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regular accountant, Danny Hart (Hart), also recommended that the
Sta-Home tax-exempt entities convert to nontax-exempt status.
Kirkland retained a tax attorney named James Pettis (Pettis)
to help Kirkland convert the Sta-Home tax-exempt entities into
for-profit entities. Subsequently, Pettis learned that
Kirkland’s firm had not obtained an appraisal for any of its
previous conversions. Pettis informed Kirkland that Pettis
“strongly [disagreed]” with that approach. By letter dated July
7, 1995, Kirkland’s firm retained Hart’s accounting firm to
appraise the Sta-Home tax-exempt entities’ net assets as of a
proposed transaction date of October 1, 1995.
The appraisal was slow in coming. Pettis, the tax adviser,
insisted on seeing the appraisal before proceeding with any
transaction that would effect a conversion. After reading the
appraisal, Pettis was concerned that it failed to deal with
issues concerning intangible assets. He believed that the mere
fact that an entity had lost money or had a negative cashflow did
not mean that the entity was worthless. He also was concerned
that the appraisal failed to address Rev. Rul. 59-60, 1959-1 C.B.
237, where the Commissioner has set forth standards on valuation
for Federal income tax purposes. Upon Pettis’s request, he
received a second appraisal. Because some of his concerns as to
intangible assets remained after reading the second appraisal, he
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