BVWire Issue #152-2 | May 13, 2015


IRS S Corp Job Aid makes some faulty assumptions

The IRS S Corp Job Aid, a newly released internal training document for IRS personnel who review valuations of these entities, has sparked some comments from the authors of a new book on this subject. “There is quite a lot that I agree with, in terms of general valuation concepts,” Nancy Fannon (Meyers, Harrison and Pia LLC) tells BVWire. “However, there are some substantive underlying assumptions made in the Job Aid that are not supported by academic research.” She points out that in the introductory section, the job aid says:

[A]bsent a compelling showing that unrelated parties dealing at arms-length would reduce the projected cash flows by a hypothetical entity level tax, no entity level tax should be applied in determining the cash flows of an electing S corporation. In the same vein, the personal income taxes paid by the holder of an interest in an electing S Corporation are not relevant in determining the fair market value of that interest. [emphasis added]

“While most CPAs would agree that it is a simple matter of common sense that investors take taxes into consideration when pricing investments, this simple common sense has not prevailed,” says Fannon. “What has been lacking in our discussions of this issue is the evidence that proves what common sense tells us. The academic research presented in our book presents very compelling evidence that personal-level taxes paid by the holder of an interest are very relevant to the prices paid in the marketplace.” She and Keith Sellers (University of Denver) are the authors of a new book, Taxes and Value: The Ongoing Research and Analysis Relating to the S Corporation Valuation Puzzle.

Learn more: Fannon and Sellers will give more comments on the job aid in the June issue of Business Valuation Update. They will also address it during their special four-hour workshop on May 20 that will reveal a new approach to PTE valuations. For an in-depth analysis of the IRS S Corp Job Aid, join Michael Gregory (Michael Gregory Consulting) for a webinar on June 16. Gregory, while working at the IRS, was a champion of the IRS internal team on valuing S corps. 

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Noncompete-goodwill connection trips up valuators

Too many valuators don’t understand the relationship between a noncompete agreement and personal goodwill, and as a consequence they produce problematic appraisals. That’s how Bob Dohmeyer (Dohmeyer Valuation Corp.) sees it. A Texas divorce case in which he served as the wife’s expert illustrates his point.

At issue was an insurance agency that the husband bought during the marriage. Both spouses had the experience necessary to run the business and under Texas law it was community property. The parties stipulated that the agency was worth $292,000 with a noncompete agreement and $141,000 without it.

Windfall: At trial, the husband argued that he should receive the business, but that it should be valued at only $141,000 for purposes of property distribution. The rationale he and his expert offered was that anything above that value was “personal goodwill.” The wife’s attorney and Dohmeyer reminded the court of the parties’ stipulated value, which turned on a covenant not to compete. As Dohmeyer explained, since the agency was valued under the fair market value standard of value, non-saleable personal goodwill was by definition excluded from the value. Moreover, since the business was not going to be sold to a third party but rather would go to the husband, the undiscounted, higher value was applicable. Awarding the husband the business while applying a discount for the lack of a noncompete would be a windfall. The court discredited the husband’s claim that he could just go across the street and open another agency. He would be competing against himself, which defied logic, the court found.

On the stand, Dohmeyer used a hypothetical to further clarify the issue. Assume the husband and wife paid cash for a business that was worth $1 million with a noncompete and $300,000 without the agreement. Two years later, after the noncompete has expired, the husband files for divorce. If the business is performing exactly as it was at the time of the purchase, its worth has not changed. Yet, based on the husband’s logic, one had to assume there was a difference in value and it was attributable to "personal" goodwill.

When the husband’s expert was asked how $700,000 of the $1 million paid in cash would suddenly turn into “personal” goodwill, she did not know but suggested the court could disproportionately divide the remaining assets of the marital estate in order to make up for the discrepancy. The court declined to do so and adopted the $292,000 value.

Takeaway: The wife’s attorney, Casey T. Boyd (The Shapiro Law Firm), says Dohmeyer’s testimony was critical to the favorable outcome in the case. “He conveyed the important concepts to the court in a manner that the court could understand.” Also, his hypothetical “really exposed to the court how inequitable the application of the personal goodwill discount would have been in this context,” Boyd says.

