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Post-Valuation Date Events: To Use or Not to Use?

While post-valuation date information is generally excluded in determining
fair market value, in some cases it is relevant and has been admitted as evidence

Don Wenk

 
 

A valuation of a business, real estate holding or any other type of asset is performed “as of” a specific date. This date generally serves as a critical cut-off point, as the appraiser considers what was known or foreseeable at this date by a hypothetical buyer of the business or asset. Generally, events subsequent to the valuation date should not impact the appraisal of the property as of the valuation date. The prohibition against using post-valuation date information is supported by various IRS Revenue Rulings and business valuation standards.

For instance, Revenue Ruling 59-60, which is widely regarded as the most comprehensive IRS promulgation on business valuation, states, “Valuation of securities is, in essence, a prophesy as to the future and must be based on facts available at the required date of appraisal.” Additionally, the American Society of Appraisers (ASA) has business valuation standards which state that an appraisal has the following quality: “It considers all relevant information as of the appraisal date available to the appraiser at the time of performance of the valuation.” (Note: The ASA separately defines the appraisal date as the “specific point in time as of which the valuator’s opinion of value applies.”) Finally, the Institute of Business Appraisers’ (IBA) Business Appraisal Standards state:

“An appraisal shall be based upon what a reasonably informed person would have knowledge of as of a certain date. This shall be known as the appraisal’s ‘date of valuation’ or ‘effective date’ and accordingly reflect the appraiser’s supportable conclusion as of that date. Information unavailable or unknown on the date of valuation must not influence the appraiser or contribute to the concluding opinion of value.”

With these pronouncements, it would seem relatively straight-forward that using post-valuation date information is not appropriate. However, as with most issues in valuation, there is some gray area. While post-valuation date information is generally excluded from consideration in determining fair market value, there are some cases in which this information is relevant and has been allowed by the courts as admissible evidence. The criteria most widely considered is whether the information is known or foreseeable. If the information passes this test, the Tax Courts have allowed its consideration in specific circumstances. For instance, in the case of Estate of Ridgely v. U.S., the court stated:

“There is no doubt that evidence of a sale taking place after a valuation date has probative force bearing on the value as of the earlier critical date – where there has been no material change in conditions or circumstances in the interim.”

While the Ridgely case specified that consideration of subsequent events is allowed if the events were foreseeable as of the valuation date, the Tax Courts have also allowed consideration of subsequent transactions even if the sales were not contemplated or foreseeable as of the valuation date. Then exemption seems to be founded in the belief that the sale of actual or comparable property is such strong evidence that it is worthy and therefore reliable evidence of fair market value. This was the reasoning in Estate of Jung v. Commissioner, 101 T.C. 412 (1993).

In Jung, the court also drew a distinction between two categories of subsequent events, distinguishing between subsequent events that affect fair market value as of the valuation date, and subsequent events that may be used as evidence of fair market value as of the valuation date.

Relevance

One of the key issues with respect to utilization of subsequent events is relevance. Two types of relevance have been identified by the courts: relevance in time and relevance in type. Relevance in time means that the event is not so far removed from the valuation date as to no longer have bearing on the subject asset’s value as of the valuation date. Relevance in type means that the subsequent event is similar to something that was foreseeable and predictable as of the valuation date. The Jung case addressed the relevance in time issue by stating that, “Of course, appropriate adjustments must be made to take account of differences between the valuation date and the dates of the later-occurring events.” However, the greater the distance between the valuation date and the occurrence of the subsequent event, the greater the subjectivity required in making such adjustments or determining the appropriateness of the subsequent event as an indicator of value.

In general, the Tax Courts have been more likely to admit evidence of actual sales prices received for property after the valuation date as long as the sale was an arm’s length sale, the sale occurred within a reasonable time after the valuation date, and no intervening events drastically changed the value of the property. Additionally, it should be stressed that most case law on the subject of post valuation date information does not allow the consideration of this subsequent information. The subsequent data allowed in certain cases has been only of the sale of the asset being valued and has only been in the gift and estate tax context.

Perspective

In our practice, we have found certain occasions (always in the context of gift and estate tax valuations) that it is both practical and relevant to use information regarding a sale of the property subsequent to the valuation date. After all, there is no better indicator of value than an actual arm’s length transaction involving the subject asset. In using this information, though, we perform the appropriate industry and economic analyses to ensure that there were no significant changes occurring in the interim that would materially impact the value of the asset. Additionally, while the Jung case utilized a transaction that occurred approximately two years subsequent to the valuation date, we believe that a more conservative time frame for which subsequent data can be utilized is generally more appropriate and should incorporate an analysis of any significant events that would affect the value of the asset.