HomeMy WebLinkAbout09-29-09IN THE COURT OF COMMON PLEAS OF CUMBERLAND COUNTY, PENNSYLVANIA
In re: ) Orphans Court Division
Estate of Robert M. Mumma, ) Number 21-86-398
Deceased )
NOTICE OF SERVICE OF EXPERT REPORTS
In compliance with Judge Oler's order concerning expert testimony and reports, attached
are copies of the reports of Joseph D.C. Wilson III, certified public accountant, and Daniel P.
Johnson, Esquire, of Williams Coulson Johnson Lloyd Parker & Tedesco, LLC. As required by
Judge Oler, I am serving this notice and copies of the reports on Mr. Buckley, opposing counsel
and my brother and sister, who are not represented by counsel.
Respectfully submitted,
~i. ~r1
Dated: September 29, 2009 Barbara M. Mumma
541 Bridgeview Drive
Lemoyne, PA 17043
717-730-2188
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WILLIAMS ~~• - _COLILSON
ATTORNEYS A T L A W
ONE GATEWAY CENTER
420 PORT DUQUESNE BOULEVARD • 16~' FLOOR
PITTSBURGH, PA 15222
(412) 454-0200 • FAX: (412) 281-6622
DANIF,L P. JOHNSON
(412) 454-0224
djohnson@wi I li amscoulson. com
September 28, 2009
Ms. Barbara Mumma
541 Bridgeview Drive
Lemoyne, PA 17043
Re: Funding of Marital Trust Pursuant to Last Will and Testament of Robert M. Mumma
Dear Ms. Mumma:
I have been asked to express my opinion on the interpretation of the marital trust funding
provision found in Article Seventh of the Last Will and Testament of Robert M. Mumma. In
preparing this letter, I have reviewed the Will as well as the opinions of Jonathan M. Crist,
Esquire, Joseph D. C. Wilson, III and David C. Cleaver, Esquire. I have not reviewed the
accountings nor verified any of the numbers set forth in those opinion letters. My comments are
limited to the proper procedure to carry out the funding of the marital trust pursuant to the terms
of the Will.
Article Seventh of the Will sets forth the funding provision for the marital trust. The relevant
portion of Article Seventh provides as follows:
"If my wife, BARBARA McK. MUMMA, survives me, I give and bequeath to the
trustees hereinafter named, an amount equal to fifty (50%) percent of my total gross
estate as finally determined for Federal Estate Tax purposes, taking into account and
including therein, for computation purposes, my undivided interest in the value of all my
interests in property which pass or have passed to my wife under other provisions of this
Will or otherwise than under this Will, but only to the extent that such interests are, for
the purpose of the Federal Estate Tax, included in determining my gross estate and
allowed as a marital deduction. In funding this Trust, I authorize my Executors to use
cash or other property or a combination thereof, and I direct that any such other property
so used shall, for the purpose of funding the trust, be valued as of the date of its
distribution. In computing the amount of this bequest, I direct that the values and
amounts as finally determined for Federal Estate Tax purposes shall control."
{WC387685.1 J
WILLIAMS COULSON JOHNSON LLOYD PARKER & TEDESCQ LLC
IRS CIRCULAR 230 TAX ADVICE DISCLAIMER: Any federal tax advice contained in this communication (including
attachments or enclosures) is not intended or written to be used, and it cannot be used, for the purpose of (I) avoiding any penalty
that may be imposed by the Internal Revenue Service or (2) promoting, marketing or recommending any transaction or matter.
Page 2
The above is a pecuniary formula provision which the trustees are to follow in determining the
amount that should be transferred to the marital trust. The starting point for determining the
proper funding of the marital trust is to determine "the amount equal to fifty (50%) percent of my
total gross estate as finally determined for Federal Estate Tax purposes." The provision "as
finally determined for Federal Estate Tax purposes" is a direction to the trustees that the value of
the gross estate is to be made after any audit of the Federal Estate Tax return. Mr. Cleaver is
correct in his statement that the amount is not determined by the values of the assets as reported
on the Federal Estate Tax return filed by the Executors, but rather, the values of the estate assets
as finally determined after an audit, if any, by the Internal Revenue Service. In this case the
Executors underreported the value of the assets on the Federal Estate Tax return so that the final
values were increased after audit. The value of the gross estate after audit is the proper value to
be used in determining fifty (50%) percent of the gross estate.
It is important to note that the calculation of fifty (50%) percent of the total gross estate is only
the beginning point for purposes of determining the amount to be transferred to the marital trust.
The Will then directs the trustees to make the determination "taking into account and including
therein, for computation purposes, the testator's undivided interest in the value of all other
interests in property which pass or have passed to his wife under other provisions of the Will or
otherwise then under his Will ...". {emphasis added) This means that in computing the amount
to set aside in the marital trust the trustees must take into account any other assets that pass to
testator's wife either as non-probate assets (joint property interests and beneficiary designation
property) or pursuant to other provisions of the Will (automobiles and other articles of personal
use per Article Sixth of the Will).
