New cases spotlight the value of ‘right of publicity’
Jimi Hendrix, Michael Jackson, Bing Crosby. You never would have seen them together on the same stage, but they’re sharing the limelight over an intriguing valuation issue known as the “right of publicity.” It’s a form of intellectual property that covers people’s likeness, including their name, image, signature, voice, and so on. The issue has made recent headlines in three cases.
It’s bad: Michael Jackson’s estate valued his name and likeness at a mere $2,105, according to the Los Angeles Times. No doubt this low value reflected the negative publicity and scandal swirling around the pop singer at the time of his death. But the IRS disagreed with this value and has filed documents in Tax Court contending that the value is $434 million. Other assets in his estate are also undervalued, says the IRS, and the difference is so great that the estate was hit with the 40% gross valuation misstatement penalty—double the normal penalty—a very unusual move.
In the case of singer/actor Bing Crosby, his first wife filed suit asking for a share of the value of his right of publicity stemming from the time they were married. However, the court never got to address the issue or the valuation because her estate had settled with Crosby’s estate some time ago. The judge ruled that the settlement precluded her pursuing her new claim.
Currently, 19 states have statutes that cover publicity rights, and those that do not will recognize some of those rights through common law. Also, dozens of states say it applies posthumously. Another recent case, involving Jimi Hendrix, challenged the constitutionality of the state of Washington’s publicity rights statute. The 9th Circuit refused to declare the statute unconstitutional.
Where you’ll find it: According to Jonathan Faber, founder of the Luminary Group and an expert in this area, valuation analysts will come upon the right of publicity issue primarily in three contexts: (1) estate valuation and planning; (2) divorce; and (3) infringement due to unauthorized use. But the issue often fails to surface at all because of a lack of awareness. The valuation involves techniques and methods common to the valuation of other IP assets, such as determining royalty rates, examining cash forecasts, choosing a discount rate, and so on. But the “application of those common methods really requires the judgment of someone who works with the right of publicity on a regular basis,” says Faber. “Those who may be experts in other areas of IP valuation should not assume he or she can jump into a right of publicity analysis and perform a defensible valuation,” Faber said.
You might think that the right of publicity only applies to celebrities. Not so. Anyone can get caught up in this issue. We’ll explore more about it in future issues of BVWire and also Business Valuation Update.
Appeals court sides with tax preparers in fight over IRS licensing scheme
Is it the end of the line for the Internal Revenue Service’s “Return Preparer Initiative”? A year after the plaintiffs in Loving v. IRS prevailed in the D.C. District Court against the agency’s proposed licensing regimen, the U.S. Court of Appeals has now affirmed the permanent injunction.
‘Vast expansion of authority’: The IRS’s initiative is an effort to regulate independent tax preparers by requiring them to pass a competency test, receive continuing education, and pay annual fees. It does not apply to attorneys, CPAs, or IRS enrolled agents who are already licensed. The agency has claimed it has the authority to do so under an 1884 statute (31 U.S.C. § 330) and justified the measure as a response to problems in the tax-preparation industry.
Three independent tax preparers filed suit to prevent enforcement of the rules that, they claimed, would put them out of business. In January 2013, the district court agreed. Now, the appeals court affirmed in a decision that came down to interpreting the statute’s key terms. It pointed out that, for the first 125 years after the statute’s enactment, the executive branch never interpreted the statute to authorize regulation of tax-return preparers. In fact, in a 2005 hearing, the National Taxpayer Advocate—“the government official who acts as a kind of IRS ombudsperson”—testified in front of Congress that “the IRS currently has no authority to license preparers or require basic knowledge about how to prepare returns.” Suddenly, in 2011, the IRS decided it, in fact, did have the power, said the court.
“If we were to accept the IRS’s interpretation of Section 330, the IRS would be empowered for the first time to regulate hundreds of thousands of individuals in the multi-billion dollar tax-preparation industry.” Nothing in the text of the statute or the legislative history provides for “that vast expansion of the IRS’s authority,” the court concluded.
