Burden of Proof in Tax Cases: Valuation and Ranges — An Update

In this Article, the author discusses the difficulty in many valuation cases of determining a definite valuation point by the required degree of persuasion (more likely than not in most civil cases). This point was made cogently in Cede & Co. v. Technicolor, Inc., a frequently cited opinion by the Delaware Court of Chancery, a forum for significant litigation involving corporate valuations: [I]t is one of the conceits of our law that we purport to declare something as elusive as the fair value of an entity on a given date. . . . [V]aluation decisions are impossible to make with anything approaching complete confidence. Valuing an entity is a difficult intellectual exercise, especially when business and financial experts are able to organize data in support of wildly divergent valuations for the same entity. For a judge who is not an expert in corporate finance, one can do little more than try to detect gross distortions in the experts’ opinions. This effort should, therefore, not be understood, as a matter of intellectual honesty, as resulting in the fair value of a corporation on a given date. The value of a corporation is not a point on a line, but a range of reasonable values, and the judge’s task is to assign one particular value within this range as the most reasonable value in light of all the relevant evidence and based on considerations of fairness. Corporate valuations for estate tax are just one context of tax litigation, but there are many other contexts. A prominent example for some time now has been transfer pricing. Sometimes when ranges are identified, arbitrary conventions (such as the midpoint in trades as in the case of publicly-traded stock) can be used to determine the value in tax litigation. But when there is no such convention that should be applied, the burden of persuasion can resolve the valuation issue by identifying the range. The party bearing the burden of persuasion (or risk of non-persuasion) then has persuaded only as to the end of the range that does not favor that party; the value, based on persuasion, is determined accordingly. The party bearing the burden of persuasion in tax cases is usually the taxpayer. In this Article, the author discusses interesting features of the burden and how, at least before the Tax Court, the burden of persuasion might shift to the Service under the Supreme Court’s decision in Helvering v. Taylor, which the author urges is often misunderstood. Another benefit of identifying a range of values is that, if it is determined on appeal that the trier of fact misapplied the burden of persuasion but did identify the range, the court of appeals can resolve the case by picking the other end of the range (unless a successful attack is made on the trial court’s choice for the ends of the range).