Mr. Cleaver improperly applies the word "including" in his interpretation of the Will. Applying
Mr. Cleaver's interpretation of Article Seventh would result in the marital trust being funded
with an amount exactly equal to fifty (50%) percent of the testator's gross estate. Nowhere in his
opinion does Mr. Cleaver explain why the testator would have included all of the words after
fifty (50%) percent if the funding of the marital trust was not to be reduced by the value of the
other assets the testator's wife received. In other words, there is no reason that the testator would
not have simply put a period after the words "an amount equal to fifty (50%) percent of my total
gross estate as finally determined for Federal Estate Tax purposes" if the funding was not
somehow be affected by the balance of the paragraph. Mr. Cleaver is essentially stating that the
following words set forth in Article Seventh have no purpose:
"...taking into account and including therein, for computation purposes, my
undivided interest in the value of all my interests in property which pass or have
passed to my wife under other provisions of this Will or otherwise than under this
Will, but only to the extent that such interests are, for the purpose of the Federal
Estate Tax, included in determining my gross estate and allowed as a marital
deduction."
Mr. Cleaver is wrong. The above provision does have a purpose, and that purpose is to provide
that the marital trust is to be funded with sufficient assets so that the amount transferred to the
marital trust after taking into account all other assets that the testator's widow received will equal
fifty (50%) percent of the gross estate. In other words, the amount in the marital trust plus the
{WC387685.1 }
Page 3
value of the other assets that testator's wife received are to total fifty (50%) percent of the gross
estate. To fund the marital trust with fifty (50%) percent of the gross estate without regard to the
other assets that testator's wife received is contrary to tcstator's expressed intent.
After determining the dollar amount that is to be transferred to the marital trust pursuant to the
first sentence of Article Seventh, the second sentence of Article Seventh provides direction to the
trustees as to how to satisfy said amount. That sentence provides that the trustees are to use the
values "as of the date of its distribution" in satisfying this dollar amount. This direction is
necessary because the value of the estate assets will likely increase or decrease during the
administration of the estate and before the marital trust is actually funded. Using the date of
distribution values provides assurance that the marital trust will receive the amount determined
by the pecuniary formula described above. Thus, if the value of the assets in the estate decreases
during the course of the estate administration, the marital trust will not be affected and the
residuary trust will bear the loss suffered as a result of the decline in value. Likewise, if the
value of the assets in the estate increases during the course of the administration, the residuary
trust benefits from the appreciation in value as the marital trust funding amount is fixed.
Finally, I have been asked to comment on the investment strategy of the trustees as it relates to
the current and the remainder beneficiaries. It is hornbook law that the trustees owe a duty of
impartiality to all the beneficiaries of the trust. This means that the investment strategy is to
consider both the income interests of the income beneficiary and the principal growth interests of
the remainder beneficiaries. In this case, the beneficiaries of the marital trust include the income
beneficiary, the testator's wife, and the remainder beneficiaries, the testator's children. In the
management and investment of the assets of the trust, the trustees owe duties to produce
reasonable income for the surviving wife and to invest for reasonable principal growth for the
remainder beneficiaries. An investment strategy that promotes maximum income for the
surviving spouse at the expense of the remainder beneficiaries is improper under the laws of
Pennsylvania. Likewise, an investment strategy that promotes principal growth at the expense of
a failure to produce current income would also be improper.
m rely,
Daniel P. John
DPJ.•sp
{WC387685.1 }
JOSEPH D. C. WILSON III
C E R T I F I E D PUBLIC A C C O U N T A N T
September 28, 2009
PRIVATE AND CONFIDENTIAL
Ms. Barbara Mumma
541 Bridgeview Drive
Lemoyne, PA 17043
RE: Estate of Robert M. Mumma
Dear Ms. Mumma:
618 HENRY W. OLIVER BUILDING
535 SMITf~fELD STREET
PrrrsBURGx, PENNSYLVANIA 15222
(412) 594-2701 phone
(412) 471-2117 fax
jwilson®j dcwilson. rnm
You asked me to review various records from the Estate of Robert M. Mumma, who died on April 12,
1986, and from the Marital Trust and Residuary Trust created by Mr. Mumma's will to determine if the
Marital Trust had been overfunded and if the discretionary withdrawals of principal from that trust (so-
called "5 and 5 distributions" or "5% withdrawals") had been excessive. In doing that review, I was also
to note any other issues of concern. I have reached the conclusions contained in this report to a
reasonable degree of professional certainty, based on my review of the information available to me.
Because of extreme time pressures, inconsistencies in the material reviewed, and the unavailability of
some materials, I was not able always to tie transfers out to the dollar, precisely to determine allocations,
or fully to investigate inconsistencies. Accordingly, my calculations may contain minor inaccuracies; I
may have used figures that are slightly incorrect; and I certainly did not investigate all inconsistencies
nor follow up on all issues that caught my attention. Those factors in no way, however, affect my
overall :,onclusions.
CONCLUSION:
My review of various documents relating to the Estate of Robert M. Mumma and the trusts formed
under his will led me to conclude that the Marital Trust was grossly overfunded. Further, the 5%
withdrawals were far in excess of the amounts provided for in the will, and the payments to the Marital
Trust as statutory interest were excessive.
