Bernier goes back to the trial court—again—on
As one of the first U.S. jurisdictions to require tax affecting when valuing an S corporation in divorce cases, the Massachusetts Supreme Court in Bernier v. Bernier caused quite the stir in BV and legal circles, with many commentators believing the court may have “opened the door” to similar holdings in other states. But has the case—what is now being called Bernier I—only helped to expose the continuing complexity and confusion that surrounds the concept in the Tax Court and elsewhere?
As a reminder, Bernier I remanded the case for the trial court to apply the same metric as in Delaware Open MRI Radiology Assocs. v. Kessler, finding that its effective 29.4% rate was the most precise and fair. The problem: The federal dividend rate was 15% when Kessler came down, but it was 40% as of the valuation date (December 2000) in Bernier. So this time around, when the wife’s expert input the applicable tax rates into the Kessler metric, the overall tax effect was zero. By contrast, the husband’s expert (a CPA only) combined a 5.85% state rate with a 39.6% federal rate to reach a 46% applied rate. The trial court wasn’t happy with either approach; the wife’s expert ignored the “fairness” mandate of Bernier I, but the husband’s 46% rate resulted in a “significant” understatement of value for the parties’ two grocery stores. Instead, the trial court strictly applied the 29.4% Kessler rate, and both parties appealed.
Held: “Application of the Kessler metric, even as it results in a zero percent tax affecting rate, does not necessarily lead to an inequitable result,” the Court of Appeals explained. “There is a distinction … between failing to tax affect at all the earnings of the supermarkets because an S corporation does not pay federal taxes at the entity level (a basis for the approach taken by the wife's expert in Bernier I), and utilizing a zero percent tax affecting rate arrived at through application of ‘all applicable rates.’” The appellate court also scolded the husband for failing to offer a BV expert who could testify specifically to tax affecting as part of commonly accepted appraisal techniques and remanded the case for a redetermination of value—including a new evidentiary hearing, if necessary. Read the complete digest of Bernier v. Bernier, 2012 Mass. App. LEXIS 211 (June 29, 2012) in the September Business Valuation Update; the court’s opinion will be posted soon at BVLaw.
AICPA backs Senate bill to exempt BV analysts from fiduciary rules
Last week, Barry Melancon, AICPA president and CEO, submitted a letter in support of
S. 1232, a bill that would, according to its title, “modify the definition of fiduciary under the Employee Retirement Income Security Act of 1974 to exclude appraisers of employee stock ownership plans.” Introduced in June 2011 by Sen. Kelly Ayotte (R-NH), the bill has since gained six co-sponsors, including one Democrat, but is still tabled in committee.
In Melancon’s letter, he asks Senators Tom Harkin (D-IA) and Mike Enzi (R-WY), the chair and ranking member, respectively, of the Health Education Labor and Pensions Committee, to join as sponsors of the legislation:
Many CPAs perform business valuation services and many of these CPAs regularly value the stock of employer corporations that sponsor ESOPs. These employer stock valuations are typically performed for transaction, taxation, or annual Department of Labor (DOL) reporting requirements. Importantly, AICPA members must abide by the AICPA’s Code of Professional Conduct when performing valuations, which requires CPAs to “be impartial, intellectually honest, disinterested, and free from conflicts of interest.” As you know, a fiduciary is bound to act for another’s benefit and, therefore, we believe CPAs, working as appraisers, cannot, by definition, be acting on behalf of the beneficiaries of an ESOP.
“The AICPA will continue to monitor this issue and advocate on behalf of CPAs and valuation professionals who perform ESOP valuations,” says Eddy Parker, technical manager of the AICPA’s Forensic and Valuation Services section. “If either you or your senator has any questions regarding this issue, please contact Diana Deem, Senior Manager of Congressional and Political Affairs, at the AICPA (202-434-9276 or firstname.lastname@example.org).” To read up on all the advocacy efforts of the FVS Section, including a posting of Melancon’s letter, click here.
Prof. Hamermesh responds: Control has distinct value in DE law
Control premia are not irrelevant in Delaware statutory appraisal law, says Prof. Lawrence Hamermesh (University of Pennsylvania). Responding to a recent assertion by Prof. Steve Bainbridge that, by excluding the accomplishments or expectations of a merger from its statutory fair value standard, the Delaware courts seem to be “making up this stuff as they go along,” Hamermesh writes:
We see it differently: Control has a distinct value to the person who owns or acquires it, and it cannot be viewed as belonging to dispersed public shareholders or minority shareholders. Accordingly, and in light of the statutory exclusion [and notwithstanding the ambiguity of such precedent as Weinberger v. UOP], we believe that it’s a mistake to appraise fair value under the Delaware appraisal statute by reference to transactions that reflect payment of a premium for control.
