ASA ‘overwhelmingly’ rejects RICS; considers international institute with CICBV

“We are happy to report that on January 31, 2010, the ASA Board of Governors voted overwhelmingly to reject a merger with the Royal Institute of Chartered Surveyors (RICS),” writes John Barton, Chair of the ASA BV Committee, in the group’s weekly E-Alert (Feb. 17, 2010). Over the past year, ASA leaders have considered several alternative strategic directions, including a proposal by which RICS, a U.K.-based surveying and real property professional society, would acquire the ASA. “[Although] such a merger may have had some benefits for a small minority of ASA members, it offered no benefit for a majority of our members,” Barton says. “Hence, we feel that the Board’s decision was a major positive for the Business Valuation Discipline and the ASA.”

One step for the ASA—a larger leap toward professional unity? The Board also renewed its commitment to the “long-term coordination of appraisal organizations leading to a unified voice.”  In March, it will vote on the proposed initiative with the Canadian Institute of Chartered Business Valuators (CICBV) (see BVWire# 81-4). “Under the proposal, the CICBV and ASA would create an international business curriculum in Valuation Principles and IFRS 3 [Business Combinations] to be offered first in the European market, but soon throughout Asia, Australia, Central and South America,” Barton explains. “The ASA and CICBV hope to project our combined intellectual capital into these markets through the formation of an umbrella organization of societies, the International Institute of Business Valuators (IIBV)…As valuation societies form around the world, they will be invited to participate with us in the IIBV.”

Mercer Capital (and QMDM) wins discounts in new FLP case

Following on the heels of the pro-taxpayer decision in Estate of Black v. Comm’r (see last week’s BVWire™), comes another taxpayer victory in the Estate of Shurtz v. Comm’r (T.C. Memo, Jan. 2010).  The “win” was based on a well-planned, well-managed family limited partnership (FLP), essentially funded with 750 acres of prime Mississippi timberland plus a 16% limited partnership interest in the timber’s operating company. Unfortunately for appraisers, the trial battle over marketability discounts didn’t make it into the Tax Court’s published opinion, which—after deciding the Sec. 2036(a) issue in the taxpayer’s favor, simply held that no further taxes were due.

Mercer insights on the marketability discounts. Fortunately, Matt Crow, the new President of Mercer Capital (Memphis, TN) was the appraiser for the Shurtz estate, which submitted the same appraisal to the Tax Court that Crow performed six years earlier, with the estate’s tax return.  He tells BVWire that the parties stipulated to the underlying net asset values and their minority discounts were similar.  “But, our marketability discounts were anything but similar,” he says.  Crow applied a 50% discount to the estate’s 16% LP interest in the timber company and a 30% marketability discount to its FLP interest. The IRS expert applied a 10% discount to both. “As a result, our valuation of the estate's interest in [the FLP] was less than half the amount determined by the IRS expert.”

“It wouldn't surprise you to learn we used the Quantitative Marketability Discount Model (QMDM),” Crow adds, “modeling the partner level cash flows over a reasonable holding period and discounting them at a premium rate of return to compensate for lack of marketability—the same shareholder-level, discounted cash flow modeling we've done thousands of times.” The IRS expert relied on the Bajaj studies along with the “usual” restricted stock and pre-IPO studies, with primary support from FMV Opinions data, focusing on comparing the subject interests with the FMV data on market-to-book ratios and dividends per share. “I rebutted the Service's expert report and he rebutted mine,” Crow reports. “In the end, the judge accepted the estate's return, and thus our valuation, as submitted.”

Why the court didn’t report the valuation decision remains a mystery. “But as the old saying goes,” Crow says, “silence means approval.” Look for the complete case digest of Estate of Black in a forthcoming (April 2010) Business Valuation Update™; the full-text of the court’s opinion will be available soon at BVLaw™.

New tax reporting requirements highlight control issues

Given recent changes to IRS form 1065 (partnership income) and revised Schedules B, C, and K-1, taxpaying firms will have to file substantial ownership information and documentation for 2009, including their positions in affiliated firms and a clearer, more complete breakdown of ownership by individual and corporate partners. These new changes “may give appraisers a better sense of control issues,” says the current issue (Feb. 2010) of Business Valuation Notes by the Minnesota BV Group.

