5th Circuit Reverses Tax Court in Dunn
In 1996, HFBE valued the 63% common stock ownership of the Estate of Beatrice Dunn in Dunn Equipment, Inc. as of June 8, 1991. The IRS disputed the valuation resulting in a tax court trial in 1998. The primary valuation differences related to using an earnings or asset-based approach and the applicability of built-in capital gains taxes. HFBE weighted earnings and assets 50/50. The Company was asset rich but about breakeven. 63% is not enough to control a liquidation or sale in Texas. The IRS and its appraiser used only the Asset-based approach and disallowed the use of a built-in capital gains tax deduction. The 2000 decision was unsatisfying and essentially split the difference. The taxpayer appealed to the 5th circuit. The Appeals Court's decision overturned the Tax Court and pointed to a value lower than HFBE suggested in its valuation by suggesting an 85 percent weight to earnings. The major victory here is the 5th Circuit's endorsement of using a full capital gains tax deduction when applying the Asset-based Approach. Also, the 5th Circuit found that a Tax Court judgment founded upon improper valuation methodolgy is reversible error.
Will Frazier
08/20/02
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