Court Opinion

ID: 5765911
Source: CourtListenerOpinion
Date Created: 2022-01-12 17:22:42.615732+00
Date Added: 2024-06-11T08:41:38.842038
License: Public Domain

Sweeny, J.
(dissenting in part). I agree with the majority on all but one point. I cannot agree that a discount for “trapped-in capital gains” should be applied in arriving at a value of Wechsler & Co., Inc. (WCI), defendant’s closely held subchapter C corporation. The Dunn1 and Jelke2 valuation methodology used by the majority recognizes the trapped-in capital gains discount for C corporations and applies dollar-for-dollar discount for such capital gains in arriving at a value for estate tax purposes. I also appreciate that the IRS has taken the position that a discount for built-in capital gains tax liabilities could be applied when valuing a closely-held stock, depending on the facts presented in each case (Announcement Relating to Eisenberg, 1999-4 IRB 4 [1999]). Depending on the facts, the IRS applies this discount whether the corporation under consideration is going to continue in business or whether it is winding up its operations.
As the majority recognizes, this valuation methodology, which *93arose out of valuations for estate tax purposes, may not be appropriate for matrimonial valuation purposes. In fact, as the majority notes, although Tax Court decisions are generally followed in the family law arena, most courts that have faced this issue have not allowed a discount for trapped-in capital gains in a matrimonial context (see generally Shannon P Pratt et al., Valuing a Business: The Analysis and Appraisal of Closely Held Companies, at 463-464 [5th ed 20081). An analysis of the cases cited therein shows that the courts in other jurisdictions have looked at the facts of each case, and where the tax consequences are immediate and arise as a result of the decree, or within an ascertainable time that is neither hypothetical nor imaginary,3 the tax consequences of the trapped-in capital gains must be taken into account. However, where there is no indication that the party will be selling the property or the party's interest in the property will continue, the dollar-for-dollar discount for trapped-in capital gains methodology may not be appropriate.4
This is not to say that uncertainty regarding a party’s future dealing with the asset should prevent attempts to value it,5 and I agree with the majority that the issue here involves the appropriate valuation methodology to use under the facts and circumstances of this case. Where I must part company with my colleagues is in finding that the trial court erred in accepting plaintiff’s expert’s methodology of valuation by using the “historical” tax rate of the corporation.
Although the neutral expert found this approach “meaningless” there is insufficient support in the record for this conclusion. The majority accepts this conclusion based on what they consider the neutral’s “common sense” view of the valuation methodology he utilized, rather than on the facts as they appear in the record. Essentially, the neutral dismissed the “historical approach” out of hand, but did not demonstrate to the trial court that this approach is inherently improper or should not be applied in this case where the amount of capital gains actually to be paid is uncertain.
Initially, unlike Dunn and Jelke, there is no indication that defendant’s interest in WCI will cease or that WCI will cease operations with the entry of the decree. This is clearly demonstrated by the fact that the equitable distribution award was to be paid out over a period of time and that the payments would *94in large part be from defendant’s earnings from WCI. Hence, there is no real “willing seller and willing buyer” but rather a hypothetical one: a legal fiction created solely to establish a value for WCI for equitable distribution purposes and to compute tax consequences that do not arise immediately as a result of the decree. As noted, other jurisdictions have found that under such circumstances, this is simply too speculative to create an immediate tax impact requiring the dollar-for-dollar discount for trapped-in capital gains. For example, in Jelke, the decedent held a minor percentage interest in an ongoing concern which was to continue into the future. The decedent’s interest terminated at his death and was valued accordingly. It was also to be paid out immediately, and thus had an immediate tax impact on the estate. Under those circumstances, it was reasonable to apply the dollar-for-dollar discount. This is not the case here. Defendant’s interest will continue in WCI and he does not have an immediate tax impact as the payments will be made over a period of time from the earnings of WCI. There is simply nothing here which distinguishes the facts of this case from those of other jurisdictions which rejected the Dunn methodology, and I submit there is no reason to reject the rationale of those jurisdictions.
Illustrative in this regard is In re Marriage of Hay (80 Wash App 202, 907 P2d 334 [1995], supra). The trial court adjusted the gross value of the real estate partnership in question from $119,049 to $101,000 to reflect the capital gains tax that would be paid if the interest were sold. The appellate court reversed, holding that “[b]ecause a sale was not imminent, the trial court erred in considering the capital gains tax consequence when valuing the parties’ interest in the real estate partnership” (80 Wash App at 206-207, 907 P2d at 336). In those cases where potential tax consequences on sale have been deducted in valuing the marital estate, even where no immediate sale was contemplated, the property in question had a limited shelf life. In Liddle v Liddle (140 Wis 2d 132, 410 NW2d 196 [1987], supra), the court found capital gains tax considerations were appropriate where the asset was a tax shelter which would lose its desirability in five to seven years and would most likely be sold. The court concluded that, under those circumstances, the sale date was neither imaginary nor hypothetical. Thus, it seems that, absent an intent to immediately terminate operation, or a reasonably foreseeable date for such termination, most jurisdictions do not find it appropriate to factor in capital gains tax *95consequences in arriving at the value of the asset for equitable distribution purposes.6
