Valuation Methodology

The estate utilized a capitalization of dividends methodology which the Court deemed to be improper as the method is too heavily relied on the future performance of PHC and its future dividend payouts while ignoring “the most concrete and reliable data of value”, the actual market prices of the stocks constituting PHC’s portfolio.  Accordingly, in valuing this type of interest, the net asset value method, as utilized by the Commissioner’s expert, was deemed proper

Lack of Control Discount

Both parties used the same data, however, the estate used the median value of 8% as the lack of control discount while the Commissioner derived its discount of 6% from the mean value of the data of 6.9%.  The Court examined the data and determined that of the 59 data points used, three outliers needed to be removed because it tended to skew the calculations.  Upon recalculation without the outlying data, the mean value was 7.75%, which the Court concluded was the reasonable control discount to use in this case.

Lack of Marketability Discount

The parties are in general agreement that lack of marketability discounts generally range from 26.4% to 35.6%, with an average discount of 32.1%.  The Commissioner applied a 21% discount because PHC paid consistent dividends, had little debt, and was professionally managed.  However, the estate argued for a 35.6% discount because the data was based upon entities whose stock are more freely marketable than that of PHC whose non-public status is of indefinite duration.  The Court found neither party’s argument convincing and applied the average of the data set (i.e. 32.1%)

LINK TO DECISION