Case Studies
J.S. Held Acquires Technorm, Québec’s Leading Forensic, Building Safety & Compliance Experts
Read MoreOur team worked with counsel representing a family office for a couple accused of making an unreported taxable gift of approximately $40M to their children’s limited partnership (LP). The Internal Revenue Service (Service) alleged that certain debt instruments exchanged between the couple and the LP were not of equivalent value and therefore created a taxable gift. We provided an independent opinion that the difference between the fair market values of the debt instruments exchanged was approximately $1M versus the $40M alleged by the Service. The matter settled before trial.
The debt instruments at issue were enormously complex. On the couple’s side of the equation, there were promissory notes owned by the couple in which the obligors were various businesses owned, in whole or part, by the couple and other individuals. These notes contained short maturity dates, some less than a year, and were adequately secured by collateral assets. Our selected risk-adjusted rates for the notes owned by the couple, which were applied in a discounted cash flow analysis to conclude fair market value, were far lower than the selected rate for the note owed by the couple. This is because the loan workout period lengthened the effective maturity date. We concluded that the sum of the fair market values of these notes was approximately 20 percent less than the sum of their face values.
On the LP’s side of the equation was a promissory note in which the obligors were the couple, with an outstanding principal and accrued interest balance of $130M. This note was a loan obtained by the parents from the LP early in the Great Recession. To estimate the fair market value of this note, we selected a risk-adjusted rate based on our analysis of high-yield credit instruments that traded during the early 2009 market crash. We calculated a single, weighted average rate based on the percentage exposure of the couple’s assets to the four sectors in which their total assets were invested. Based on this analysis, we concluded that the fair market value of this note was approximately 50 percent less than face value plus accrued interest.
Based on the above analysis, we concluded the value “gap” (the gift) to be approximately $1M versus the $40M alleged by the Service.
Dean Driskell, CPA, ABV, CFF, CFE, MBA
Executive Vice President
Economic Damages & Valuations
+1 470 690 7925
[email protected]
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