Benjamin Franklin, in a letter to Jean-Baptiste Leroy in 1789, said, “In this world nothing can be said to be certain, except death and taxes.” But the Ohio Court of Appeals, in a recent domestic relations case, is of the opposite opinion, and it sought to clarify the matter.
The husband was 44 years old and owned interests in four businesses valued at $4,740,717 before considering taxes. His expert then testified to the values of the businesses when factoring in the tax consequences of a possible sale, which resulted in a decrease to the value by over $1 million. In determining the impact, he used current tax rates and the husband’s current income and stated that because both are known, they were not speculative. Further, he also testified that he did not expect the tax rates to change much at any time in the near future.
While the wife argued that the value of the businesses should not be tax-affected because it was speculative, the trial court sided with the husband stating that the distribution or transfer of assets between the parties provides for a known set of economic circumstances and a known and determinable tax calculation as a result.
On December 14, 2015, however, the Court of Appeals reversed this decision citing a number of previous cases in support of the wife’s argument. (Lewis v. Lewis, Rosenberger v. Rosenberger, Thomas v. Thomas, Huelskamp v. Huelskamp)
The Court stated that in applying the logic of these cases – particularly Lewis, which was the most factually similar – the taxes considered by the Husband’s expert were determined to be too speculative. Like Lewis, the Husband indicated his desire to sell his businesses at the time of retirement. Also like Lewis, any retirement date is uncertain and even further distant in the future than it was in Lewis. Like both Lewis and Rosenberger, the trial court in this case used the current tax rates, requiring the trial court to engage in speculation to assume that the tax rates will be the same or substantially similar in the future. Finally, similar to Lewis, Rosenberger, Thomas, and Huelskamp, the distribution of assets did not require the Husband to sell his businesses. Thus, based on the holdings of these cases, the Court determined that the taxes were too speculative to be considered by the trial court.
Understanding both the taxes associated with a closely held business interest, and the valuation of those interests, are key to supporting any position. If you have a potential valuation issue, please contact me at (937) 913-2507 or firstname.lastname@example.org. We actually like doing this!