Opinion ID: 2633654
Heading Depth: 1
Heading Rank: 6

Heading: Discount for Trapped-In Capital Gains

Text: [¶45] Next, we consider Appellants' challenge to the 5% discount applied by the district court to account for potential future tax consequences. The district court found the corporation was cash poor and estimated that Arp and Hammond would need to sell some of its assets in order to satisfy the judgment awarded to Appellants. A sale, the district court reasoned, would likely result in tax consequences. Appellants claim that the discount was not supported by the evidence and is based upon a theory that conflicts with the meaning of fair value. We agree. [¶46] The 5% discount applied by the district court does not result in fair value pursuant to Wyo. Stat. Ann. § 17-16-1301(a)(iv). The fair value of Appellants' shares is measured immediately before the effectuation of the corporate action to which the dissenter objects, excluding any appreciation or depreciation in anticipation of the corporate action unless exclusion would be inequitable. Wyo. Stat. Ann. § 17-16-1301(a)(iv). This language generally excludes costs that may be incurred after effectuation of the corporate action causing the shareholder to dissent, and such costs should not be assessed against the dissenting shareholders. Hansen, 957 P.2d at 43. The valuation date for Arp and Hammond was September 26, 2003. As of that date, no sale of assets was contemplated. [¶47] Nevertheless, Arp and Hammond contends that it would be inequitable to not apply the discount in this case. It claims that liquidation was anticipated because it would be the only way the corporation could pay for Appellants' shares. This justification for applying a tax discount has been rejected as inconsistent with the remedy provided by the dissenting shareholder's right to appraisal: Under the dissenters' rights statute, the court is required to value the corporation as a going concern. Accordingly, courts have generally rejected any tax discount unless the corporation is undergoing an actual liquidation. Here, there was no evidence that TFL was undergoing liquidation on the valuation date. Indeed, the evidence indicated that TFL was a going concern. Thus, the trial court correctly declined to consider the tax consequences of the sale of any assets. TFL maintains that it will have to sell assets in order to pay the dissenters for their shares, and that therefore the tax consequences of the sale should be considered in the valuation. Under the dissenters' rights statute, however, the dissenters are entitled to a pro rata share of the fair value of the corporation immediately before the merger. Thus, if costs are incurred after effectuation of the exchange, those costs should not be assessed against the dissenting shareholders. Accordingly, it would be inappropriate to consider a future sale of assets to determine the fair value prior to merger. In re 75,629 Shares of Common Stock of Trapp Family Lodge, Inc., 725 A.2d at 934 (internal citations omitted). [¶48] Courts generally find that unless the corporation is undergoing an actual liquidation, the liquidation method is not an appropriate method of valuing shares of a dissenting shareholder. Hansen, 957 P.2d at 42. [23] As one commentator observed: The purpose of the remedy given to dissenting shareholders is to compensate them for the fair value of their shares. The process is designed to arrive at a value based upon what the shareholder is forced to give up as a result of the transaction triggering the right to dissent. Based upon that purpose, . . . neither immediate tax consequences nor deferred tax consequences of the triggering transaction should be considered in determining the fair value of dissenters' shares. To consider such tax consequences would not only violate the clear language of most statutes, but also charge dissenting shareholders with taxes which would not accrue but for the transaction itself or taxes which may never accrue. . . . when a court is valuing the assets of a corporation as a part of valuing the corporation as a whole, tax effects should be considered only in the most limited circumstances. Such tax consequences should be considered only when a sale of those assets is imminent and unrelated to the transaction which triggered the shareholders' right to dissent. Cecile C. Edwards, Dissenters' Rights: The Effect of Tax Liabilities on the Fair Value of Stock, 6 DePaul Bus. L.J. 77, 98-99 (1993). [¶49] Additionally, Arp and Hammond did not present evidence to support its assertion that a judgment favoring Appellants would force a sale of corporate assets. The district court found that Arp and Hammond's proof as to the availability of this discount is somewhat sketchy... From our review of the record, that may be a generous description. The undisputed testimony indicated that there were no current plans to sell any of Arp and Hammond's land, unless such action was required to pay the judgment to Appellants. There was no evidence identifying the property that might be sold, the date of sale, or the taxable basis for the property. In the absence of specific facts about a prospective sale, [i]t would be the basest form of speculation to attempt to determine tax consequences of a voluntary liquidation of assets at an unknown future time. Hall v. Hall, 2005 WY 166, ¶ 16, 125 P.3d 284, 289 (Wyo. 2005). [¶50] Under the circumstances of this case, a discount for trapped-in capital gains taxes should not have been a consideration in the fair value of Appellants' shares because it was premised upon action contemplated by the corporation subsequent to (or because of) the reverse stock split. Additionally, the district court lacked an evidentiary basis to calculate the discount when the nature, timing, and details of a sale were speculative. Application of the 5% discount for trapped-in capital gains was erroneous.