Matter of Digeser v. Flach, Index No. 2383/13, 01/31/2017 (Platkin, J.)

Judicial Dissolution

By Denise Dessel | Staff Writer

Gould Erectors & Rigging, Inc. (“Gould”) was a corporation formed to perform commercial construction work. Gould’s owners formed Flach Crane & Rigging Co., Inc. (“Flach Crane”) as a separate corporation to insulate Gould’s assets from potential liabilities. Plaintiff and Defendant jointly managed Gould and Flach Crane. Upon the deterioration of their relationship, Plaintiff commenced a special proceeding seeking judicial dissolution of both corporations; as part of the proceeding’s remedy, Plaintiff agreed to Defendant purchasing Plaintiff’s shares at their fair market value. Additionally, Plaintiff sought an award of interest. A trial followed on the dissolution. The parties had three major disagreements in determining the valuation of Gould and the Plaintiffs shares: (1) the averaging of income; (2) the adjustments for non-arm’s length transactions and (3) the tax rate to be applied to Gould’s net income.

As to the parties’ first claim, Plaintiff valued his interest in Gould at $3,812,000 by solely relying on Gould’s income for fiscal year (“FY”) 2012; Plaintiff did not give any weight to the performance in prior years. In contrast, Defendant relied upon a weighted average using income from four fiscal years. Defendant argued that weighting was proper based upon Gould’s increase in gross profits in FY 2012. The Court held that, by applying Defendant’s analysis, a willing purchaser would mainly rely upon the corporation’s performance in FY 2011 and FY 2012 and both years should be weighted equally.

As to the parties’ second claim, the parties agreed that an adjustment was required for non-arm’s length transactions, but disagreed as to the magnitude. Plaintiff opined that Gould had overpaid Flach Crane simply using information obtained by Plaintiff. In contrast, Defendant relied on a detailed spreadsheet, which reflected: (1) the actual labor hours recorded by Flach Crane employees on Gould jobs, including crane operation and mechanical work; (2) the market-based rental costs of the crane and lift equipment supplied by Flach Crane; and (3) the actual charges to Gould from Flach Crane. The Court held that the arm’s length charges computed by Defendant should have been reduced in four aspects.

As to the parties’ third claim, Plaintiff applied a 25% combined tax rate; however, a 38.7% combined tax rate is the combined standard tax rate in effect in 2012 for C corporations, such as Gould. Plaintiff found the owners of Gould effectively operated the corporation as a pass through entity and avoided the double taxation attendant to C Corporations by distributing de facto dividends. Furthermore, Plaintiff testified that it would be a simple matter for a purchaser of Gould to convert to S corporation status. In contrast, Defendant applied a combined 38.7% tax rate to Gould’s income, arguing that this was the combined standard tax rate in effect in 2012 for C corporations, such as Gould. The Court held that there was no basis for deviating from the standard 38.7% combined tax rate. Therefore, the Court found the Plaintiff’s shares in Gould as of April 30, 2013 to be $2,797,750; upon stipulation of parties the fair value of Plaintiff’s shares in Flach Crane as of April 30, 2013 was $842,000 and the Plaintiff is entitled to pre-judgment interest from April 30, 2013 at the rate of nine percent.

Matter of Digeser v. Flach, Index No. 2383/13, 01/31/2017 (Platkin, J.)

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