PETALUMA, Calif. (BRAIN) — Marin Mountain Bikes is suing the Internal Revenue Service in the U.S. Tax Court, charging that the IRS misvalued the company’s worth, causing it to be billed for an extra $3 million in taxes and penalties this year.
The Petaluma, California-based company received a notice of deficiency from the IRS this spring, totaling $4.5 million in taxes and penalties owed for the 2021 and 2022 tax years, when Marin claimed net operating loss deductions that the IRS disputes.
“This is a tax-valuation dispute. We strongly disagree with the IRS's position, and the filing is a procedural step that allows the case to move to IRS Appeals, where we expect a fair and informed review,” said Matt van Enkevort. Marin’s CEO. “We remain optimistic about achieving a favorable resolution,” he added.
The dispute dates to a loan conversion in 2018 and Marin’s claimed net operating loss carryovers in the following years.
In 2018, Surewell Investments took a 100% equity position in Marin — 19.4 million shares at $1 per share — after agreeing to convert $19.4 million in loans and interest it was owed by Marin. Prior to the loan conversion, Sorbus Advisors LLC appraised Marin at about $30.3 million in enterprise value. Including cash on hand and subtracting the loan, Sorbus calculated a net enterprise value of $11.5 million before the loan conversion.
According to the Marin petition, the IRS valued Marin at just $2.25 million in 2018, meaning it would have been insolvent and the loan conversion would have been characterized as a debt discharge. Marin said that IRS valuation was inaccurate for several reasons, including the IRS appraiser’s use of the 2018 sale of Niner, Inc. to United Wheels as a comparable transaction. Marin points out that Niner was sold out of Chapter 11 bankruptcy.
Marin said that because its share value (based on the Sorbus valuation) was higher than the loan conversion, it was solvent in 2018. That meant no debt was discharged by the conversion, which affected the subsequent net operating loss carryovers.
