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Articles From Brisbane Consulting Group

From Fraud to Pandemic: How Valuators Handle Subsequent Events

Fraud can paralyze a business, large or small. In some cases, a business that falls victim to employee theft can never fully recover. Fraud scams often take years to detect, so they may not have an immediate impact on stock price.

When valuing a business, experts must put themselves in the shoes of hypothetical buyers and sellers and consider only what was “known or knowable” on the valuation date. In a recent U.S. District Court case, the estate filed a tax return based on the exchange price of bank stock before the company disclosed a devastating fraud scam. After the public disclosure of the incident, the stock became worthless. Here's why the estate filed a refund claim — and the court denied its claim.


For estate and gift tax purposes, fair market value is defined in IRS Revenue Ruling 59-60 as: “The amount at which the property would change hands between a willing buyer and willing seller, when the former is not under any compulsion to buy, and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts.”

The fair market value of a decedent's property may be calculated on either:

  • The date of death, or
  • An “alternative valuation date,” occurring six months from the decedent's death.

In general, the most reliable evidence of fair market value of corporate stock is the price paid on an active exchange, such as the New York Stock Exchange. The price reflects what public investors knew on that specific date.

Refund Claim

In Carter, the estate chose the alternative valuation date (March 21, 2008) to value its interest in Colonial BancGroup. The estate argued that the stock was worthless on the valuation date due to a multimillion-dollar “sham mortgage” scheme perpetrated by one of its customers.

In 2013 and 2016, a representative for the estate filed an amended return and sought a refund of allegedly overpaid estate tax. The court denied her claim for various reasons.

History of the Alternative Valuation Date

It may seem unfair or inequitable to owe a substantial tax bill on an inheritance that proves to be worthless shortly after it's received. To correct supposed injustices resulting from extreme fluctuations in market valuation, Congress added the alternative valuation date provision. This intervention was made after the stock market crash of 1929, to provide relief for post-death decreases in the value of estate property.

Congress initially provided for an alternative valuation date one year after the decedent's death. However, in 1970, Congress amended the alternative valuation date to six months after the decedent's death, because it changed the deadline for filing estate tax returns from 15 months to nine months.

Recently, a bill, known as the Fair Tax Act of 2019, was introduced in the U.S. House to repeal the estate tax altogether. However, in the midst of the novel coronavirus (COVID-19) crisis, it's unlikely that proposed legislation has enough support to be enacted any time soon.

Timeline of Events

The following three relevant dates in this case:

  1. September 21, 2007, the date of death.
  2. March 21, 2008, the six-month alternative valuation date.
  3. August 3, 2009, the date that Colonial BancGroup publicly disclosed the fraud incident, causing the stock value to plummet.

The market for Colonial BancGroup didn't collapse until more than a year after the six-month alternative valuation date. Until the fraud announcement affected the exchange price, the shareholders were unaware of the scam, and it exhibited no effect upon the stock's fair market value.

Court Decision

When valuing a business, it's important to differentiate between events that affect value and those that provide an indication of the company's value.

A third-party buyout that happens a year after the valuation date is an example of an event that provides an indication of what the business is worth. These types of subsequent events might be used to provide evidence of fair market value, assuming that market conditions remain consistent with conditions on the valuation date and the transaction occurs at arm's length.

However, in general, when a subsequent event affects the stock price, a valuation expert can factor it into his or her analysis only if it was “known or knowable” as of the valuation date. In Carter, the fraud scam adversely affected Colonial BancGroup's stock price — but not until more than a year after the valuation date. The company's shareholders were unaware of the fraud and, therefore, didn't factor it into their investment decisions.

The U.S. District Court for the Northern District of Alabama reasoned that, if the estate had sold the stock on the valuation date, it would have received the market rate for the stock as of that date. Therefore, the stock's value was correctly reported on the original estate tax return, and the estate wasn't entitled to a refund. 

In Carter, the court concluded that “the fair market valuation method does not include an exception for fraudulent or criminal actions not known to the public, even if those actions lower or destroy the stock's value.” The court also noted that, while it was “sympathetic” to the estate's circumstances, it was unwilling invoke its equitable powers to provide relief.

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It's important to disclose to your business valuation expert any subsequent event that may affect value or provide an indication of value. He or she can determine whether it's appropriate to factor the event into the valuation analysis. Contact your business valuation advisor for more information.

