Estate of Gallagher v. Comm'r, T.C. Memo 2011-148, 2011 Tax Ct. Memo LEXIS 150 (T.C., 2011)
*240
Decision will be entered under Rule 155, Tax Court Rules of Practice and Procedure.
James R. Spoor and Jon M. Wilson, for petitioner.
Stephen R. Takeuchi and Robert W. Dillard, for respondent.
HALPERN, Judge.
HALPERN
SUPPLEMENTAL MEMORANDUM OPINION
HALPERN, Judge: Our Memorandum Findings of Fact and Opinion in this case was reported as Estate of Gallagher v. Commissioner, T.C. Memo. 2011-148. We issue this supplemental opinion to correct an error in our computation of the value of 3,970 membership interests (units) in Paxton Media Group, LLC, a Kentucky limited liability company included in Louise Paxton Gallagher's gross estate.
In the appendix to our original report, we calculated the value of the 3,970 units to be $32,601,640 by using a discounted cashflow analysis. We computed the total present value of expected cashflows for 5 years and added to that sum the present value of a reversion, which we assumed to be received at the end of the fifth year. In computing the present value of the reversion, we erred in using the present value factor "(1 + 0.1)6". To determine the present value of the reversion to be received at the end of the fifth year, the value of the exponent in the present *241 value factor should have been 5, not 6. We have attached hereto a new appendix in which we have revised our computation of the value of the 3,970 units, using the corrected present value factor and determining a value for the units of $35,761,760 (an increase of $3,160,120), which we find to be the value of the 3,970 units (the shares) as of the valuation date.
Decision will be entered under Rule 155, Tax Court Rules of Practice and Procedure.
Valuation of 3,970 Units of Paxton Media Group, LLC as of July 5, 2004
Projected Items
LTM * ended June 27, 2004
Year 1
Year 2
Revenue
$163,602,288
$172,514,890
$175,102,613
Operating income
62,795,420
63,737,351
(@ 36.4% op. margin)
Other income (expense)
172,515
175,103
(@ 0.1% of revenue)
Adjusted operating income
62,967,935
63,912,454
Cashflow adjustments
+ Depreciation
5,347,962
5,428,181
(3.1% of revenue)
(-) Working capital additions
222,815
64,693
(-2.5% of revenue)
(-) Capital expenditures
(4,830,417)
(4,902,873)
(2.8% of revenue)
Yearend cashflow
63,708,295
64,502,455
Discount rate (WACC)
10%
10%
Present value interest factor (1 / (1.1) n)
0.9091
0.8265
Present value of cashflows
57,917,211
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ESTATE OF LOUISE PAXTON GALLAGHER, DECEASED, F. GORDON SPOOR, PERSONAL REPRESENTATIVE, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent *
Estate of Gallagher v. Comm'r, T.C. Memo 2011-148, 2011 Tax Ct. Memo LEXIS 150 (T.C., 2011)
*240
Decision will be entered under Rule 155, Tax Court Rules of Practice and Procedure.
James R. Spoor and Jon M. Wilson, for petitioner.
Stephen R. Takeuchi and Robert W. Dillard, for respondent.
HALPERN, Judge.
HALPERN
SUPPLEMENTAL MEMORANDUM OPINION
HALPERN, Judge: Our Memorandum Findings of Fact and Opinion in this case was reported as Estate of Gallagher v. Commissioner, T.C. Memo. 2011-148. We issue this supplemental opinion to correct an error in our computation of the value of 3,970 membership interests (units) in Paxton Media Group, LLC, a Kentucky limited liability company included in Louise Paxton Gallagher's gross estate.
In the appendix to our original report, we calculated the value of the 3,970 units to be $32,601,640 by using a discounted cashflow analysis. We computed the total present value of expected cashflows for 5 years and added to that sum the present value of a reversion, which we assumed to be received at the end of the fifth year. In computing the present value of the reversion, we erred in using the present value factor "(1 + 0.1)6". To determine the present value of the reversion to be received at the end of the fifth year, the value of the exponent in the present *241 value factor should have been 5, not 6. We have attached hereto a new appendix in which we have revised our computation of the value of the 3,970 units, using the corrected present value factor and determining a value for the units of $35,761,760 (an increase of $3,160,120), which we find to be the value of the 3,970 units (the shares) as of the valuation date.
