Big win for the taxpayer and defined-value clauses

In a big win for the taxpayer—and for estate and gift tax professionals—the Tax Court resoundingly rejected the IRS’s three arguments against defined value clauses, even in cases involving interfamily transfers. In this new decision, the court also provided what amounts to a four-part “blueprint” for drafting successful formula clauses in the future.

The case concerned a wealthy Colorado couple, who set up a family LLC with cash and marketable securities to continue a gift-giving plan for their children and grandchildren; specifically, they executed gift documents that transferred a “sufficient number” of LLC units to each recipient “such that the fair market value for federal tax purposes” would equal the amount of the then-current annual gift tax exclusion. If the IRS later determined a different value, then the number of gifted units would adjust accordingly. The taxpayers retained an independent appraiser to value the LLC assets, made appropriate adjustments in the LLC’s capital accounts to reflect the transfers, and then reported their value on their gift tax returns, based on the appraisal as well as the descriptions in the operative documents.

The IRS challenged the valuation of the gifts as well as the validity of the defined value clause. Importantly, the taxpayers stipulated to the IRS’s valuation, thus “closing the door” to the IRS’s first argument, that they intended to transfer fixed percentage interests rather than a specific dollar amount. This amount—and the recipients’ right to receive it—was always fixed and certain, the Tax Court held, in defeating the IRS’s second argument. Just because the precise number of LLC units necessary to fulfill the gifts might be uncertain did not create a condition subsequent to which the taxpayers could “take the property back.” Finally, that the gifts had no charitable component was “inconsequential,” the court held, in overruling the IRS’s final argument, that the formula clauses were void for public policy reasons. It then cited four provisions in the gifting documents that preserved their operation in this and possibly future cases.

Read the complete digest of Wandry v. Commissioner, T.C. Memo. 2012-88 (March 26, 2012) in the next Business Valuation Update; the Tax Court’s opinion will be posted soon at BVLaw.

Why is there still a market for low-cost (and low-quality) BV providers?

Here’s a good question for BV professionals to ponder, writes Mike Crain (Financial Valuation Group): “If there are indeed a lot of inferior BV services being performed, why hasn't the marketplace done a better job at eliminating these providers?”

As it happens, Crain’s question arrived on the same day as the ASA’s most recent weekly E-Letter to members, in which guest contributor Barbara Walters Price (Mercer Capital) wrote an article entitled “How to Compete With Low-Cost Providers … Don't!” Prompted by a “lively” discussion on LinkedIn about how to communicate “quality” in valuation services to a prospect who is shopping only on price, she acknowledged the frustration caused by the situation, but her advice was: “Get over it and get on with it.” Some clients will always shop only on price, while some appraisers will always commoditize their services. You can argue with either camp until you’re “blue in the face,” Walters Price said, but nothing will change (except perhaps your blood pressure). In fact, the only thing you can change is your response, she said, continuing:

I strongly suggest using that time to do two things: 1) become an expert in a niche or service line that cannot be a commodity, and 2) find and cultivate referral sources who understand what you do and respect the quality of it. They will, in turn, refer the types of engagements you desire.

Does your practice provide Kias or BMWs? In her complete article, Walters Price lists half a dozen ways to “move your practice to a different level.” In sum, she concluded with this comment from Rod Burkert (Burkert Valuation Advisors):

I've used this analogy before: to get from point A to point B, some people need a BMW while others are fine with a Kia. And as real-world observation shows, there is a market for both cars. As practitioners, we need to decide what market we want to be in. I like the BMW market, myself, for obvious reasons. The wonderful thing is that for my sized practice, I only need a handful of those kinds of clients/referral sources to keep me wonderfully busy.

How to use the EOU in litigation—new update and article

We’ve just added February 2012 data to the Economic Outlook Update (EOU). Each issue is available in Microsoft Word, Excel, and PDF formats, and subscribers can access, download, print, and save any issue of the EOU to their computers and iPads.

We’ve also posted an article written by Shannon Pratt (SPV) that discusses how to use EOU data in reports prepared for litigation. For example, what if the testifying expert is asked about the sources of the EOU? What if opposing counsel wants to know its authors—or even their qualifications? The complete article is available on the EOU FAQs page; scroll down through the questions to: “Can I use the EOU in a litigation setting?” and click on the article link.

IRS plans to launch its transfer pricing ‘SWAT team’

A new article in Forbes says the IRS is planning to “crush” transfer pricing abuse by recruiting “a crack unit of specialists” from Big Four audit firms, boutique consultancy firms, and top law firms. “A number of multinational companies” are in the team’s sights,” says the article. Tops on the list are those in the pharmaceutical and high-tech sectors, the same ones—such as Apple, Microsoft, Oracle, and Pfizer—that are setting up shops overseas in such “garden spots” as Ireland, the Netherlands, and the Caymans.

Most tax professionals tend to think the IRS will have an “uphill battle,” however, given the “billions and billions of dollars” at stake, the article says. The IRS is also still in the midst of a budget and hiring crunch (which may have hampered its efforts to fulfill a similar promise, made just a few years ago—before the economic crisis hit—to ramp up its oversight on 409A abuses). And yet, its recruitment of a transfer pricing “SWAT team” from the top echelons of accounting and law, who may have jumped from the private to the public sector precisely due to the financial crisis, speaks to the IRS’s current levels of committed force. Both sides of any ensuing battles on transfer pricing will require experts, of course, and will likely be looking to recruit from the “top guns” in the BV and IP valuation professions.

Beaton, et al., move to Alvarez & Marsal

Last week, Alvarez & Marsal expanded its Seattle office and Pacific Northwest presence by recruiting Neil Beaton (formerly of Grant Thornton) as its new managing director of valuation services.

Joining Beaton to help start A&M’s valuation services are: Arik Van Zandt, Drew Voth, Brent Sloan, Jason Andrews, Clint Poppins, Michael Locke, and Char Connolly (all formerly of Grant Thornton). Congratulations to A&M and Beaton, et al., on the new move.

April showers bring May BV conferences, fresh from the ASA

It’s springtime in most parts of the country, which heralds the end of the busy tax time and the beginning of an equally productive BV conference season. The American Society of Appraisers (ASA) is kicking off the season on both coasts, with three meetings by various chapters in May, to wit:

• On May 7th, the ASA and its NYC Chapter hosts the 20th anniversary of the Current Topics in Business Valuation, to be held in New York City. Sessions will cover effective tactics related to IRS Audits, selecting the optimum capital structure for a subject firm, navigating the WACC vs. the IRR in business combinations, and an analysis of quantitative DLOM models outputs. For more information, click here.
  
  
• On Tuesday May 15th, the national ASA hosts its 7th Annual Fair Value Conference, to be held at the local Los Angeles offices of PricewaterhouseCoopers. The roster of speakers includes nationally recognized experts such as Ben Couch (FASB), Tony Aaron (Ernst & Young), and Jon Isler and Adam Smith (both from PwC). For more information and to register, click here.
  
  
• On Thursday May 17th, the L.A. Chapter of the ASA hosts the U.S. Tax Court Cases Symposium, a multi-disciplinary event to be held in Cerritos, Calif. Offering “the inside scoop” on what goes on inside the federal Tax Court, the event will feature speakers from the IRS as well as appraisal experts Dennis Webb (Primus Valuation) and Carsten Hoffman (FMV Opinions) and attorney Chuck Morris (Albrecht & Barney). To register, click here.