The Marital Trust was overfunded for two reasons: first, the amount to be funded was overstated; and
second, the assets transferred to fund the trust were significantly undervalued. The withdrawals were
excessive because the Marital Trust had been overfunded and (thus the 5% amount was overstated) and
because the assets withdrawn were significantly undervalued. The payment of statutory interest was
excessive because the Marital Trust had been overfunded (thus the 5% per annum calculated interest
was overstated) and because the assets used to make the payment were significantly undervalued.
JOSEPH D. C. WILSON III
C E R T I F I E D P U B L I C A C C O U N T A N T
Barbara Mumma
September 28, 2009
Page 2
DOCUMENTS REVIEWED:
In performing my work, I reviewed portions of the accountings for the Estate of Robert M. Mumma, the
Marital Trust under his will, and the Residuary Trust under his will; the Estate Tax return (Form 706)
and related filings; portions of the income tax returns (Forms 1041) for those entities; the transcript of
Mr. Hadley's testimony in this matter on August 8, 2009; various valuation reports, and various
memoranda, letters, valuations and worksheets, particularly relating to the 5% withdrawals for the
Marital Trust and the payment of statutory interest to the Marital Trust by the Estate. I also reviewed the
reports of .Tonathan M. Crist, David C. Cleaver, and Robert C. May.
ISSUES RAISED:
Two determinations must be made in order to evaluate the reasonableness of the transfers. First, the
amount of each transfer, withdrawal, or payment must be determined. Secondly, if the transfer,
withdrawal, or payment is not made in cash, then the assets used to satisfy the obligations must be
valued.
AMOUNTS:
In each case, the amount of the transfer, withdrawal, or payment is determined by formula. The
formulae for the valuation of the 5% withdrawal and the payment of statutory interest are relatively
straightforward, the first being an annual right to request 5% of "the principal" in the Marital Trust; and
the second being 5% of the unfunded amount of the Marital Trust from date of death to date of funding.
The calculation of the funding of the Marital Trust is a little more complicated.
Amount of the Marital Trust:
The establishment of the Marital Trust is contained in Article Seventh of Mr. Mumma's will, which
provides, in part:
SEVENTH: If my wife, BARBARA McK. MOMMA, survives, me, I give and bequeath to the trustees
hereinafter named, an amount equal to fifty (50%) percent of my total gross estate as finally determined
for Federal Estate Tax purposes, taking into account and including therein, for computation purposes, my
undivided interest in the value of all my interests in property which pass or have passed to my wife under
other provisions of this Will or othenrvise than under this Will... In computing the amount of this bequest, I
direct that the values and amounts as finally determined for Federal Estate Tax purposes shall control.
The application of this article results in the Marital Trust to be funded with $7,787,150, computed as
follows:
,JOSEPH D. C. WILSON III
CERTIFIED PUBLIC A C C O U N T A N T
Barbara Mumma
September 28, 2009
Page 3
Total Gross Estate as reported on the Federal Estate Tax Return, Form 706 16,645,786
Increase reflected on Estate Tax Closing Letter of 06/11/90 from the I.R.S. 650,551
Total gross estate as finally determined for Federal Estate Tax purposes 17,296,337
Fifty percent of the above to the wife 8,648,169
Including therein, for computational purposes:
Schedule D, life insurance 516,765
Schedule E, joint property 596,907
But only to the extent included in the gross estate 29( 8,453)
298,453
Schedule F, personal use property
Mercedes Coupe 36,000
Personal property, less clock and jewelry 8,800
1975 Formula Motorboat 1,000
45,800
(861,018)
Amount to fund the Marital Trust 7,787,150
The Marital Trust was actually funded as follows:
Cash - 11/19/86 2,500
Stock and real estate - 12/15 & 12/28/87 6,837,401
Liabilities assumed - 12/31/87 (550,092)
6,289,809
Cash • 11/16/01 1,358,360
- 12/06/01 800,000
Note 03/31/03 200,000
2,358,360
8,648,169
Amount by which the Marital Trust was over-funded 861,018
Mr. Crist and Mr. Cleaver disagreed on the interpretation of this provision. Mr. Crist's reading was
correct, although his calculation was incorrect because he did not take into account the adjustment made
to the gross estate resulting from the I.R.S. examination.
VALUATIONS:
JOSEPH I). C. WILSON III
C E R T I P I H D PUBLIC A C C O U N T A N T
Barbara Mumma
September 28, 2009
Page 4
Even greater errors were made in the valuation of the assets transferred, and therefore in the base on
which the 5% withdrawals were made and on which the statutory interest was paid, and in the valuation
of the assets transferred to make such withdrawals and payment. That is, because the Marital Trust was
overfunded, the statutory interest paid was excessive and the 5% withdrawals were overstated. The
overpayments were further increased because the assets used to fund the statutory interest and the 5%
withdrawals were similarly undervalued, and thus too much property was distributed.
