Summer 2015


Focus on Reasonable Compensation in Eminent Domain and Expropriation Controversies

Editor for This Issue: Kevin M. Zanni Eminent Domain and Expropriation Insights

Best Practices:
Valuing a Going-Concern Location-Specific Business Operation in an Eminent Domain or Expropriation Matter

Kevin M. Zanni
Eminent domain and expropriation actions, whether brought about for reasons such as for the good of the general public or for project-specific procurement objectives, may result in significant damage to a business entity. In certain cases, primarily in businesses that are property-specific or location-specific, the damage may be all-encompassing. For property-specific or location-specific businesses, the reasonable compensation for the “taking” may be greater than the value of the tangible assets. The measurable loss can include (1) tangible assets, (2) intangible assets, and (3) future earning potential. This discussion provides insight into the types of business operations that are most at risk of total loss as a result of an eminent domain action. An illustrative example is presented to show what types of factors are typically considered in the valuation of a locationspecific business involved in an expropriation action.

Panel Discussion with Condemnation-Focused Attorneys
Kevin M. Zanni
This column presents a roundtable discussion between our Insights editor Kevin Zanni and a panel of distinguished legal counsel who regularly practice in the eminent domain discipline.

Are Municipal Land-Use Commissions Paying Attention?
G. Wilson Horde III, Esq., and Hans Clausen, Esq.
Following the U.S. Supreme Court’s strongly pro-developer holding in Koontz v. St. John’s River Management District, a seminal 2013 decision on land use, permitting, and inverse condemnation, most real estate developers and their legal counsel anticipated a relaxation in the aggressiveness of municipal permitting and regulatory bodies. Some of those municipal bodies, however, apparently place little importance on judicial rulings and restrictions no matter how “supreme.” In the Koontz decision, Justice Samuel Alito wrote, “Extortionate demands for property in the land-use permitting context run afoul of the Takings Clause [of the Constitution] not because they take property but because they impermissibly burden the right not to have property taken without just compensation.”1 Notwithstanding the Supreme Court’s recent guidance, it seems to be an increasingly common story that a real estate developer reaches a common understanding with a municipal land-use authority concerning the permissibility of a particular development— then, after commencing or completing the development, is met with additional or inconsistent demands from the municipal authority, often in apparent bad faith.

E.L. Thompson Farms, Ltd. v. Aurora County, South Dakota: Milk Cows, Manure, and Management Problems—Utilizing Experts to Maneuver through the Muck of Inverse Condemnation
Richard P. Tieszen, Esq., and Naomi R. Cromwell, Esq.

Public-Private Partnership and the Taking by Eminent Domain of a Previously Granted Interest in Land:Litigation Pitfalls and the Continuing Impact of West River Bridge Co. v. Dix
Nicholas W. Myles, Esq., and Scott A. King. Esq.
Legal counsel commonly retain valuation and/or forensic accounting professionals to assist in eminent domain and expropriation disputes. Such engagements may include the valuation of a going-concern business interest or the quantification of economic damages related to the condemnee. This discussion provides insights into an inverse condemnation litigation dispute involving a dairy farm operation in South Dakota. More specifically, this discussion provides an example of how forensic accounting experts and real estate appraisal experts worked together in an inverse condemnation dispute. Many eminent domain controversies require both types of forensic experts.

Valuation of Technology-Related Intangible Assets
Robert F. Reilly, CPA
Going-concern business entities may be the subject of an eminent domain or expropriation action. In such an instance, often, both the business entity’s tangible assets and the business entity’s intangible assets may be subject to the “taking.” Therefore, the entity owner should receive reasonable compensation for both the tangible assets and the intangible assets. Many business entities own and operate technology-related intangible assets. This discussion explains—and illustrates—the valuation of technology-related intangible assets within an eminent domain reasonable compensation context.

Business Valuation Insights

Thought Leadership:
Issues Related to the Treatment of an NOL Carryforward in Income Approach Valuation Methods

Aaron M. Rotkowski and Robert F. Reilly, CPA
Property tax assessors often value centrally assessed taxpayers using income approach unit valuation methods. Such income approach valuation methods include the direct capitalization method and the yield capitalization method. For taxpayers that have accumulated a net operating loss (NOL) carryforward, some property tax assessors (1) estimate taxpayer normalized net operating income (NOI) based on a 0 percent income tax rate but (2) apply an after-tax (i.e., tax-affected direct capitalization rate in the income approach valuation analysis. This discussion considers if such a 0 percent income tax rate assumption is appropriate in the income approach valuation of a taxpayer unit for property tax valuation purposes. And, this discussion considers if and how the use of such a 0 percent income tax rate assumption may overstate both the value of the taxpayer unit and the value of the NOL tax attribute component of the taxpayer unit.

Adjusting for Underfunded Pension and Postretirement Liabilities
Christopher W. Peifer
Fewer and fewer companies have pension liabilities recorded on their balance sheets. This is because most employer companies continue to shift retirement programs to defined contribution plans such as 401(k) plans instead of traditional defined benefit pension plans. However, a significant number of companies still provide pension plans for their employees. Since many employer pension plans and other postretirement benefits plans are underfunded, to some degree, the funding status of a company’s pension and postretirement benefits should be considered as part of the business valuation process.

Tax Controversy Insights

Valuation Treatment of Built-In Capital Gains in a C Corporation
Frank “Chip” Brown, CPA
A built-in capital gains adjustment, if appropriate, is a discount or adjustment in the value of an ownership interest in an entity, typically a C corporation, that has a built-in capital gains tax liability. Corporate income taxes that will be due on the appreciation in the value of assets owned by a business can affect the value of an ownership interest in that business. The valuation analyst can develop an appropriate adjustment to value to offset the impact of capital gains taxes paid on the appreciated assets at some future liquidation event. This discussion demonstrates that, under most circumstances, built-in capital gains taxes in a C corporation (even though payment of those taxes is not due until the asset is sold in the future) reduces the value of the C corporation. Illustrative examples are provided in this discussion. In addition, this discussion summarizes the factors that the analyst typically considers in determining the amount of any value adjustment related to the built-in capital gains in a C corporation.

Estate of Giustina v. Commissioner

Christopher M. Silvetti
In matters argued before the U.S. Tax Court, valuation professionals are frequently asked to provide opinions related to the value of closely held businesses and of fractional ownership interests in closely held businesses. This discussion relates to a recent appeal of a U.S. Tax Court decision involving such valuation issues. The case in question is Natale B. Giustina v. Commissioner. In this case, the Tax Court’s selection of the method for valuing a fractional ownership interest in a closely held business was appealed to the United States Court of Appeals for the Ninth Circuit. The Appeals Court reversed the decision and remanded it back to the Tax Court for further consideration.

The Service Continues to Challenge Taxpayer Transactions Based on the Economic Substance Doctrine

Robert F. Reilly, CPA