Divorce Mediation Blog

Rule 2704 Opposition - Talking Points

Wednesday, November 23, 2016

Recently, we blogged about the Internal Revenue Service proposed new section 2704 rules, which if enacted in their current form would create a new minimum value for businesses subject to intra-family transactions, and essentially eliminate discounts for marketability in that context.

Many in the business appraisal and estate planning communities are up in arms, and they mobilizing to defeat this IRS move, before it becomes entrenched.

While keeping an eye on unfolding commentary, we ran across “talking points” suggested by the American Society of Appraisers for use in opposing the new regulations. In summary they are:

  1. By increasing the value of fractional interests in family businesses, the new rules would result in an "stealth" tax increase of 25-50% in estate and gift taxes.
  2. By treating intra-family actors as "known parties", rather than hypothetical buyers and sellers, the rule would disregard the reality that a fractional interest is in fact, fractional, and not controlling, reducing its economic value.
  3. The notion that families will always work in concert has been rejected previously by the United States Supreme Court.
  4. The suggestion that intra-family transfers should be treated differently than those between unrelated parties is unsupported by any public reasoning advanced by the IRS.
  5. The proposed rule may put IRS regulations on a collision course with various state laws which recognize applicability of marketability discounts.
  6. This new approach will cause family-owned businesses to delay capital investment, and inhibit new hiring, as they preserve cash for pain increased taxes.

As divorce mediators and arbitrators, a former Probate judge, and litigators-in-recovery, we are used to this approach from Bernier, in the divorce context, but in estate and gift taxation?

What do you think?


Dell-a- ware Valuation Decision and DCF

Wednesday, November 09, 2016

A Vice Chancellor (we love that title) of the Delaware Chancery Court recently ruled that Michael Dell and Silver Lake Partners undervalued Dell, Inc. stock by more than 26% in engineering a going private transaction, to the detriment of shareholders. After hearing the discounted cash flow analyses of experts for both sides, at an appraisal trial, the VC (apt abbreviation) rejected both.

In doing so, he noted that market price is not necessarily an indicator of value, a proposition that seems, at first blush, to be mildly shocking. We are used to searching for value in closely held businesses because they have no public market to provide value. Where there is a public trading record, we do tend to accept it: the market rules. Minority discounts are even baked in because every share is a non-controlling interest.

The VC’s reasons that public share value is a reflection of perception in the marketplace from known information, presumably from regulatory disclosures, proxies and press accounts perhaps. They lack, however, insiders’ understanding which yields a more sophisticated measure of value. A little bit troubling as an investor, but sure: not everything is public record. With a going private transaction, wherein public investors are being divesting of their stakes, the company owes a fiduciary duty to maximize shareholder value, so his reasons commonsense.

We won’t get into the DCF decision-making of the VC. Interesting to some but as dry as a bone to most.


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