A recent U.S. Tax Court case reminds us of a valuation ‘fact of life’: credentials are important and, in a dispute, often are the difference between winning and losing.

In Ringgold Telephone Company v. IRS Commissioner, a taxpayer and the IRS disagreed about the value of a limited partnership interest in a cellular license.  The taxpayer claimed the interest was worth $2,980,000 on the valuation date; the IRS argued the interest was worth almost twice as much: $5,220,423.  Judge Wells of the Tax Court decided the correct answer was $3,727,142 – signifying a win for the taxpayer; a defeat for the IRS.

Ringgold shows first-hand the importance of using a credible appraiser. 

“As is customary in valuation cases”, said the Court, “the parties offered expert opinion evidence to support their opposing valuation positions.  In such cases, we evaluate the opinions of experts in the light of the demonstrated qualifications of each expert…”  The taxpayer’s appraiser was a CPA with an ABV designation conferred by the AICPA and who had extensive experience valuing telecommunication entities.  The IRS’ appraiser, on the other hand, was a CPA who had no valuation credentials and had never valued a telecommunications entity.   

When you choose a valuator, always assume the appraisal may end up in court.  So choose someone who is competent, knowledgeable, experienced and can explain complex ideas in layman’s terms.  Those are the ingredients that Judge Wells of the Tax Court (or any judge hearing your case) is looking for.

Another aspect of this case is also interesting.  A short six months after the valuation date, this taxpayer sold his interest for $5,220,423 to BellSouth.  (That is where the IRS’ number came from.)  Nevertheless the Tax Court ruled the sale price was not the interest’s fair market value. 

How can this be?  Doesn’t the price at which an asset changes hands determine ‘fair market value’?  Not necessarily!  BellSouth was a ‘strategic buyer’, not a ‘financial buyer’.  In the valuation world, strategic buyers pay more for assets than ‘financial buyers’.  In a future blog post I’ll explain the difference between the two.  To get that post and other Valuation Matters updates delivered right to your email, enter your address in the Subscribe box on the right.