Giustina (*) case dealt with the value of an approximate 41% limited partnership interest in a partnership that held timberland. Giustina Land & Timber Co. Limited Partnership (GLTC) owned more than 47,000 acres of timberland at the time of death of Natale Giustina. GLTC had operated continuously since its formation in 1990. Profits were generated from harvesting trees and selling logs. The timberland had a market value of more than $150M. The valuation dispute was originally tried in the U.S. Tax Court in 2011 (**) and was reversed and remanded in 2014 (***).
GLTC had two general partners and eight limited partners. The limited partners were all members of the same family. The GLTC partnership agreement provided that a limited partner interest could be transferred only to another limited partner unless the transfer was approved by the general partners. A dissolution provision in the agreement provided for liquidation of GLTC on the approval of two-thirds of the limited partnership interests (measured by pct. interest). A two-thirds vote of the limited partner interest (by pct.) could also replace the general partners.
The Tax Court originally reasoned that there was a 25% probability that the hypothetical buyers of the 41% limited partner interest could convince two-thirds of the limited partner interests to either (1) vote to dissolve and distribute proceeds or (2) replace the general partners to achieve the same result. The Tax Court also assigned a 75% probability that GLTC would continue as a going concern. This resulted in a 25% weight on the liquidation premise and 75% on the going-concern premise of value.
The Ninth Circuit Court of Appeals pointed out that for liquidation to occur the hypothetical buyers would:
1. Somehow obtain admission as a limited partner from the general partners, who have repeatedly emphasized the importance of continuing to operate GLTC as a going concern;
2. Then seek dissolution of GLTC or removal of the general partners who just approved admission to GLTC as a limited partner; and
3. Then would manage to convince at least 2 other limited partners to agree.
Alternatively, one would have to assume that the existing limited partners owning two-thirds of GLTC would seek dissolution.
The Ninth Circuit Court stated that it was clear error to assign a 25% probability weight to these hypothetical events. The Court stated that the Tax Court engaged in “…imaginary scenarios as to who a purchaser might be, how long the purchaser would be willing to wait without any return on his investment, and what combinations the purchaser might be able to effect…” with the existing partners.
The case was remanded back to the Tax court to determine the going-concern value. The original valuations and the decision of the Tax Court (****) on remand were as follows:
It would be nice if the Tax Court were to quit playing valuation expert and simply weigh the evidence of value that is presented by the parties. That would save a lot of wasted time and money. If the IRS examiner presents similar unrealistic assumptions concerning “imaginary scenarios” for hypothetical buyers, this case should be instructive.
Stephen E. Koons, CPA, ABV, ASA, CFF
(*) Estate of Giustina v. Commissioner, 586 F. Supp’x 417 (9th Cir. 2014).
(**) Estate of Giustina v. Commissioner, T.C. Memo 2011-141.
(***) Estate of Giustina v. Commissioner, 586 F. Supp’x 417 (9th Cir. 2014).
(****) Estate of Giustina v. Commissioner, T.C. Memo, 2016-114