I am mindful of the fact that Jelke was decided after these cases. The principles set out in Jelke may or may not have had an impact on those decisions. Moreover, although Dunn and Jelke are not matrimonial cases, the principles of taxation, capital gains and valuation are the same. The controlling principle here is whether the valuation, which will ultimately find its way into a decree embodying the equitable distribution of the assets of this marriage, will have a present and immediate impact and this, in turn, depends on the facts of the case. The issue before us is not whether New York courts should adopt the dollar-for-dollar discount for trapped-in capital gains but rather whether the valuation adopted by the trial court was properly utilized in valuing WCI.
There is no single set methodology for valuing a closely held business (see Matter of Seagroatt Floral Co. [Riccardi], 78 NY2d 439, 445 [1991]). Here, the valuation that the trial court adopted has support in the record. Mindful of the fact that we have the power to review the record de novo, issues of credibility and contrary interpretations of fact are not sufficient to warrant disturbing the court’s determination (see Matter of Cohen v Four Way Features, 240 AD2d 225 [1997], citing Matter of Penepent Corp., 198 AD2d 782 [1993], lv denied in part and dismissed in part 83 NY2d 797 [1994]).
Notwithstanding the majority’s lengthy and eloquent argument for its position, on the record before us, there is no reason to substitute our judgment for that of the trial court with respect to the methodology selected to value this corporation. During the extensive trial, the court viewed the witnesses, carefully examined the evidence and wrote a detailed and thoughtful decision. The majority reduces plaintiff wife’s award considerably; an award which, notwithstanding a dollar amount which *96appears large by itself, is significantly less than she was entitled to under the trial court’s careful analysis of Domestic Relations Law § 236 (B). It must also be emphasized that plaintiff was denied any maintenance because of the valuation the court placed on her share of WCI. To place the burden on plaintiffs counsel for not cross-moving for maintenance at this stage misses the point of the effect of the disposition.
There was a sound factual and legal basis for the court’s exercise of its discretion and there is no reason for us to disturb it.
I would therefore affirm the trial court’s valuation of WCI.
Friedman and Gonzalez, JJ., concur with McGuire, J.; Sweeny, J., dissents in part in a separate opinion.
Judgment, Supreme Court, New York County, entered February 3, 2006, modified, on the law and the facts, the provisions thereof (1) reducing the baseline value of WCI by $7,793,292 pursuant to the “historical” rate of annual taxes paid by WCI, (2) determining that the husband’s right pursuant to a subscription agreement to purchase additional shares of stock in WCI’s predecessor was not his separate property, (3) reducing by $55,712.53 the after-tax value of the proceeds of the securities sold prior to the commencement date of the action but not settled until after that date, (4) determining that the marital interest in WCI is $69,262,977, (5) determining that the value of the marital estate is $99,811,533, (6) directing the husband to pay the wife a distributive award of $22,770,623, payable in quarterly installments of $379,510.50, and (7) determining that the wife’s share of the tax liability of WCI is 46.7%, should be vacated and replaced by provisions (1) reducing the baseline value of WCI by $29,572,000 pursuant to the approach of the neutral expert and the husband’s expert, (2) determining that the husband’s right pursuant to a subscription agreement to purchase additional shares of stock in WCI’s predecessor was his separate property and reducing the baseline value of WCI by the value of that right, $196,800, (3) reducing by $211,403.71 the after-tax value of the proceeds of the securities sold prior to the commencement date of the action but not settled until after that date, (4) determining that the marital interest in WCI is $47,131,777.95, (5) determining that the value of the marital estate is $77,680,333.95, (6) directing the husband to pay the wife a distributive award of $11,705,013, payable in quarterly installments of $195,083.55, and (7) determining that the wife’s share of the tax liability of WCI is 44.8%, and otherwise af*97firmed, without costs, and the matter remanded to Supreme Court both for a hearing to determine which securities the husband sold, what he did with the proceeds, what costs he incurred selling and reinvesting securities and the amount of the resulting credit to which he is entitled against the distributive award and, following that hearing and a determination of the amount of the credit, entry of an amended judgment consistent with this opinion. Motion seeking leave to reargue stay pending determination of this appeal dismissed as moot.

. Dunn v Commissioner of Internal Revenue, 301 F3d 339 (5th Cir 2002).

. Estate of Jelke v Commissioner of Internal Revenue, 507 F3d 1317 (11th Cir 2007).

. Liddle v Liddle, 140 Wis 2d 132, 410 NW2d 196 (Ct App 1987).

. In re Marriage of Hay, 80 Wash App 202, 907 P2d 334 (Ct App 1995).

. Burns v Burns, 84 NY2d 369, 375 (1994).

. While some states are not as restrictive concerning an immediate or likely sale (e.g. Colorado, Missouri and Virginia),
“Courts have generally found that consideration of tax consequences is either required or at least appropriate where they [the consequences] are immediate and specific and/or arise directly from the court’s decree, but find they are not an appropriate consideration where speculation as to a party’s future dealing with property awarded to him or her would be required” (Tracy A. Bateman, Annotation, Divorce and Separation: Consideration of Tax Consequences in Distribution of Marital Property, 9 ALR5th 568, 592, § 2 [a]).