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What kinds of actions are the IRS taking against appraisers

There are none against business appraisers as this date, under the vague and far reaching terms of Circular 230.  ”Most are against real property people, doing conversation easements,” said Karen Hawkins, head of the IRS’ Office of Professional Responsibility. “We have appraisers doing creative things with hunting trophies and things like that.”

Hawkins says that OPR’s benchmark is “willful conduct.”  ”We have not seen a single 6695-A referral from the field,” she says, and these actions are supposed to be negotiated between field agents and the OPR.

There’s a change in IRS language in 2011. As of next year, anything that involves submission to the IRS is “practice,” and subject to the impact of disqualifications that might be issued by OPR.

“We have not taken an appraisal case to completion,” says Hawkins.  ”The service often uses its engineers to resolve things like this because they can’t afford to bring in expensive experts.  But, I believe, if we went into a hearing against an appraiser, I would try to have the opinion of a reputable subject matter expert.”  Hawkins recognizes that she’d be unlikely be able to support a strong case against an appraiser without this kind of expert support.

Hear Hawkins speak on the subject here.

Determining FMV in light of Stark II important for medical practice valuations

“When valuing a medical practice, how do you determine fair market value in light of recent Stark II regulations?” asks Reed Tinsley CPA, CVA, CFP in a recent NACVA Ambassador QuickREAD article. “Some of it depends on the definition of the term “commercially reasonable.” And a lot also depends on accurate assessment of future revenues, as well as expense assumptions,” he answers. Tinsley reports:

  • “The Stark definition of fair market value may restrict and prevent the use of certain market comps, since use of such comps may not be "commercially reasonable."
  • Just because a transaction may be "fair market value" does not necessarily make it "commercially reasonable."

For the complete article click here.

Valuing healthcare AR: Can you spot the errors?

The owner of several dialysis centers in San Antonio sold to a national provider in 2006. But the parties couldn’t account for the pre-sale accounts receivables (AR) and wound up in front of a jury, which awarded the plaintiff/seller $750,000 based on expert testimony (that calculated damages as high as $2.8 million). The defendant’s challenged the expert under the state’s six-factor, Daubert-type test, claiming his method was unreliable.

In particular, the expert “just took a percentage of what’s been paid on the amount billed in the past and applied that percentage to the amounts outstanding.” For example, the expert assumed that private patients who had paid the entire amount of their bill in the past were insured by companies that did not have a contract with the dialysis center; and further, that all of these patients would continue to pay their entire accounts. He applied a similar approach to Medicare and Medicare patients, without reviewing the underlying data or verifying the accuracy of his averages. For example, one contract-patient had not paid any of his six bills, but the expert still assumed a 29% collection, because that was the company’s average rate for such patients.

By contrast, the defendants’ rebuttal expert (a healthcare specialist) pulled eight Medicare patient files: Seven posted the secondary insurance payment as a primary Medicare payment, “which basically created the zero balance on the secondary side,” he said, causing the plaintiff’s expert to inflate retained AR. The eighth file contained a handwritten note indicating no secondary insurer, but the plaintiff’s expert categorized him as private. Ultimately, this lack of review rendered his conclusions “extremely unreliable,” the defendants’ expert said—and the Texas Court of Appeals agreed, finding “not a scintilla of evidence” to support the jury award. Look for digest of U.S Renal Care v. Jaafar, 2010 WL 3405831 (Tex. App.)(Aug. 31, 2010)  in the Nov. 2010 Business Valuation Update™ and the court’s opinion at BVLaw™.

Confirm your credible healthcare valuations: Order your copy of The AHLA/BVR Guide to Healthcare Valuation, 2010 Edition, available now in book and electronic form. Edited by Mark Dietrich and co-published with the American Health Lawyers Association (AHLA), this newly updated edition includes the latest industry specific information and insight along with eight new chapters, written by top healthcare appraisal experts. Check out the Table of contents here.

Global perspectives on growing your business valuation business

Last week over 80 delegates attended the International BV Conference, co-sponsored by ASA and CICBV: 30 were from the US, 16 from Canada, 16 from the UK and Europe, and the remainder from 13 different countries. The first panel on growing international BV practices ever brought together practice leaders from Duff & Phelps, Deloitte, and KPMG to talk about how they’ve succeeded and grown internationally.

Jeff Harder (National Valuation Services Leader for Canada, Deloitte and Touche) began by commenting on the differences between open markets like the US, or closed markets like Germany, where other professions own the valuation market.

Frank Bollman, who began the valuation practice for Duff & Phelps in Germany, “was in Silicon Valley during the time that 141 came into being, and then in Europe when IRFS started, so I followed the changes in business combination across continents.” He finds more resistance to third party advice in Europe than he does in the US.  Second, the US market is more diverse–compared in particular to Germany where “the valuation practice is dominated by the big accounting firms.”  There isn’t as much room for independent consultants, he believes.

Kevin Moss (Deloitte Financial Advisory) agrees.  ”You can’t assume that markets behave the same.  In Australia, there’s a lot of work for business combinations.   In Europe, we do more work for business modeling,” he reports.

Doug McPhee (Deputy Chair of KPMG’s Global Valuation Service) commented on some of the risk issues that occur.  One simple issue is whether a qualified partner-in-charge can even sign off on his work in a new country.  ”I ran across this with a Johannesburg regulator on a project initiated in London,” he recalls.  ”I think representational risk is probably bigger than litigation risk,” he concluded.  ”As much as possible, we try to standardize practice no matter where it’s delivered.”

Is tax policy redefining reasonable compensation?

In his recent blog post “Reasonable Compensation and Soaking the Rich,” Raymond J. ("RJ") Dragon (Rotenberg Meril Solomon) analyzes the concept of reasonable compensation in the context of a tax policy aimed to “soak the rich.”

