IRS requests reconsideration in Jelke

Last week the Internal Revenue Service filed a motion with the 11th Circuit Court of Appeals to reconsider en banc the decision in Estate of Jelke v Comm’r (November 15, 2007) (see BVWire™ #62-3).  Its basic argument: Valuation is a question of fact, and the Court’s holding that permits dollar-for-dollar discounts for embedded capital gains as a matter of law violates this basic tenet.

“There’s no timetable for the Court to address the motion, which will go to the Chief Judge,” according to attorney John Porter, who provided the update during the BVR teleconference last week on the Jelke reversal.  “If there is a groundswell of support [among 11th Circuit justices], then the Court will reconsider it,” he said.  If the Court grants the motion, then it can request additional briefing from the parties or decide based solely on the current record.  “If it denies the motion, the government can still petition the [U.S.] Supreme Court” to hear the case, Porter added, “but I’d be surprised if they did that, and I’d be surprised if the Supreme Court accepted it.”   But the appeals decision would be up to the IRS.

Free case law overview.  The teleconference panel—including Michael Paschall and Will Frazier, the taxpayer’s appraiser in the original Jelke proceedings—put together extensive ancillary reading materials, including Paschall’s spreadsheet of all calculations in the case (net asset value, minority and marketability discounts) and Porter’s cogent, comprehensive overview of the 11th Circuit’s decision, from its antecedents in tax legislation to precedent in the 2nd and 5th Circuits.  We’ve posted Porter’s presentation as a Free Download at For anyone who missed the teleconference—including a lengthy Q&A covering the applicability of the discount to S Corps, real estate holding companies, the income approach, and more—the CD recording plus all reading materials are available here.

FASB reaches ‘milestone’ codification phase

The FASB Accounting Standards Codification™ is now accessible for a one-year verification phase.  During this timeframe, the Financial Accounting Standards Board is asking constituents to verify that the Codification “accurately reflects existing GAAP and to provide any pertinent feedback,” says the FASB release.  The Board has also made a free, online “Codification Research System” available during the verification phase.  “Users are advised that the Codification content is not yet approved as authoritative,” the Board notes, “and, therefore, they must verify research results using their existing resources for the currently effective literature.”

During the verification phase, registered users can provide input at the individual paragraph level as well as the general system level, prompting periodic updates and revisions.  Upon completion, “the Codification will become the single source of authoritative U.S. GAAP.”  To access the Codification, click here.     

2008 PE multiples bucking conventional wisdom?

In its annual “data dump,” PEWeekWire announced VC stats for Q4 and year-end 2007, derived from Thomson Financial and NVCA (National Venture Capital Association):

  • U.S. buyout deals. The announced deal value of 2007 was $468.7 billion, topping the $436.2 billion from 2006.
  • U.S.VC Deals.  Preliminary figures indicate more VC dollar disbursements in 2007 than in any other year since 2001. The current figure is about $26.59 billion, and may grow as more data become available.
  • Buyout-backed IPOs.  Only 32 buyout-backed IPOs were priced last year, raising $7.8 billion.  Compare this to the $14.8 billion raised by 59 buyout-backed IPOs in 2006.
  • VC-Backed IPOs.  A record 31 VC-backed companies went public on U.S. exchanges in Q4 2007, the highest quarterly total in seven years. They raised $3 billion and pushed the year-end numbers to $10.3 billion raised by a total of 86 offerings. In 2006, only 57 such offerings raised $5.12 billion.
  • VC-Backed M&A.  Only 45 VC-backed companies were acquired last quarter, the lowest since Q1 1998.  In 2007 there were 304 such exits with an aggregate disclosed value of $23.7 billion—a seven-year high.

Private equity outlook.  In a second release, PE ‘Wire cites new data from Citi Alternative Investments’ current Private Equity Outlook.  (Note: Research at the site appears to be limited to registered clients.)  With less leverage available, the study expects to see downward pricing adjustments, leading to lower “entry valuations” that PE firms pay for portfolio companies.  But so far in 2008, “Bain Capital offered a whopping 47% premium for Bright Horizons,” PE ‘Wire notes.  Two additional PE acquisitions this year have paid premiums from 32% to 36%.  In a broader context:

…Standard & Poor’s reports that the average 2007 purchase price multiple (vs. enterprise value) for buyouts was 9.33x.  That’s the highest-ever on record, and up from 8.04x in 2006.  Within those numbers, there was obviously a drop-off in Q3 and Q4, but not nearly so much as credit crunchers might expect. For deals of $500 million or more, it dropped from 10.56x in Q2 to 10.23x in Q3, and then dropped again to 9.56x in Q4.

