Subjective Belief Is Insufficient To Establish Potential Value of Business For Tax Purposes Without Objective Evidence That the Belief Was Reasonable
BILTHOUSE v. UNITED STATES (January 15, 2009)
Alan and Patricia Bilthouse bought $500,000 worth of stock in S&E Contractors (“S&E”), a heavy construction contractor in Florida. S&E’s principal business was public works projects, for which it needed to be bonded. S&E came upon hard times beginning in early 1994. It suffered severe losses from cost overruns on a large project, eventually defaulting on the bonds in 1995. Without bonding, S&E had to discontinue its public works projects. It did file a lawsuit in late 1995 to recover its losses from the project. The lawsuit was settled in 1997 with S&E receiving no money. The confluence of the IRS regulations and the Bilthouse personal situation made the S&E losses much more valuable to them if their loss occurred in 1997 rather than 1995. The Bilthouses sought a refund from the IRS from their 1997 tax payment, asserting that their interest in S&E became worthless in 1997 and their shares were, therefore, “disposed of” in that year. The IRS denied their claim. The Bilthouses sued in district court. The court granted summary judgment to the United States. The Bilthouses appeal.
In their opinion, Judges Ripple, Kanne and Williams affirmed. The principal question before the Court was whether the stock became worthless in 1995 or 1997. The parties agreed that, for loss computation purposes, the stock is considered “disposed of” the year it became worthless. The Court noted that “worthless” is not defined by the IRS but is a fact question, taking into account both the liquidating value and the potential for value. It is the Bilthouse’s burden, however, to establish the facts supporting the worthlessness in 1997. The Bilthouses rely on two facts: a) the lawsuit was expected to result in an award in excess of $15 million and b) S&E continued its construction activity on small, private projects through 1997. The Court rejected first basis. Although the plaintiffs presented evidence of the subjective belief of many that the lawsuit would succeed, the Court stated that the proper inquiry requires objective evidence of the reasonableness of those beliefs. The Bilthouses presented no such evidence – nor did they present evidence of the basis for the calculation of damages in the event of success. The Court viewed the continued projects as a closer question. Continued operations of a company can establish the potential for value. The plaintiffs again, however, were unable to demonstrate a sufficient evidentiary basis for their claim. The record was silent on the amount of private work S&E was engaged in, its future prospects, and whether the private projects would have eventually been sufficient to revive the company. The Court concluded that the Bilthouses failed to carry their burden.