In particular, although reporting requirements for sole proprietorship distributions haven’t changed, “limited liability companies, partnership, and other tax pass-through business forms…must now display a chain of ownership, showing who owns directly or beneficially an interest,” Steve Blakely (Olsen Theilen & Co., Ltd., St. Paul, MN) tells BV Notes. For example, if Party A owns 15% of Partnership X directly but also owns 90% of Company B which owns 40% of Partnership X, then Party A must report owning a 51% “direct and indirect” interest of Partnership X, Blakely explains. “While the chain of ownership reporting seems to give a trail to control issue,” he adds, “it’s not as clear as ownership charts suggest.” The new rules also incorporate family relationships not required by prior estate planning regimens, including ownership by spouses and children.

Estate and gift tax valuations: insights from inside the IRS

In the past three years, we’ve seen an average of 5 to 7 new family limited partnership (FLP) cases per year, primarily in the estate tax context but also the gift tax and even the state tax and divorce arena. We’ve also seen increased IRS oversight of appraisers in particular and tax preparers in general—for example, the IRS’s Return Preparer Review, just released in Dec. 2009. Regulatory revisions will continue apace, especially given the legislative vacuum that will need to be filled on the “expiration” of the estate tax this year.

Where can you get the latest insights and updates from the top tax appraisers? Join Linda Trugman, Chris Treharne, and Jay Fishman for the next BVR teleconference, “Valuation Issues in Estate & Gift Tax,” on March 4, 2010. In particular, Fishman has just returned from a meeting in Washington, D.C.—he’s the only business appraiser on the Internal Revenue Service Advisory Council—and will share IRS news on tax preparer penalties, concerns about limitations (or elimination) of marketability discounts, and other current topics. Find out more and register for the teleconference here.

FEI wants 3 years to implement FASB/IASB standards

The Financial Executives International (FEI) has just filed comment letters with the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) to address concerns regarding the effective dates of the major convergence standards outlined in the FASB and IASB Memorandum of Understanding, anticipated to be issued by June 2011. The current proposed dates “present challenges to realizing a high quality implementation,” the FEI says, and recommends the Boards deliberate the effective dates and transition of the major convergence standards “holistically” rather than on a standard-by-standard basis, taking into consideration the impact to companies and the interdependencies among the standards. In its letters, FEI also asks the Boards to:

• Provide a three-year implementation period for the body of converged standards through an aggregated effective date, also allowing for early adoption.
• Permit preparers, when practical, to choose the method and manner of initial adoption (retroactive restatement, cumulative effect, prospective, etc).

FEI “continues to support the Boards' mission to establish and improve financial accounting and reporting standards through the convergence standards,” its Executive Committee says, in a current release. “Our committee is uniquely positioned to assist the FASB and IASB in [developing] strategies to address the multitude of potential challenges resulting from the implementation of these new standards, and we welcome the opportunity to work closely with the Boards as we draw closer to the desired date."

PCAOB answers questions on documenting engagement review

The Public Company Accounting Oversight Board just published a staff question and answer on the documentation required by Auditing Standard No. 7, Engagement Quality Review. Previously, the SEC approved AS No. 7 on Jan. 15, 2010, and encouraged implementation guidance from the PCAOB; the staff question and answer provides this additional guidance for auditors and other users. (The statements contained in the staff Q & A are not rules of the Board, nor have they been approved by the Board.) The staff Q & A provides an objective framework for reviewers to evaluate an engagement team’s significant judgments and conclusions.

Collier joins HSSK as healthcare director

Texas-based Hill Schwartz Spilker Keller LLC (HSSK), the business valuation, litigation consulting and computer forensics firm, announced Cindy Eddins Collier has come on board as Managing Director of Healthcare Valuation. Collier is a nationally recognized, distinguished thought leader and contributor to the valuation profession. She serves as a technical reviewer and national faculty member for the AICPA and NACVA, and most recently has co-edited (with Mark Dietrich) BVR’s Guide to Healthcare Valuation, 2009 edition.

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