Although the amount required to fund the Marital Trust under Article Seventh of Mr. Mumma's will
was to be determined using estate tax values, the value of any property transferred to fund the trust was
to be determined at date of distribution from the Estate to the Marital Trust. The non-cash assets used to
fund the Marital Trust were transferred from the Estate in late December, 1987. Article Seventh states:
In funding this Trust, I authorize my Executors to use cash or other property or a combination thereof, and
I direct that any such other property so used shall, for the purpose of funding the trust, be valued as of the
date of its distribution.
Similarly, property used to make the 5% withdrawals and to pay the statutory interest should have been
valued at the dates of those transfers.
Rather than having the properties appraised for this purpose, the executrices used valuations from the
estate tax return with slight adjustments. For the following several reasons, however, those valuations
provide little or no basis for determining values to be used in funding the Marital Trust: The valuations
on the estate tax return were specifically calculated for use on that return; the operating businesses were
being actively marketed before the Marital Trust was funded; there is clear evidence that the fair market
values of the assets transferred were significantly higher than the estate tax valuations; and there is clear
evidence that the Executrices and their advisors knew or should have known that the estate tax
valuations were irrelevant when the Marital Trust was initially funded.
Please note that the entities transferred to the Marital Trust were not the entities owned directly by Mr.
Mumma at his date of death because of the liquidations of Pennsylvania Supply Company and Kim
Company on December 19, 1986, and the incorporation of Hummelstown Quarries as a separate entity
prior to that liquidation. The values assigned to the stock in Hummelstown, Nine Ninety Nine, and
Union Quarries, (a former subsidiary of Kim Company) were established from the estate tax value of
Pennsylvania Supply Company. The following discussion will therefore treat Union Quarries,
Hummelstown Quarries, and Nine Ninety Nine, as though they had been in the estate, and when
reference is made to "estate tax value," the point of reference is really the values assigned to those
entities when distributed from Kim Company or Pennsylvania Supply Company in the 1986
liquidations.
JOSEPH D. C. WILSON III
C ERTIPIHD PUBLIC ACCOUNTANT
Barbara Mumma
September 28, 2009
Page 5
Purpose of the valuations:
A separate appraisal is strongly encouraged when a Marital Trust is funded with property, with updates
made for subsequent withdrawals. A basic rule of valuation is that an appraiser is to consider the use of
the valuation in doing the work and that an appraisal should not be used for any other purpose other than
its original and stated purpose. The (current: 2008-2009 edition) Uniform Standards of Professional
Appraisal Practice states:
Standards Rule 9-2
In developing an appraisal of an interest in a business enterprise or intangible asset, an appraiser must:
(b) identify the intended use of the appraiser's opinions and conclusions;
THE ISSUE:
An appraiser must identify and consider the intended users of the appraiser's reported opinions and
conclusions in order to identify the problem to be solved and to understand his or her development and
reporting responsibilities in an appraisal, appraisal review, or appraisal consulting assignment. An
appraiser must state the intended use and intended users of the opinions and conclusions in a report.
Shannon P. Pratt, the oft-cited and oft-published authority on valuation of closely held businesses, states
in his book, Valuing a Business: The Analysis and Appraisal of Closely Held Companies (Fifth Edition)
No single valuation method is universally applicable to all appraisal purposes. The context in which the
appraisal is to be used is a critical factor... Many business appraisals fail to reach a numberrepresenting
the appropriate definition of value because the appraiser failed to match the valuation methods to the
purpose for which it was being performed. The result of a particular appraisal can also be inappropriate if
the client attempts to use the valuation conclusion for some purpose other than the intended one.
The valuations compiled by Lucker, Kennedy & Felmeden of the Estate of Robert M. Mumma for use in
preparing the federal estate tax return and the underlying valuations of Pennsylvania Supply Company,
Kim Company, Union Quarries, Inc., Nine Ninety Nine, Inc., and Pennsy Supply, Inc. all bear such a
limiting legend. The following language is from that of Pennsylvania Supply Company:
The common stock valuation determined is to be used in the valuation of the Estate of Robert M. Mumma
and is not to be used for any other purpose.
This rule is particularly important here. Estate valuations and the preparation of an estate tax return are
actions of advocacy. The taxpayer generally wants the lowest supportable valuation, and the I.R.S.
generally wants the highest supportable valuation. Whether an appraisal is obtained for an estate tax
return depends on what support an executrix wants and whether a qualified appraisal would, in fact,
support the estate's position. In funding a marital trust, however, the fiduciaries are required to weigh
the rights of different beneficiaries and not to favor one class over another. Using an estate tax
valuation, which presented the lowest supportable valuation, will generally not result in equity to both
JOSEPH D. C. WILSON III
C 8 A T I P I H D PUBLIC A C C O U N T A N T
Barbara Mumma
September 28, 2009
Page 6
groups, particularly where the same fiduciaries are on both sides of the transaction, and there are no
independent fiduciaries.
Absence of qualified appraisals:
The valuations on which the estate tax return was based were not appraisals, but were compiled by
Lucker, Kennedy &Felmeden, CPA's. These were compilations, and a compilation indicates that the
CPA firm did little other than to take the client figures and put them in a readable format. It says
nothing about the quality of those figures.