Lastly, purchase price multiples for mid-sized deals ($250m-$500m) between Q1 and Q2 2007 increased from 9.09x to 9.31x before declining to 8.69x in Q4.  “So is the conventional wisdom wrong,” PE ‘Wire asks, “or is it simply lagging?”

Get a seat for sold-out panel on fair value

Anyone who missed registering for the now sold-out National Fair Value Summit—or who just couldn’t get away to New York in midwinter—can still attend the “Big Four Roundtable Webinar,” presented by NACVA and BVResources.  In this highlight of the conference’s first day, February 5th, senior valuation partners from each of the Big Four accounting firms (Deloitte, E&Y, PwC, and KPMG) will join moderator Bill Johnston to discuss what each firm wants to see in fair value reports.  The panelists will cover everything from SFAS 157 compliance to purchase price allocations to impairment testing—to how to learn from the “beating” BV experts can sometimes take from auditors and accountants during these tough engagements.  After the live and lively discussion, a specially selected NACVA expert panel will answer attendee questions and offer additional guidance.   To register for this one-time opportunity, go here.

2nd working group on fair value practices needs you  

The Appraisal Foundation (TAF) has just announced a call for applicants for its second Intangible Asset Work Group.  This work group will focus on best practices for valuing customer relationships.  The first working group project—which is well underway, led by Tony Aaron  (Ernst & Young), has focused on contributory assets and economic rents; it will release an exposure draft  in the near future, with the goal of reaching the largest group possible.  Similarly, the goal of this second working group is to reach the largest pool of experience volunteers, Carla Glass told attendees at the most recent ASA BV Conference in San Diego. Glass, who sits on the steering committee, explained that while the TAF is spearheading these efforts, the actual work will be done by “valuation professionals who actually do purchase price allocations…the real nitty gritty.”   Without these best practices, “there will be a huge variety in how people do things,” she warns, “and financial statements will end up looking very different.”  The deadline for completing your application to the second working group is February 15, 2008.  For more information, click here.  (Note:  Glass’ comments originally appeared in the Dec. 2007 Business Valuation Update™.)

India endorses international valuation standards

It has been almost two years since India opened its real estate investment sector to foreign investors.  The response was “overwhelming,” according to an International Valuation Standards Committee (IVSC) release.  “Billions of dollars have been committed to various projects in India.”   While industry players predict that it will take a year for the first real estate investment trust to hit the market, last month the Securities and Exchange Board of India (SEBI) issued the long-awaited draft regulations for setting up REITs.  The draft provides guidelines for establishing trust and fund management companies, their minimum net worth and infrastructure.  “All schemes must be appraised by an appraisal agency, rated by a credit rating agency, and also valued by a valuer,” SEBI says.  “The valuations must follow either national Indian valuation standards or the International Valuation Standards.”  The draft guidelines are available at the SEBI website.

The IVSC welcomed the guidance and the endorsement.  Elvin Fernandez, IVSC chair, noted the “timely introduction of a REIT framework in India and …emphasis on the conduct of professional valuations,” in particular the recognition of International Valuation Standards (IVS).  The latest edition (IVS 2007) “adequately guides valuers on such valuations,” he noted.

Everything you’ve always wanted to know
about building a BV practice…

…and now you can ask: Appraiser and nationally certified speaker Mel Abraham will be offering a FREE teleseminar on “How to Build a Business” on Tuesday, January 29, 2008.  Abraham is producing this live, interactive, seventy-minute seminar based on the overwhelming number of inquiries he gets that begin, “Mel, how do I build my business?”   Listen to his introduction at the following link——and note the space to submit your questions in advance.  Given the frequency of such questions—and the need for solid, practical, “actionable” answers, there’s a good chance that Abraham will repeat this free offering in February.

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