Opinion ID: 2604259
Heading Depth: 1
Heading Rank: 16

Heading: the stock and debt method of valuation

Text: The idea behind use of the stock and debt indicator of value [15] for a company for ad valorem tax purposes is that a company may be said, in a general way, to be worth the total of what investors can be shown to be willing to pay for all the pieces of it. The pieces of a company for this purpose are of two kinds: debt, i.e., the various kinds and amounts of loan obligations that the company has outstanding at any one time, and equity, i.e., the various kinds and classes of stock that the company has outstanding at that same time. While reasonable theoretically, the stock and debt approach encounters difficulties in the present case due, inter alia, to the fact that the debt and equity securities of the parent holding company, UPC, reflect substantially more than the value of the Union Pacific Railroad. As noted earlier, the parent corporation owns three other major subsidiaries: Champlin Petroleum Company, Rocky Mountain Energy, and Upland Industries. These subsidiaries are engaged primarily in oil and gas exploration and production, mining of coal and soda ash, and industrial land development, respectively. There also are significant nontaxable assets owned by UP itself. Separating the portion of UPC's total stock and debt attributable only to UP's taxable operating unit thus represented a formidable task for the parties' experts and for the Tax Court. Broadly speaking, five issues emerged from the testimony with respect to the stock and debt approach to valuation: 1. Should the valuation of UPC's common stock be made by the use of an annual average of stock prices, or by the use of an average derived from the fourth quarter of each year preceding the assessment date? 2. Should the preferred stock of UPC be valued and allocated among the subsidiaries of UPC in a manner consistent with the allocation of the common stock, or should it instead be attributed solely to the railroad? 3. By what method should the value of the railroad operation be isolated from the value of UPC as a whole? 4. Once the equity value attributable to UP is determined, what method is most appropriate for eliminating nontaxable property owned by the railroad? 5. Should debt values be determined using annual average interest rates, or year-end rates? We next address the parties' approaches to these questions, among others, and the Tax Court's and this court's responses to them, as we examine the various components of the stock and debt calculation.