Matter of Unimet Corp.
| Decision Date | 25 February 1987 |
| Docket Number | Bankruptcy No. 685-00240. |
| Citation | 74 BR 156 |
| Parties | In the Matter of UNIMET CORPORATION fka the Union Metal Manufacturing Company, Debtor and Debtor in Possession. |
| Court | U.S. Bankruptcy Court — Northern District of Ohio |
Eric D. Fingerhut, Hahn, Loeser & Parks, Cleveland, Ohio, for debtor and debtor in possession.
Robin L. Greenhouse, and Joseph Cammarata, U.S. Dept. of Justice on behalf of the I.R.S.
FINDINGS AND CONCLUSIONS RE: OBJECTION TO CLAIM NO. 441
The Chapter 11 debtor and debtor in possession, Unimet Corporation, fka The Union Metal Manufacturing Company (Unimet), has objected to the $830,444.91 proof of claim, as amended, filed by the United States of America on behalf of the Internal Revenue Service (IRS or government). The IRS claim asserts liabilities for 1979 to 1983 corporate income taxes, 1984 and 1985 Federal Insurance Contribution Act (FICA) taxes, 1984 Federal Unemployment Tax Act (FUTA) taxes, interest on all unpaid taxes up to the petition date and penalties for failure to pay the taxes in a timely fashion. After several months of discovery and negotiations, a one week trial was scheduled on the matter. Immediately prior to trial, a proposed settlement on several of the issues in dispute was reached by the parties, and has since been approved by the Joint Committee on Taxation of the United States Congress.1
At the trial the court heard testimony and received evidence on the remaining issues, which essentially involved the valuation of assets of three companies acquired by the debtor several years before it filed for relief before this court: Car Rack, Inc. (Car Rack), Munck Systems, Inc. (Munck) and a subsidiary of Munck, Morg Controls, Inc. (Morg) (Sometimes hereinafter the latter entities may be treated as one and referred to as Munck/Morg).2 A chart, as prepared by the debtor, which indicates the basic valuation issues presented, is set forth in Appendix A. See also, Debtor's Proposed Findings of Fact and Conclusions of Law with Respect to the Debtor's Objections to Claim No. 441 at 4. At the conclusion of the trial, the court established a schedule for the filing of proposed Findings of Fact and Conclusions of Law. Both parties have submitted their proposals and after review of the testimony, evidence and pleadings, the court now enters its decision.
Unimet purchased all of the shares of Car Rack in 1979 and all of the shares of Munck/Morg in early 1981 for a net purchase price of $12,300,000.00 to form a subsidiary of the debtor called Intech Systems, Inc. (Intech). Pursuant to Section 334(b)(2) of the Internal Revenue Code the debtor treated these stock acquisitions as purchases of the assets of the companies. The debtor then allocated the purchase price of the stock to each company's assets based upon the debtor's determination of the fair market value of the assets as of the date they were liquidated into the acquiring entity.3
On March 8, 1985, Unimet filed a voluntary petition for relief under Chapter 11 of Title 11 of the United States Code. The court set July 15, 1985 as the deadline for filing proofs of claim. On July 9, 1985 the IRS filed its proof of claim totaling $941,439.74 for corporate income, withholding, FICA and FUTA tax liabilities. The debtor filed an objection to the IRS' claim on January 29, 1986 and the government amended its claim on February 20, 1986 to reduce the claimed tax liability to $830,441.91. On August 22, 1986, three days prior to trial, a statutory notice of deficiency was sent by the IRS to the debtor. The notice informed the debtor that a deficiency of $18,228.00 in tax liabilities existed for the years 1976, 1979, 1982 and 1983.
The debtor's valuations of the assets in dispute are based upon appraisals conducted by independent appraisers near the time of the purchases. The debtor hired Manufacturers' Appraisal Company (MAC), a recognized and experienced appraisal firm, to conduct an evaluation of certain of the real and personal property of Munck/Morg and Car Rack. George Sees, Executive Vice President of MAC and an employee with 18 years' experience, testified as to his knowledge and opinion of the methodology and techniques utilized by MAC in conducting the appraisal. Mr. Sees based his testimony on a review of the final appraisal reports and interviews with MAC personnel.