As the accountants' certificate on the valuation of the Pennsylvania Supply Company (and those for the
Estate, Kim Company, Nine Ninety Nine, Inc., Union Quarries, Inc., and Pennsy Supply are similar or
identical) states:
We have compiled the valuation of common stock per share of Pennsylvania Supply Company as at April
12, 1986 on the basis as presented in Exhibit A... Because of the nature of the assignment, we do not
express an opinion or any other form of assurance on the valuation amount.
And, as Mr. Hadley testified on August 8, 2009 (Vol. X, p. 2228):
Basically, a compilation is the lowest level of service we provide. We take a client's information,
look at it. We don't do many tests or procedures.
We type it up on our letterhead and put a compilation in and we scan to see if it looks reasonable,
make sure it is mathematically accurate. It was a low level of service and a low level of assurance.
As far as I could determine, with one exception, no separate, independent appraisal of the assets
distributed to fund the Marital Trust was obtained at the time of funding, nor, for that matter, at any
other time. There is a complete absence of any qualified appraisal in connection with the transfer of any
non-cash assets to or from the marital trust. The one exception, an appraisal by Touche Ross & Co. of
one operating company, prepared 10 months after Mr. Mumma's death and 10 months before the initial
funding of the Marital Trust, demonstrates how improper the Lucker, Kennedy &Felmeden valuations
were for determining Marital Trust funding values.
Timing of an appraisal:
In the instant case, relying on valuations used to prepare the estate tax return to determine the funding of
the Marital Trust is particularly egregious because so much had changed in that period. CRH, and other
potential purchasers, had expressed interest in acquiring the Pennsylvania Supply companies. The
executrices had interviewed and then hired someone to negotiate a sale. The properties were actively
being marketed.
I do not know when the family had begun marketing the properties, but they and Arthur Klein had met
on August 12, 1987 (four months before funding the Marital Trust with non-cash assets) with W. Lloyd
JOSEPH D. C. WILSON III
C E R T I F I E D PUBLIC A C C O U N T A N T
Barbara Mumma
September 28, 2009
Page 7
Snyder III to discuss "using WLSIII as `investment banker' in offering and negotiating [the] sale of PSI
and related quarries."
The methodolog, used in deriving the valuations used on the estate tax return:
Mr. Hadley testified that the appraisals made by Helsel for the real estate assets in the estate did not
include an amount for the mineral reserves because that value was only realizable after quarry
operations were established. (pp. 2311 - 2312, Auditor's Hearing Transcript, August 8, 2009; and p.
2318, Auditor's Hearing Transcript, August 8, 2009):
Q. Who evaluated the mineral reserves on this property?
A. Basically, they were considered to be part of the operating companies.
THE AUDITOR: Mr. Hadley, did you testify that the mineral reserves were assigned to operating
company values? Is that your testimony?
THE WITNESS: Essentially, yes. What I said was that the Hummelstown - what I think I said was that
the Hummelstown properties were essentially valued as real estate; that the minerals are included as part
of the operating -they are part of the consideration of value in the operating assets.
According to this testimony, the quarry properties, themselves, were valued as farmland and the value of
the quarry operations and the reserves were considered to belong to the operating companies. Yet, the
valuations of the operating companies prepared by Lucker, Kennedy &Felmeden put equal weight (or
50% of equal weight) on book value (which included -0- for the reserves) as on operating income.
Similarly, the valuations of the operating companies prepared by Lucker, Kennedy &Felmeden put
equal weight on the dividend paying history of the entities as on operating income, even though
dividends from closely held companies were generally minimized at that time due to the high individual
tax rate on dividends.
Valuations were prepared by Lucker, Kennedy &Felmeden for Pennsylvania Supply Company, Kim
Company, Union Quarries, Inc., Nine Ninety Nine, Inc., and Pennsy Supply, Inc. for use on the estate
tax return. Those valuations were prepared on the following bases:
Pennsylvania Supply Company: Asset basis, solely. No consideration was given to income,
even though PSC owned and received royalties from the Hummelstown quarry.
Kim Company: Asset basis, solely. No consideration was given to income. The value given to
its ownership of Union Quarries was determined as set forth here following.
Union Quarries, Inc.: The average ofthe prior five years (ending June 30, 1986) income was
capitalized by a factor of eight and then given a weight of two. The average of the prior five
years' dividends were capitalized at 6% and then given a weight of one. The June 30, 1986,
JOSEPH D. C. WILSON III
C E A T I P I E D P V B L I C A C C O U N T A N T
Barbara Mumma
September 28, 2009
Page 8
book value (with a zero value for land or reserves) was given a weight of one. The four factors
were then arithmetically averaged to come up with a valuation for the entity.
Nine Ninety Nine, Inc.: Asset basis, solely. No consideration was given to income. The value
given to its ownership of Pennsy Supply, Inc. was determined as set forth here following.
