director Rand Curtiss.

Several years ago, I appraised a private equity interest for charitable donation purposes. On June 30 of that year, all shareholders entered into a binding agreement to sell the entire equity of the company for cash. The closing was scheduled for August 15. The shares were donated on July 15. Hurricane Katrina struck on July 29, causing the sale to be cancelled on force majeure grounds consistent with the sale agreement.

I valued the donated interest at its pro rata share of estimated sales proceeds less a 5% discount. The discount reflected the perceived negligible risk of the sale not closing and the equally negligible time value of money. The discount did not include factors related to lack of control or lack of marketability, since the sale of 100% of the equity made them irrelevant. It ignored Katrina, since it was not known or reasonably knowable as of the valuation (donation) date, per Revenue Ruling 59-60, Section 3, Paragraph 3.

This was a classic example of a simple valuation based on simple rules and simple facts.

Much, but not entirely, to my surprise, the IRS contested the valuation, attempting to argue that Katrina substantially impaired the private interest value. The donor incurred a fair amount of additional legal fees successfully rebutting the challenge, based solely on the cited Revenue Ruling.

This was a classic example of … (you can fill in the rest!)

Valuations play a part in all tax, transaction, and litigation matters.  For additional information or advice on a current one, please do not hesitate to call.

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About Western Reserve Valuation Services LLC
Western Reserve Valuation Services LLC, based in Columbus, Ohio, is a leading provider of valuation services and financial opinions relating to corporate finance transactions, corporate tax planning and compliance, succession planning and wealth preservation, employee stock ownership plans (“ESOPs”), financial reporting and portfolio / fund valuations.  For more information, visit www.wesresvaluation.com or call (614) 448-3700.

Western Reserve Valuation Services is an affiliate of Western Reserve Partners LLC, a FINRA-member investment banking firm offering financial advisory services relating to mergers and acquisitions, capital raising and financial restructuring. For more information on Western Reserve Partners, please www.wesrespartners.com or call (216) 589-0900.

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