Working on a tax valuation? Beware of the jurisdiction, Laro warns

The taxpayer’s residence determines in what jurisdiction the Tax Court “sits” and what federal circuit law applies.

These is just one of the numerous interesting and illuminating facts presented by Judge David Laro and appraiser Mel Abraham during their session to the San Francisco Valuation Roundtable last week. Most attendees were amazed to learn, for example, that the issue of subsequent events could have one of five possible federal rules apply, depending on the location/jurisdiction of the Tax Court in the case. Valuation of embedded capital gains is another “split” issue: Courts in the fifth and eleventh circuits now follow the “bright line” rule of Estate of Dunn and Estate of Jelke, while others have yet to consider and decide the issue. “Which law, which court, which judge, what facts, which expert—these are all questions to ask before a case to make decisions regarding where to file the case and how to prepare the expert evidence,” Judge Laro told attendees. Read and know the precedent that applies to your case.

What if the federal circuit in which the Tax Court sits has yet to rule on an issue? Discuss the matter with the attorney and decide on the better valuation approach. “This is your field; the trier of fact needs your best analysis, one that’s reliable and credible,” Laro said. “Our job is to tell a ‘valuation story’ in an objective, educational way,” Abraham added. “Can we take the triers of fact down the ‘valuation path’ and explain every decision point along the way—the equity risk premium cap rate, size premium, discount rate, etc.—so that by the end of the story they are looking at the result and finding it credible.”