Pennsy Supply and subsidiaries): The average of the prior five years (ending June 30, 1986)
income was capitalized by a factor of eight and then given a weight of one. The average of the
prior five years dividends were capitalized at 6% and then given a weight of one. The June 30,
1986 book value, with no write up to FMV for any asset, was given a weight of one. The three
factors were then arithmetically averaged to come up with a valuation for the entity.
Thus, the Lucker, Kennedy &Felmeden valuations were strongly influenced by dividend-paying history
and were influenced not at all by the value of any mineral reserves.
Evidence of si~nificantl~igher fair market values:
If the estate tax valuations have no probative value, is there any other contemporary evidence that the
values were understated, and is there any contemporary evidence of the actual fair market values of the
properties transferred to the Marital Trust? In fact, there was an appraisal of part of the business, there
were earnings flowing from the entities, there were spread sheets allocating the expected sales price in
connection with the proposed sale in 1988/1989 and the actual sale in 1993 of the operating and quarry
assets, and there are memoranda indicating that the advisors to the executrices knew that significantly
higher ~-~lues were called for.
Evidence to the contrary:
The inadequacy of the Lucker, Kennedy & Felmeden's methodology can be seen from the one company
for which there was prepared an independent, qualified appraisal. On May Z0, 1987, Touche Ross &
Co. issued a valuation report on its analysis of Pennsy Supply, Inc. and its subsidiaries as of February
28, 1987. That valuation was $10,200,000, which includes a discount of 20% for lack of marketability,
not a relevant discount for a company being marketed, and a thin management discount of 10%, perhaps
also not an appropriate discount for a company being marketed. Even so, the Touche Ross value is
dramatically higher than the valuation of $5,000,000 used by Lucker, Kennedy &Felmeden in its
valuation of Pennsy Supply's 100% parent, Nine Ninety Nine, Inc. Further, Lucker, Kennedy &
Felmeden's valuation of Nine Ninety Nine, Inc. then included a 30% "Lack of Marketability Discount."
Even if such a discount was appropriate for use on the estate tax return, which was a return prepared for
an advocacy setting and prepared for a date when the properties were not being actively marketed, it was
certainly not appropriate in computing fair market value when the entity was being actively marketed
nor in computing fair market value for a transfer to a trust where the rights of parties on both sides of the
transaction were to be considered. Indeed, because having control of the various entities in order to
JOSEPH D. C. WILSON III
CBRTIFIeD PUBLIC ACCOUNTANT
Barbara Mumma
September 28, 2009
Page 9
actively market them was important to the executrices/trustees, as will be shown later, a control
premium was more appropriate than a lack of marketability discount.
In any case, the stock of Pennsy Supply, Inc. was valued at $3,500,000 ($5,000,000 less 30%) in
computing the value of Nine Ninety Nine, Inc. when funding the Marital Trust, rather than at something
approaching the $10,200,000, or $12,000,000, if the discounts are ignored, determined by Touche Ross
in its independent, qualified appraisal, prepared as of 10 months before, issued 7 months before, and
forwarded by Mr. Hadley to Barbara McK. Mumma and Lisa Mumma Morgan one month before the
transfers to fund the Marital Trust. A $7,000,000 - $9,000,000 difference is substantial, even when
reduced to reflect the estate's mere 43'/z% allocable interest in Nine Ninety Nine, Inc. It is clear that Mr.
Hadley, the Morgan, Lewis &Bockius lawyers, and the executrices all knew that values at a multiple of
the values used on the Form 706 were required.
Because Pennsy Supply, Inc. is apparently the only entity for which an independent, qualified appraisal
was obtained, we could simply assume that all the entities were undervalued by the same 65 - 75%, but
there is significant other evidence that all the other properties transferred to the Marital Trust were
similarly substantially undervalued.
Morgan~Lewis &Bockius Memoranda:
As many professionals are aware, an estate receives astepped-up basis to date of death value for
property included in a decedent's taxable estate. On December 15, 1988, Robert E. Slota of Morgan,
Lewis & Bockus (ML&B) wrote an internal memorandum at the request of Arthur L. Klein on the issue
of whether an estate is bound by the value reported on the estate tax return in determining its subsequent
basis, or whether it can use a higher basis than the value reported on the estate tax return. Apparently,
the estate was considering using a different, higher basis for the assets in a sale to CRH and believed
there was sufficient evidence to overcome the substantially lower values shown on the estate tax return.
Before going on to discuss the doctrine of collateral estoppel, Mr. Slota wrote:
First, it is clear that the Mumma Estate is not absolutely bound by the value reported for estate tax
purposes in determining its basis in the property upon a later sale... The value of an asset for estate tax
purposes is not absolutely determinative of the asset's basis in the hands of one who takes the property
from a decedent, but it is prima facie evidence of such basis. This presumption can be overcome by
convincing evidence that the actual value at the date of death was different than that reported or agreed
upon for estate tax purposes.
