Walker v. Daniels, 2024
This was an Iowa appeal of a trial court decision of an oppression suit filed by two sisters who were minority shareholders in a family farming operation. This was a dispute between three brothers and their two sisters over their family farming operation. Before the appellate court were the questions as to whether the trial court determined the correct date of valuation and whether it determined the proper value of Daniels Farm Inc., which owned about 1,100 acres of farmland in northwest Iowa. This valuation determined how much the corporation must pay each sister for their shares of Daniels Farms.
The siblings disputed the correct date of valuation and whether the valuation “should include discounts for taxes or transaction costs that would be incurred in a hypothetical liquidation.” The court agreed with the sisters and ordered Daniels Farms to pay them each $2.9 million for their interest. The brothers had proposed to pay $1.5 million to each sister. The appellate court agreed that the sisters have the best argument on both questions.
The plain text of section 490.1434(4) presumptively sets the valuation date as the day before the sisters filed their amended petition first asserting a dissolution claim, not the day before their original petition seeking damages for common law minority-shareholder oppression.
The facts and background of the dispute were outlined in the opinion but were not germane to the remaining questions noted above. We have noted the clear decision regarding the valuation date above, which leaves the issue of the valuation of Daniels Farms. Equity did not call for a departure from the statutory valuation date, as both parties argued.
Valuation of Daniels Farms.
The sisters’ expert witness provided the only credible evidence as to the value of Daniels Farms as of Aug. 23, 2021. Both parties’ experts agreed that the net asset method was appropriate. However, the experts did disagree on whether to discount the net asset value for tax consequences or transaction costs from a hypothetical liquidation. The trial court found that the opinion of the sisters’ expert that the discounts should not apply was the correct answer and adopted that expert’s value.
The brothers had provided no evidence that contemplated a sale of the assets of Daniels Farms. The trial court acknowledged that Daniels Farms was a C corporation and, thus, could have to pay corporate taxes if its assets were sold. However, the trial court reasoned that this is “not the determining factor.” It pointed to the expert’s opinion that, “with operations continuing into the foreseeable future and no liquidation events imminent, management has ample time to take strategic action to minimize or evade altogether any hypothetical tax consequences,” including “conversion to an S-Corporation five years prior to a sale or a 1031 Election to defer taxes.”
Consistent with the sisters’ expert, the trial court adopted a value of $2.9 million for the interests of each sister.
Discount for corporate taxes and transaction costs.
The Iowa statute required the trial court to determine the fair value of the sisters’ shares in Daniels Farms, but it did not define “fair value.” But the Iowa Supreme Court defined it as “the value of the corporation’s shares” calculated “[u]sing customary and current valuation concepts and techniques generally employed for similar businesses in the context of the transaction requiring appraisal” while not “discounting for lack of marketability or minority status.” Iowa Code § 490.1301(3).
The brothers and the sisters both presented expert witnesses to determine the fair value of the sisters’ shares in Daniels Farms. The experts both agreed that the net asset method was most appropriate considering the farming operations of Daniels Farms. However, the experts disagreed as to whether deductions should include corporate taxes or transaction costs that the corporation might incur in a sale or liquidation of the corporate assets. The trial court found that sisters’ expert was more credible. Their expert opined that the hypothetical taxes and costs should not be deducted because no sale of assets was contemplated. The trial court relied on the expert’s opinion that, “with operations continuing into the foreseeable future and no liquidation events imminent, management has ample time to take strategic action to minimize or evade altogether any hypothetical tax consequences,” including “conversion to an S-Corporation five years prior to a sale or a 1031 Election to defer taxes.”
The brothers argued that the trial court erred in not discounting for tax consequences based on the Iowa Supreme Court decision in Guge v. Kassell Enterprises, Inc. They reasoned that, because Daniels Farms was a C corporation, “subjecting it to a potential tax liability at the corporate levels—the double-taxation logic—would not apply here and the tax discount should be made.”
However, Guge also said that, “in a fair-value determination, tax consequences should be considered only in the most limited circumstances, which in most cases means only when a sale of those assets is imminent and unrelated to the transaction that triggered the petitioning shareholders’ action.” The trial court found no evidence of a sale or potential sale of the Daniels Farms assets that would create any tax consequences. No adjustment for tax consequences was made.
An earlier case, Daniels v. Holtz [not the same “Daniels” as here], relied on various federal courts approving big tax deductions. However, those cases used the fair market value standard and not the fair value standard used in this case. “And so, because we find Daniels, Inc. was properly valued on the date before the sisters’ amended petition was filed and that valuation properly did not discount for the corporation’s tax consequences and transaction costs, we affirm the district court’s fair-value determination.”