Tax Judge Addresses Valuation and CPAs

Tax Judge Addresses Valuation and CPAs
On Subsequent Events and Writing Expert Reports
By Simon Eskow

The impact of subsequent events in valuation cases varies from court to court, a federal tax judge said during the May 17 Foundation for Accounting Education’s Business Valuation Conference.

In his luncheon address to about 150 conference attendees at the Mariott Marquis in New York City, U.S. Tax Court Judge David Laro said that subsequent events in valuation cases must be judged on their relevance because of federal guidelines concerning evidence.

“Can we consider events subsequent to a valuation date?…Are subsequent events relevant?” Laro said. “It depends.”

Laro said that the U.S. Tax Court, which includes 18 judges presiding over cases in 35 courtrooms nationwide, is one of three venues for taxpayers to settle differences with the Internal Revenue Service. Taxpayers can pay their tax bill, then sue in federal district court for a refund; they can sue in the court of special claims; or they can refuse to pay and request a redetermination.

The tax court, for its part, handles 20,000 cases a year, Laro said, split roughly between valuation cases and tax protesters.

“The tax protesters are interesting cases,” Laro said.

One litigant categorized as a tax protester was a father who tried to use his daughter’s wedding as a deduction because his son-in-law turned out to be a “disaster.”

Tax court trials can last from less than a day to months, and can involve tax bills ranging from $50 thousand to billions of dollars.

But Laro devoted more of his time discussing evidence issues in valuation cases.

Justice Wendell Holmes, in a 1929 Supreme Court case, called valuation a “prophecy,” Laro said, that is no less true if it doesn’t come to pass as long as the prophecy “was good when it was made.”

Laro said judges, using Holmes’ opinion as precedent, have had to measure the admissibility of subsequent events on a case-by-case basis. Some measure admissibility based on what was “reasonably foreseeable,” while others have allowed subsequent events to be used for confirmation of a valuation.

Laro urged conference attendees to protect their independence if they must write an opinion as an expert witness in a valuation case. In the course of writing an opinion, valuators often come up with several drafts, with attorneys sometimes asking to pick and choose parts of a draft to better support their case. Laro said valuators need to keep every draft, to write reports themselves and to avoid the “spoliation of evidence.”

The NYSSCPA’s Business Valuation Committee, then chaired by Morton Cohen, sponsored the conference. Martin Lieberman, Brian Pearson and Cohen cochaired the event.