Carter v. United States, No. 18-cv-01380-HNJ, N.D. Ala. Aug. 9, 2019

Factoring COVID-19 into the Valuation Equation

As Carter demonstrates, the valuation date is a critical decision when valuing a business. It typically coincides with the subject company's quarterly or annual financial statement date. For that reason, December 31 is a common cutoff for data that's used to value calendar-year businesses, especially for smaller entities that don't issue interim statements.

Experts consider external market conditions on the valuation date when valuing a business. Today, the novel coronavirus (COVID-19) outbreak is a developing crisis that's having an ongoing effect on many types of businesses. What exactly was “known or knowable” about COVID-19 as of December 31, 2019 (or March 31, 2020)? To answer this question, consider how hypothetical investors would have perceived the situation on the valuation date.

The following timeline provides insight into what public knew on various dates through April.

Timeline of COVID-19-Related Milestones

December 31, 2019 – April 16, 2020

December 31, 2019

China reports to the World Health Organization (WHO) that there was an outbreak of pneumonia from December 12 to December 29 in Wuhan, China.

January 7, 2020

The WHO identifies the virus as a novel coronavirus.

January 21, 2020

Officials in Washington state confirm the first case in the United States.

January 30, 2020

The WHO declares the COVID-19 outbreak a public health emergency.

February 24, 2020

U.S. stock markets plunge for the first time over COVID-19-related fears.

March 6, 2020

The number of COVID-19 cases hits 100,000 globally. President Trump signs an $8 billion COVID-related relief package.

March 11, 2020

The COVID-19 outbreak is officially upgraded to a pandemic by the WHO.

March 13, 2020

President Trump declares a national state of emergency. Several U.S. states announce plans to close schools.

March 15, 2020

Guidance from the Centers for Disease Control and Prevention recommends canceling or postponing in-person events of 50 people or more in the United States for the next 8 weeks.

March 16, 2020

President Trump advises Americans to avoid gatherings of 10 or more people, going out to bars and restaurants and discretionary travel. U.S. stocks plunge (again).

March 18, 2020

President Trump signs the Families First Coronavirus Response Act into law, providing COVID-19-related health care treatments and financial relief measures.

March 27, 2020

President Trump signs the Coronavirus Aid, Relief, and Economic Security (CARES) Act, providing individuals and businesses with roughly $2 trillion in financial relief. The federal guidelines on social distancing are extended until April 30.

April 2, 2020

The U.S. Department of Labor (DOL) released new figures that show more than 10 million Americans filed for unemployment benefits in March.

April 15, 2020

The U.S. Department of the Treasury starts issuing Economic Impact Payments.

April 16, 2019

President Trump announces plans for gradually reopening the U.S. economy on a state-by-state basis.

April 24, 2020

President Trump signs the Paycheck Protection Program and Health Care Enhancement Act, providing an additional $484 billion in funding for small business loans and grants, hospitals and COVID-19 testing.

April 30, 2020

The DOL announces that U.S. unemployment filings in the past six weeks have reached 30 million.

There is universal date for determining when COVID-19 was known or knowable. COVID-19 probably wasn't on the radar for most U.S. businesses or investors at year end. Notable events for businesses operating in the United States might include January 30 (when the WHO declared COVID-19 a public health emergency, February 24 (when the stock markets first experienced a major decline), March 16 (when Trump issued social distancing guidance), and March 27 (when the federal government passed a massive financial relief package).

It's important for valuators to evaluate economic conditions within the subject company's industry and region, too. The pandemic has devastated many industries, such as airlines, hotels, restaurants, and specialty retail. But some companies — such as distilleries, delivery services, and grocers — are struggling to keep up with surging demand. In addition, some parts of the country have suffered more financial distress from COVID-19 than others — and the timing of the outbreak may vary regionally.

There's no one-size-fits-all approach to estimating the short- and long-term financial impacts of the pandemic. Many variables remain unclear in the midst of the crisis. Contact a valuation professional to determine what's appropriate in your situation.

From Fraud to Pandemic: How Valuators Handle Subsequent Events

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Doug is a Partner with Brisbane Consulting Group, LLC providing business valuation, forensic accounting, and litigation support services. He has extensive valuation experience and has served as a financial consultant and expert to attorneys in the economic aspects of matrimonial dissolution. Doug has experience consulting with publicly traded entities and valuing a variety of closely held companies in connection with mergers, acquisition and divestitures, business combinations, estate and gift tax planning, ESOPs, and purchase allocations.


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