The case is Mauceri v. Mauceri, 199th District Court, Collin County, Texas, No. 199-50537-2013. No appeal has been filed.

Talk to us. Have you had an interesting experience with a case in court? Email and tell us about it, and we’ll share it with BVWire readers.

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Prevailing multiples for healthcare ASCs

The ambulatory surgery center field was very active last year with new transactions and partnerships, according to the 2015 ASC Valuation Survey from HealthCare Appraisers Inc. This level of activity will likely continue this year, says the report.

Healthy numbers: For multispecialty ASCs, 78% of the respondents reported multiples of 7.0 to 8.0 times EBITDA when purchasing a controlling interest. When purchasing a controlling interest in single-specialty ASCs, 65% said the prevailing valuation multiples were 6.0 to 7.9 times EBITDA. Most ASC company respondents are willing to pay a premium for ASCs in certificate-of-need states, with 57% reporting they would add a premium of 0.51 to 1.0 to the typical multiple.

“For 2015, acquisition activity is expected to remain high, as 60% of our respondents plan to purchase between one and five ASCs, 25% plan to purchase between six and 10 ASCs, and 5% plan to purchase 15 or more ASCs,” according to the report. The survey includes responses representing well over 500 ASCs throughout the country.

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IACVA to issue draft of proposed quality control standards

The “time has come” for global quality control standards for valuations, according to Bill Hanlin (Hanlin Moss Yi, PS), president of the International Association of Consultants, Valuators and Analysts (IACVA). At last week’s 2015 International Valuation Forum in Atlanta, Hanlin announced that IACVA will soon issue an exposure draft, Quality Control Standards for Valuation and Appraisal Firms. There will be a comment period, and then the standards—which will be voluntary—will be finalized.

Currently, the only country that has quality control standards is China, which has a peer review process for valuations, according to Hanlin. IACVA feels that international standards for quality control will improve the public trust in the valuation profession. Accountants have a peer review process and they are high on the list of “most trusted” professionals around the globe, he says. Currently, regulators are asking, “How do we know this valuation report is any good?” These proposed standards will also serve to head off government regulation in this area.

Hanlin also announced that Business Valuation Resources will help disseminate these new proposed standards. Stay tuned to the BVWire for an announcement of the exposure draft’s release. We will also post it on BVR’s new Global Business Valuation Resource Centre.

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James P. Catty receives IACVA award

At the IACVA conference in Atlanta, a special award was given to James P. Catty (Corporate Valuation Services, Ltd., Toronto) for his dedication to the business valuation profession and his willingness to share knowledge. Catty is chairman emeritus of IACVA, the International Association of Consultants, Valuators and Analysts. He served as IACVA chairman from 2006 to 2014. In accepting the award, Catty remarked, “This is the 60th anniversary of my first valuation job.” BVWire congratulates a very deserving Jim Catty on receiving this award.

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BV movers …

People:  Christine Baker joins the Grand Rapids, Mich.-based investment banking firm Charter Capital Partners as managing director to lead the firm’s new business valuation services group … Kristopher Boushie joins NERA Economic Consulting as a vice president in its Washington, D.C., office … Piotr Luc joins the Southfield, Mich.-based business advisory firm Alderney Advisors as director of restructuring. Luc will be based out of New York City.

Firms:  The Northern California firm DZH Phillips has agreed to merge in Bridgeway LLC, a financial operations consulting firm located in Burlingame, bringing the number of staff to more than 80 accounting professionals and 100 employees throughout offices in San Francisco, Oakland, San Rafael, and on the peninsula … HLB International launched a Global Russian Desk service to support Russian companies abroad as well as foreign companies operating in Russia and supported by HLB Russian Group, the fifth largest audit network in the country … The Indiana CPA Society celebrated its 100th anniversary on May 6. Congratulations!

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May winds down with a good slate of CPE events

Important note to webinar attendees: To ensure that you receive your dial-in instructions to BVR’s training events, please make sure to whitelist

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We welcome your feedback and comments. Contact the editor, Andy Dzamba at: or (503) 291-7963 ext. 133
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In this issue:

IRS S Corp Job Aid

Noncompete-goodwill link

ASC multiples

Global BV news

BV movers

CPE events










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