"I'm a Lumberjack and I'm OK!" - Cash Flows from Timber Apparently Trump the Value of Land

What a great start to 2015 - when a recent case allows me to include a reference to the halcyon days of Monty Python (and gives me an excuse to waste far too much time reliving classic skits on YouTube!).


Last December, the Ninth Circuit gave a short ruling overturning the Tax Court's determination in the matter of Estate of Giustina v. Commissioner (2014 PTC 587). The issue was the valuation of a 41% interest in Giustina Land and Timber Co. Limited Partnership owned by Mr. Giustina on his death. The Partnership held land on which it conducted timber operations. The Estate valued the interest at $12.6 million on the estate tax return. The IRS argued that the value of the interest was $35.7 million.


The Tax Court looked at the valuation methods suggested by each party and decided to give a 75% weighting to a cash flow approach used by the Estate reflecting the ongoing income from the timber operations and a 25% weighting to the asset approach used by the IRS which reflected the value of the underlying land - essentially assuming the sale of the land, a liquidation of the partnership and a distribution of the proceeds. This approach resulted in a value of $27.4 million.


On appeal by the Estate, the Ninth Circuit did not consider it probable that the owner of the 41% interest could force the liquidation of the partnership and, therefore, gave no weight to the asset method. It remanded the case to the Tax Court to recalculate the value of the partnership as a going concern.


The Ninth Circuit's approach, however, does not reflect the fact that there remains a possibility of sale of the land at some point in the future, which is not necessarily reflected in the ongoing cash flows derived from the timber operations.


Its thought process also seems to run counter to Revenue Ruling 59-60 which states: "...net worth should be accorded greater weight in valuing the stock of a closely held...real estate holding company...than any of the other customary yardsticks of appraisal, such as earnings and dividend paying capacity."


I suspect the ruling will not prevent the IRS from continuing to place significant weight on asset values when they review valuations. Although I am not sure I could vouch for how they would approach the value of cheese shops, stores selling dead parrots, etc...(and if you don't get these references, then you need to spend some time on YouTube.)