Further, on November 4, 1986, the executrices met with George Hadley and lawyers from ML&B to
discuss whether to liquidate Kim Company and Pennsylvania Supply Company ("PSC" in Mr. Klein's
summary memorandum of the meeting) before the December 31, 1986, effective date of the 1986 Tax
Reform Act. Mr. Klein noted, "we reviewed every asset in both corporations..." With respect to the
JOSEPH D. C. WILSON III
C BRTiPIBD PUBLIC ACCOUNTANT
Barbara Mumma
September 28, 2009
Page 10
Hummelstown quarry, which the attendees planned to incorporate as a separate entity in order to limit
potential operating risks, Mr. Klein noted:
We discussed whether the incorporation of Hummelstown, which represents a substantial portion of
PSC's value (perhaps a third), might cause the application of the liquidation reincorporation doctrine...
If Hummelstown were worth "perhaps a third" of PSC's value, then using even the Estate's low
valuation for PSC ($9,144,473, or $9,795,024, as adjusted by the I.R.S.), would put the value of the
estate's 98+% interest in Hummelstown in the range of $3,000,000 to $4,000,000 (with the gross-up}
rather than the $799,082 used as the value in funding the Marital Trust. In this case, the undervaluation
was in the range of 75-80%.
Later, Mr. Klein noted, with respect to Union Quarries, Inc., which was then held in "C Corp" form,
The quarry operation is quite profitable and excess cash is building up, presenting an accumulated
earnings tax problem.
This again demonstrates the irrelevancy of using dividends paid by a closely held corporation as
evidence of value. Earnings in a closely held corporation were seldom paid out until they had
accumulated to a point that the I.R.S. would force apay-out or impose a confiscatory tax. Lucker,
Kennedy & Felmeden's equal weighting of dividends with income in valuing Union Quarries makes no
sense. Of course, the equal weighting of book value, which included nothing for the mineral reserves,
also makes no sense.
In its valuation of Union Quarries, Inc., Lucker, Kennedy & Felmeden also assessed a 30% "Discount
for Minority Interest." Such a discount also makes no sense. Apart from the fact that Kim Company
owned exactly 50%, not a minority interest, in the entity, Union Quarries, Inc. is run by a trustee for the
benefit of its co-owners. As such, the trustee has a fiduciary obligation not to favor one owner over the
other, and the trustee has a fiduciary obligation to maximize the income and the value for the owners.
How can there then be a minority discount? That discount was an additional $460,000 reduction in the
value used in transferring Union Quarries, Inc. from the Estate to the Marital Trust.
The same Arthur L. Klein memorandum emphasizes the executrices' interest in maintaining control of
the operating assets and the possibility of disproportionate distributions in the upcoming liquidation.
Obviously, if some (or all) of the non-cash assets were misvalued, then any disproportionate
distributions would have been financially unequal.
Indication of value from income received:
Although we have only one appraisal, Fair Market Value is generally considered to be the current value
of the future income stream from an asset. Because of their combination with other assets in the pre-
death and pre-liquidation ownership structure, and because of the limited information available to me, I
JOSEPH D. C. WILSON III
C EA7IFIED PUDLiC ACCOUNTANT
Barbara Mumma
September 28, 2009
Page 11
was unable to review the income of these assets for the period prior to funding the Marital Trust. I was,
however, able to review the income earned by the Marital Trust from most of these assets for the 66
months of Marital Trust ownership before the sale to CRH. A comparison of income earned by each
asset to the value assigned upon distribution by the Estate to fund the Marital Trust is as follows:
Value Assigned Income Earned During
Upon Transfer to the Following 66
Marital Trust Months
December, 1987 until sale to CRH)
Bender & Grove (Mt. Holly)
Hummelstown Quarries
Union Quarries
Notes:
The income for Union Quarries is for the following 6 years (72 months) because that entity was not
included in the sale to CRH.
The similar figures for Nine Ninety Nine are not included because that entity was a C Corp and so its
income was not derivable from the federal income tax returns of the Marital Trust.
As can be seen from this schedule, the cumulative accumulated income for each of the entities for the
following 66 months is substantially in excess of (indeed, a multiple of} the values assigned to them by
the executrices. This again shows the gross undervaluation of the assets upon their transfer to the
Marital Trust.
Comparisons:
Finally, the values used for the transfers to the Marital Trust (first column, below) can be compared to
the allocated values with regard to the offer made by CRH in 1988 -1989 and the sale in 1993 to CRH.
The allocations from the earlier offer are based on a spreadsheet prepared in late December 1988 by Mr.
William S. Pilling III of the Stradley Ronon firm, which was negotiating the transaction. Those figures
come from a letter of intent dated December 19, 1988. The third column of figures are from a similar
sheet prepared by Mr. Pilling in early March 1993, and the fourth column of figures came from the
proceeds actually received, as reflected in the Marital Trust accountings. From the information available
to me, I cannot explain the differences between the third and fourth columns (especially with regard to
Bender & Grove), whether it represents a change in the purchase price, a reallocation of the purchase
price, the unwanted assets that were distributed, or simply a too rapid reading of the accountings on my
part. The total consideration is not readily apparent because of a net worth adjustment and the existence
of and the deferred receipt of notes receivable, liquidation corporations, and escrow accounts. Further,
because I do not know the source of the $5,000,000 in unwanted assets, nor how they were distributed, I
JOSEPH D. C. WILSON III
C 8 H T I P I B D PUBLIC A C C O U N T A N T
Barbara Mumma
September 28, 2009
Page 12
cannot allocate that to the various entities' bases. The comparison is not perfect, but the scope of the
undervaluation is clear.