The normal MAC procedure in evaluating real property begins with an inspection of the property by an individual with expertise in the real estate appraisal field. This individual is responsible for collecting all available and relevant data concerning the property, including information on topography, size and shape of building, type of construction and comparable sales of similar property in the area. The appraiser performs an analysis of the functional, economic and physical depreciation of each asset and, if appropriate, utilizes comparable sales of similar property to assist in determining fair market value.
Three appraisal methods were used by MAC to arrive at a figure for fair market value for real property: cost, market data and income. The cost approach determines fair market value by estimating the cost of reproducing new the buildings and improvements and then reducing that value for depreciation. The land value is then added to the result to produce a total property value. The market data approach develops a value for property through a comparison of similar property sales. Adjustments are made to the comparable sales to reflect differences between the comparable and the subject property. The third method, the income approach, determines value by capitalizing the net future income that the property is capable of producing.
The MAC methodology used to appraise personal property is similar to that performed for real property. An MAC appraiser takes inventory of the equipment and machinery, noting its age, condition and marketability. The MAC research department then compares this data to prices gathered from machinery and equipment dealers and from its own price files to establish a figure for fair market value.
MAC defines fair market value in its appraisal reports essentially as follows:
Fair market value as part of a going concern is considered to be the price expressed in terms of money which a willing and informed buyer would pay for the property to a willing and informed seller, neither acting with undue haste, both exercising prudent judgment, and with the buyer contemplating continued use of the property....
See, Fair Market Value Report, Car Rack, Inc., by The Manufacturers' Appraisal Company, Debtor's Exhibit 3 at 1; The Manufacturers' Appraisal Company Report, Munck Systems, Inc. and Morg Controls, Inc., Debtor's Exhibit 2 at 1. Mr. Sees conceded that this definition, which indicates that a going concern value has been included, is confusing and misleading. Mr. Sees stated that the term "going concern" as used by MAC was a term of art to indicate that the assets were valued "in place." Mr. Sees further explained that "in place" value represents a value which includes such items as the cost of shipping, dealer installation and wiring. Mr. Sees distinguished "in place" value from going concern value and stated that going concern value was the additive value for "an assemblage of items," and was a "premium over and above installed costs."
With respect to the accounts receivable, Lee J. DiCola, President and Chief Executive Officer of the debtor, a certified public accountant and a former accountant with the firm of Ernst & Whinney, testified that he engaged Ernst & Whinney to audit the accounts receivable of the companies and to make a recommendation as to their value. Mr. DiCola testified that such an audit should include a review of the accounts and an evaluation of the risk inherent in each receivable and a discount therefor.
The debtor hired Dr. Phillip V. DeSantis, an engineering consultant with experience and knowledge in the computer field, in December, 1980 to evaluate 40 basic programs of the Munck/Morg computer software system. Dr. DeSantis did an actual study of a portion of the system, evaluating computer code line by line to determine its length, complexity and quality, and arrived at an opinion of fair market value using both a future profit stream and a replacement cost analysis.
In contrast, the government witnesses and experts did not do an on-site evaluation of the debtor's assets, but instead critiqued the appraisals performed for the debtor. The IRS did not hire independent appraisers to conduct its own evaluation of either the real property or personal property of Munck/Morg or Car Rack. Rather, the government offered the testimony of Greg Zivoder, a general engineer for the IRS, as to the value of the tangible and intangible assets of the debtor's acquisitions. Mr. Zivoder's testimony criticized the debtor's evidence and allocated the purchase price to the assets in dispute using the balance sheets of the companies. Dr. George S. Sacerdote, the holder of a Ph.D degree in mathematics and an employee of the Arthur D. Little Co., testified as to the value of the computer software. According Dr. Sacerdote, Dr. DeSantis' report contained several flaws, but he used the same basic methodology to form his own view of the fair market value of the software.
MAC performed appraisals of both Munck/Morg's Hampton, Virginia facility and Car Rack's Macedonia, Ohio plant on behalf of the debtor. The income approach was omitted in both the Munck/Morg and Car Rack appraisals as both buildings in question were properties which are usually owner occupied and not leased. The evaluations of the facilities were conducted on site by individuals with over 15 years of experience in real estate appraisals.
The MAC report lists the fair market value of Munck/Morg's ten acre Hampton, Virginia facility at $1,064,000.00. The ten year old building is described as "o...
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