Estate of Gallagher v. Comm'r , 102 T.C.M. 388 ( 2011 )

ESTATE OF LOUISE PAXTON GALLAGHER, DECEASED, F. GORDON SPOOR, PERSONAL REPRESENTATIVE, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent ^*

Estate of Gallagher v. Comm'r

Docket No. 16853-08

United States Tax Court

T.C. Memo 2011-244; 2011 Tax Ct. Memo LEXIS 240; 102 T.C.M. (CCH) 388;

October 11, 2011, Filed

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Estate of Gallagher v. Comm'r, T.C. Memo 2011-148">T.C. Memo 2011-148, 2011 Tax Ct. Memo LEXIS 150">2011 Tax Ct. Memo LEXIS 150 (T.C., 2011)

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.

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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 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

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Footnotes

• *. This opinion supplements our previously filed Memorandum Opinion, Estate of Gallagher v. Commissioner, T.C. Memo. 2011-148.↩