It’s not clear what the IRS plans to do next. The IRS’s newly installed commissioner, John Koskinen, has suggested the agency might offer certification on a voluntary basis. The idea is that consumers would ask their tax preparers whether they had gone through the IRS training—and favor those who had. Not surprisingly, tax return preparation services, including H&R Block, reacted with displeasure at the outcome. "It is outrageous that all consumers don't enjoy basic protections with such a significant financial transaction as tax preparation," the company’s CEO said.
Tax preparers should note that the requirement for a paid preparer to obtain a PTIN and include it with all prepared returns is separately authorized in Section 6109 and is not being affected by the Loving case. The case is Loving v. IRS, 2014 U.S. App. LEXIS 2512.
Introducing IPCPM: A cost of capital model that builds on IPCPL
The implied private company pricing line is a new tool for estimating the cost of capital for small private companies. Feedback from the BV community has been positive, but some commenters have pointed out that, while IPCPL is fine for average companies, what if the subject company is not average—and what if it’s not in the same industry? How do you adjust for these factors? The IPCPL developers have introduced the implied private company pricing model (IPCPM), which will allow users to move off the IPCPL (line-size adjusted average). The model is the only specific private company cost of capital model that is indexed directly to the IPCPL cost of capital. It facilitates adjustments from the IPCPL size-based indication for comparable differences in: (1) systematic risk (i.e., beta); (2) diversifiable and total risk (i.e., total beta); (3) liquidity; and (4) debt capacity.
Learn more: The developers will conduct a webinar, Utilizing the Implied Private Company Pricing Model: The Cost of Capital Wizard, on March 5. Robert Dohmeyer (Dohmeyer Valuation Corp.), Peter Butler (Valtrend), and Rod Burkert (Burkert Valuation Advisors) will explain how this exciting new model works in estimating cost of capital for companies whose revenues are less than $150 million.
First look at new Valuation Handbook
Be a part of the first presentation of the Valuation Handbook, Duff & Phelps’ newest resource, which fills the void left by the discontinued SBBI Valuation Yearbook. BVR will host a free, one-hour event on February 20, Valuation Handbook—Guide to Cost of Capital and the Risk Premium Calculator. It features Roger Grabowski (Duff & Phelps), the lead of the team that produced the Valuation Handbook and the Risk Premium Calculator. He will explain how both of these powerful resources were created and how best to put them to use. Don’t miss it!
New analysis of value of small online biz
The average small website sells for 2.43 times earnings, according to a new study of 250 sales transactions of online businesses during 2010-2012. Other findings of the study, conducted by Digital Exits, include:
- The average sale price was $514,725;
- The final sale price was 90% of the asking price on average;
- E-commerce and advertising websites commanded the highest multiple (2.6 times earnings); and
- The lowest multiple (1.8 times earnings) was for lead generation sites.
Digital Exits believes that, when 2013 data are included in the analysis, the average multiple will increase to 2.8 times earnings. It also believes that the newest data will show an increase in the multiple paid for very small websites (those under $200,000 in value) from 1.8 to 2.5.
PwC sponsors IVSC in quest for global valuation standards
Joining the rest of the Big Four accounting firms, PricewaterhouseCoopers is now an official sponsor of the work of the International Valuation Standards Council. The IVSC seeks to create globally recognized and accepted valuation standards, particularly for financial instruments, and promote quality within the valuation profession. As a sponsor, PwC will provide financial support to the organization and actively contribute to the development and revision of the IVSC’s International Valuation Standards and the advancement of its road map for a high-quality professional framework around the world.
“We support the stated objectives of the IVSC, and have been especially encouraged by its recent actions, including the appointment of Sir David Tweedie as the Chairman of the Board of Trustees in September 2012,” says John Hitchins, global chief accountant at PwC.