Value Used Allocated Value Allocated Value Allocated Sales
in Funding from from Proceeds
Marital Trust 12/19/88 Letter March 1993 Offer July, 1993
Nine Ninety Nine 2,921,165 14,897,581 12,029,811 10,496,922
Hummelstown Quarries 799,052 3,433,014 3,196,628 2,796,211
Bender8~ Grove (Mt. Holly 277,185 5,500,000 4,475,000 1,373,180
Union Quarries, Inc. is not included in this chart because Union Quarries, Inc. was not included in the
sale to CRH. However, in computing the principal value of the Marital Trust in order to determine the
5% withdrawal in 1994 -which was the first year after the sale of the other operating assets to CRH, the
value of Union Quarries was increased from $1,300,000 to $3,000,000. In light of the other valuations,
the issues previously discussed, and given that 6'/z years of reserves had been excavated, that suggests
the value of Union Quarries at December 1987 was at least $3,000,000.
With respect to the December 1988 offer and letter of intent, the allocation is, of course, hypothetical,
but so is any appraisal, even an independent, qualified appraisal. A transaction is the best evidence of
value; that is why appraisals (e.g., Touche Ross & Company's appraisal cited above) often use
comparables to public companies. Even though public companies are inherently different from private
companies, the values of their shares reflect actual transactions. The December 1988 offer was more
than just an offer, due diligence had been performed, and the offer was lost not because of an absence of
value, but, because of litigation risk or because of market conditions. Even if the December 1988 offer
did not close, it represents a range of values and provides clear evidence of substantial undervaluation
and substantial evidence of how much the values should be increased.
CONCLUSIONS:
Because the fair market values of the distributions to the Marital-Trust were substantially undervalued,
then the Marital Trust was significantly overvalued, in my opinion, by an amount in the range of at least
$12,500,000 and perhaps as much as $25,000,000.
Consequentially, the 5% withdrawals were substantially overpaid. Based on an overfunding of the
Marital Trust of $15,000,000, those overpayments were cumulatively in the range of $10,000,000 -
$10,500,000, to which interest at the statutory rate of 5% should be added, totaling an additional $6.5 -
$7.0 MM.
JOSEPH D. C. WILSON III
CERTIFIED PUBLIC A C C O U N T A N T
Barbara Mumma
September 28, 2009
Page 13
Further, the 5% withdrawals were paid in stock of Nine Ninety Nine, Inc. and Hummelstown until the
sale to CRH. Because the value of the stock in those entities was so significantly undervalued, the 5%
withdrawals were substantially overpaid. Those overpayments are cumulatively in the range of
$1,500,000 - $2,000,000, to which interest at the statutory rate of 5% should be added, totaling an
additional $650,000 - $750,000.
Statutory interest was paid in-kind on the delayed funding of the Marital Trust. That interest was paid in
significantly undervalued stock of Nine Ninety Nine, Inc. That overpayment amounts to approximately
$500,000, to which interest at the statutory rate of 5% should be added, totaling an additional
approximately $500,000.
Finally, there remains the miscalculation of the amount of the marital trust by $861,018, to which
statutory interest of 5% should be added.
Not only should an appraisal have been made of the assets funding the Marital Trust, particularly with
the same fiduciaries on both sides of the transaction and with the same advisors on both sides of the
transaction, and not only should the executrices and their advisors have known that the assets were
substantially underfunded, they did know. The Marital Trust was exorbitantly overfunded to the
detriment of the residual beneficiaries.
OTHER ISSUES:
Sailfish Point condo:
A condominium at Sailfish Point in Stuart, Florida appears on the Form 706, but does not appear on the
accountings for the Estate until its sale is reported in September 1998. Interestingly, it was sold for
approximately its value as reported on the Form 706, 12 'h years earlier.
Although the asset does not appear on the accountings, the expenses related to the condo do appear.
Interest was appropriately charged to the account during the 12 '/z year period, but all other expenses
(approximately $292,000) were charged to principal. Although there may have been some portion of
this (amounts aggregating less than $50,000) paid to the owners' association as assessments for capital
expenditures (the records are not detailed enough to make that determination, most of these expenses are
items which should have been properly charged to income such as telephone and utilities, insurance,
condo owners' association fees, real estate taxes, recurring repairs and maintenance, and apparent
transfers to a local account.
Twelve years is simply too long to hold an asset to administer an estate. Some portion of these expenses
must have been chargeable against income.
JOSEPH D. C. WILSON III
C ER7IFIED PUBLIC ACCOUNTANT
Barbara Mumma
September 28, 2009
Page 14
I was unable to review expenditures regarding other properties or general expenses or fees to determine
the correctness of their allocation between principal and income, but if the allocations were similar to
the Sailfish Point expenses, then the allocation of these expenditures would be equally improper.
Sincerely yours,
~~~ ~" " --
Joseph D.C. Wilson III