“Disaggregated shareholders don’t have control,” Hamermesh reiterates, “and fairness doesn’t require that they be paid for what they don’t own.” To read his complete response, click here.
New chapter on valuing private stock using the secondary markets, from AICPA’s FinREC
The AICPA’s Financial Reporting Executive Committee (FinREC) has just posted—for public comment—the draft of a new chapter to its guide on Valuation of Privately Held Company Equity Securities Issued as Compensation (originally released in March 2011).
Currently titled “Inferring Value From Transactions in a Private Company’s Securities,” this new Chapter 8 of the guide will provide a framework for evaluating private transactions—including secondary market transactions—and their relevance for estimating fair value of other securities within an enterprise.
To help reviewers put the new chapter in context, FinREC has also released the latest working draft of the guide. “However, we are not seeking feedback on the entire Guide—only on the new chapter and the new questions and answers (Q&As) in Chapter 12 of the Guide (starting on page 96),” says the FinREC announcement. To access the working drafts, click here. Interested parties are encouraged to submit their informal feedback by Oct. 1, 2012.
Thinking of expanding your M&A consulting practice and expertise? Consider becoming a CM&AA
In the current age of economic globalization, financial and appraisal professionals may want to extend their expertise beyond the discrete “pieces” of valuing a business—i.e., accounting, tax, and M&A. If so, they may consider acquiring the Certified Merger & Acquisition Advisor (CM&AA) certification, sponsored by the Alliance of Merger & Acquisition Advisors (AM&AA). New courses this fall will take place on university campuses in Chicago (DePaul), Charlotte, N.C. (Wake Forest), and Los Angeles (Pepperdine). Current learning objectives include:
- An overview of the private capital marketplace;
- The dynamics of an M&A engagement and practice management;
- Corporate M&A development;
- Buy- and sell-side representation;
- Traditional investment banking;
- Business valuation and M&A standards, accounting, finance;
- Traditional business valuation and transactional valuation;
- M&A legal and tax issues;
- Acquisition and growth financing; and
- Review and examination for credentialing.
Course books include Private Capital Markets, by Rob Slee, and Valuation for M&A: Building Value in Private Companies, by Chris Mellen and Frank Evans. For more information, click here.
Business valuations are ‘less important than you think,’ Inc. magazine tells owners
“Essentially, this is the problem with business valuations,” says a new article by Inc. online magazine: They take a snapshot of value in time, which may (or may not) have anything to do with the current state of the business—which could be booming or it could be broken. “More important,” the article tells prospective sellers:
A valuation gives you practically no information on how much you may be able to sell your company for. The marketplace, not some academic exercise, determines the true value of your business. No matter what the numbers say, your company is worth what a qualified buyer is willing to pay for it on the day of closing.
Prospective buyers “couldn’t care less” about business appraisals, either, adds Inc. “They evaluate a potential transaction through their own criteria, their own set of conditions and values at that time, and the results of their own due diligence.” The bottom line: “A valuation can be very useful when there is a specific reason for it and a time frame within which to use it. But remember that the state of a company can change pretty quickly. If you’re just starting the process of selling your company, a valuation generally isn’t worth the money and hassle.”
FASB presents a complete ‘where are we now’ on all projects
Before taking a brief break for summer, the Financial Accounting Standards Board (FASB) posted its presentations to the 2012 American Accounting Association’s national meeting, held last week in Washington, D.C. Part I, by FASB member Tom Linsmeier and IASB member Patricia McConnell, covers the present status and future time frames for the FASB’s various projects on revenue, leases, insurance, disclosure framework, and private company decision-making framework.
In Part II, the same duo covers financial instruments, consolidations, investment entities, going concern, and repos. The FASB will resume its normal schedule of meetings beginning August 20.
Last CPE for the summer
Only two more chances to fulfill your CPE requirements before the busy fall season begins:
- On August 21, BVR’s Online Symposium on Healthcare Valuation continues with Valuing Assisted Living Facilities, featuring Alan Simons and Deb Freeland (both CliftonLarsonAllen) and addressing all the valuation challenges inherent in a highly regulated but expanding industry.
- On August 23, join James Andersen (Burr Pilger Mayer), a veteran appraiser in northern California’s wine region, for Valuing Wineries & Breweries. As an added bonus, five attendees selected at random during the webinar will have a chance to win a premium bottle of wine or beer from BVR’s home region of Portland, Ore.
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