Decision will be entered under Rule 155, Tax Court Rules of Practice and Procedure.
Valuation of 3,970 Units of Paxton Media Group, LLC as of July 5, 2004
Projected Items
LTM * ended June 27, 2004
Year 1
Year 2
Revenue
$163,602,288
$172,514,890
$175,102,613
Operating income
62,795,420
63,737,351
(@ 36.4% op. margin)
Other income (expense)
172,515
175,103
(@ 0.1% of revenue)
Adjusted operating income
62,967,935
63,912,454
Cashflow adjustments
+ Depreciation
5,347,962
5,428,181
(3.1% of revenue)
(-) Working capital additions
222,815
64,693
(-2.5% of revenue)
(-) Capital expenditures
(4,830,417)
(4,902,873)
(2.8% of revenue)
Yearend cashflow
63,708,295
64,502,455
Discount rate (WACC)
10%
10%
Present value interest factor (1 / (1.1) n)
0.9091
0.8265
Present value of cashflows
57,917,211
53,311,279
Total present value of cashflows
$246,332,859
(year 1 - year 5)
Present value of reversion:
462,981,425
66,434,946 (1.01 / (0.1 - 0.01)) / ((1 + 0.1)5)
Total present value of all future cashflows
709,314,284
Long-term debt
(243,602,413)
Enterprise value of PMG (w/o discount)
465,711,871
Value less in-the-money value of options1
448,290,271
Value with 23% minority discount
345,183,509
Value with 31% lack of marketability discount
238,176,621
Value of each unit
9,008
Value of 3,970 units
35,761,760
* Last 12 months
1($9,008-$2,786) x $2,800 = $17,421,600
Valuation of 3,970 Units of Paxton Media Group, LLC as of July 5, 2004
Projected Items
Year 3
Year 4
Year 5
Revenue
$176,853,640
$178,622,176
$180,408,398
Operating income
64,374,725
65,018,472
65,668,657
(@ 36.4% op. margin)
Other income (expense)
176,854
178,622
180,408
(@ 0.1% of revenue)
Adjusted operating income
64,551,579
65,197,094
65,849,065
Cashflow adjustments
+ Depreciation
5,482,463
5,537,288
5,592,660
(3.1% of revenue)
(-) Working capital additions
43,776
44,213
44,656
(-2.5% of revenue)
(-) Capital expenditures
(4,951,902)
(5,001,421)
(5,051,435)
(2.8% of revenue)
Yearend cashflow
65,125,916
65,777,174
66,434,946
Discount rate (WACC)
10%
10%
10%
Present value interest factor (1 / (1.1) n)
0.7513
0.6830
0.6209
Present value of cashflows
48,929,101
44,925,810
41,249,458
Total present value of cashflows
(year 1 - year 5)
Present value of reversion:
66,434,946 (1.01 / (0.1 - 0.01)) / ((1 + 0.1)5)
Total present value of all future cashflows
Long-term debt
Enterprise value of PMG (w/o discount)
Value less in-the-money value of options1
Value with 23% minority discount
Value with 31% lack of marketability discount
Value of each unit
Value of 3,970 units
1($9,008-$2,786) x $2,800 = $17,421,600
Footnotes
*. This opinion supplements our previously filed Memorandum Opinion, Estate of Gallagher v. Commissioner, T.C. Memo. 2011-148.↩
Estate of Gallagher v. Comm'r, 2011 T.C. Memo. 244, 102 T.C.M. 388, 2011 Tax Ct. Memo LEXIS 240 (tax 2011).
2011 T.C. Memo. 244 (Estate of Gallagher v. Comm'r) — published by Counsel Stack Legal Research, free access to 12M+ legal documents.