“The agreement by PwC to provide financial support to the IVSC represents a very positive start to 2014,” says Tweedie. “It is tangible evidence of the growing consensus that the IVSC is enhancing trust in valuation—an activity that is a vital component of the global financial system.”
APB looking for BV subject matter experts
The Appraisal Practices Board (APB) of The Appraisal Foundation (TAF) is seeking valuation professionals for a national talent pool to serve as a resource to the board as it develops future voluntary guidance on generally recognized valuation methods and techniques.
Most APB projects take three to six months, and SMEs should expect to dedicate two to eight hours per week. This may include working independently, as well as collaborating with others and participating in conference calls. In addition, SMEs can expect attending one to two face-to-face meetings (with expenses paid by The Appraisal Foundation).
If you are willing to share your expertise, be part of a broader conversation, and receive recognition for your contributions, click here for an application.
AICPA BV schools start in May
The AICPA will conduct a series of week-long Business Valuation Schools at various locations: Atlanta (May 19-23); New York City (June 9-13); and Denver (July 28-August 1). You’ll be in a classroom-like setting conducive to sharing ideas and maximizing interaction with prominent experts and thought leaders to dig deep into BV essentials to master new skills and expand your practice. Click here for more information and to register.
BV Movers . . .
People: William E. Balhoff, managing director and CEO of Postlethwaite & Netterville of Baton Rouge, La., is the new chairman of the AICPA’s board of directors … Debbie Foister has joined HBK LLC as a manager in the firm's litigation support and forensic services group in Erie, Pa.
Firms: Bober Markey Fedorovich, with offices in Akron and Cleveland, has added 15 new associates throughout the firm … Daniels, Uselton & Clay PC and Collinsworth, Bright & Co. of Tennessee have merged and changed their names to Uselton, Clay & Bright PC … Fiske & Co. has been recognized as one of the South Florida Business Journal’s 2014 "Best Places to Work" in the "small company" category … Stout Risius Ross announced the expansion of its Dispute Advisory & Forensic Services practice by adding 20 professionals in Washington, D.C., Baltimore, and Philadelphia, all formerly with Invotex Inc.
Escape winter doldrums with some exciting CPE events
There’s a good variety of BV webinars on tap:
Demystifying Compensation for Hospital Call Coverage: New Data Sources and Methods for Valuing On-Call Pay (February 25), featuring Timothy Smith (American Appraisal) and Gregory Anderson (Horne LLP). As hospital call coverage arrangements gain prominence, so too do their importance and complexity, as well as the challenges of soundly applying emerging data and other resources. Part 2 of BVR’s 2014 Online Symposium on Healthcare Valuation addresses these and other common call coverage issues.
Advanced Workshop on Control Premiums & Discounts (February 27), featuring James Alerding (Alerding Consulting) and James Ewart (Dixon Hughes Goodman). Over an intensive, four-hour presentation, experts Alerding and Ewart will discuss the proper identification, quantification, and application of one of appraisal’s oldest and most consistent foils: discounts and premiums for control.
Omissions & Commissions: Errors, Challenges & Solutions in Business Appraisal Reports (February 28), featuring: L. Paul Hood Jr. (The University of Toledo Foundation) and Timothy Lee (Mercer Capital). Over the years, judicial scrutiny, professional standards, and peer review have shed light on critical, damning, and often common errors in business appraisal reports. Join Hood and Lee for Part 3 of BVR’s Advanced Webinar Series on Reporting & Testimony on how to identify and avoid these mistakes. The series concludes on March 7 with How to Succeed as a Jointly Retained Expert, featuring William Morrison (WithumSmith + Brown). (Note: This webinar was previously scheduled for February 21.)
Challenges in Measuring the Fair Value of Intangible Assets (March 4), featuring Robert Reilly (Willamette Management Associates). In Part 3 of BVR’s Online Symposium on Fair Value Measurement, Reilly examines how to properly value intangible assets for fair value purposes.
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