Says Dragon:

“In my work as a business valuation expert, I have seen several cases in which a reasonable compensation analysis yielded a figure of around $250,000 for the owner.  So if the business owner made $366,400, then the remaining $116,400 of that would be the return to the owner’s capital investment.  Applying the principle of “soak the rich”, the owner would be relatively lightly taxed on the first $250,000, with the remaining $166,400 taxed at “soak the rich” tax rates of over 50% when Medicare taxes and state income taxes are added to the Federal income tax.  What results is a very high tax rate on the returns to investment capital.”

“What a reasonable compensation analysis shows is that “soak the rich” really means “heavily tax the returns on the investment capital of small business owners.”  

Read the complete blog post here.

Appraisal hurdles unique to promissory notes

At the recent Arizona Society of CPAs Business Valuation Conference Suzanne Daggert (Kotzin Valuation Partners) outlined several challenges to valuing promissory notes:

  • In most cases the borrow and lender are related parties
  • Most notes are issued without adequate financial disclosure or review of borrower creditworthiness
  • Most of the private notes have terms which are not available in the commercial retail market

“These factors make it difficult for appraisers to find appropriate proxies,” added Daggert.  Look for an article on the subject by Daggert in a future issue of Business Valuation Update™

IP value is context specific

There are many reasons for valuing IP. But regardless of the scenario, “the most important underlying concept in all IP valuation is that it is very much context-specific,” says Weston Anson (CONSOR) in "When IP Valuation Is Necessary: The Sales/ Commercial Transaction.”  Anson outlines eight different situations or contexts:

  • Going concern sale
  • Reorganization or bankruptcy
  • Estate settlement
  • Divorce
  • Donation
  • License
  • Litigation

“The contextual environment can change how an asset is valued, for what period of time the asset is valued, whether the asset is valued at today’s value or under some other scenario, etc.,” says Anson.

Click here for the article, which is an excerpt from Anson’s recent book IP Valuation and Management,

Five concerns when valuing illiquid securities

Larry Levine (McGladrey) outlined the key valuation drivers for a fixed income security
in his sessionValuing Illiquid Financial Securities” last week at the ASA/CICBV Business Valuation Conference.

  • Forecast of coupon payment –fixed or floating rate
  • Consider financial impact of embedded options:
    • right to prepay, right to call
    • right to convert into another security
    • interest rate floors or ceilings
  • Assess impact of credit risk –risk and monetary impact of potential default
  • Time to maturity
  • Discount rate –required market derived yield for a security given its creditworthiness

“One of the biggest challenges is the discount rate, Levine said. “With a large public company you can find the discount rate on Capital IQ.  But for private companies there isn’t a similar database.”

Updates to BVMarketData

Subscribers will enjoy new improvements at BVMarketData;

  • The BIZCOMPS® database has been updated with 350 new transactions, bringing the database's total transaction count to nearly 12,900 sold businesses. The new additions span the gamut of industries, including manufacturing, retail, wholesale, services and more. The update includes valuable seller's discretionary earnings data and seller's discretionary earnings valuation multiples.

  • The Valuation Advisors' Lack of Marketability Discount Study also received a substantial update when over 350 new transactions were added. This newest update adds companies that have IPOed as recently as August 2010 with pre IPO transactions as recently as July 2010. This update brings the database up to 4,724 transactions. Also, subscribers to the database can visit the Subscriber Services page to find an updated summary data table and a transcript from the Valuation Advisors' teleconference that took place in July 2010.

    What's more, the 2011 FMV Companion Guide has been posted to the FMV Restricted Stock Study the Articles page. The updated Guide gives insight into the new data that has been added to the database and discusses FMV Opinion's preferred methodology for calculating discounts for lack of marketability, including illustrative examples.

Lost Profits & Shareholder Dissent ahead in BVR’s Webinars

This Friday, October 15, BVR’s Webinar Series on Damages Essentials continues with “Reasonable Certainty and Lost Profits in Early Stage Companies,” featuring attorney Robert Lloyd (University of Tennessee College of Law) and expert appraiser Neil Beaton (Grant Thornton).  The second installment in our four part series, this program will examine the divide between a burden to prove lost profits within “reasonable certainty” and the absence of any definition of those terms.  For more information on this program, or any other in our Series, click here.  Two CPE credits are available.

The webinar series continues on October 21 with “Valuation Issues in Shareholder Dissent & Oppression,” featuring two of the best minds on this topic: Jay Fishman (Financial Research Associates) and Gil Matthews (Sutter Securities).  In this 100-minute presentation, Fishman and Matthews will discuss how fair value standards, discounted cash flow analysis, and case law all have slight – but crucial - variations in shareholder dissent and oppression cases.  This program is a must for anyone even thinking about working this valuation area.  For more information click here.   Two CPE credits are available.

What’s the new Congress going to do with “Sunset”?

The adjournment of the 111th Congress last week was marked by one noticeable omission: a lack of action of estate tax reform.  For business appraisers, attorneys, estate planners, and other professionals this gap continues the speculation that began last winter when provisions were allowed to lapse.  At the Advanced Summit on Business Valuation: Resolving Tax & Legal Issues, attorney Ron Aucutt (McguireWoods), a well-known and highly respected specialist in estate planning, will discuss the current state of affairs with regard to this legislation and look to the future to make sense of future actions or inactions in our nation’s capital.

The Advanced Summit on Business Valuation: Resolving Tax & Legal Issues, presented by BVR and Georgetown School of Law, takes place on November 10 at the Georgetown School of Law in Washington, D.C.  To find more information or to register click here

See you in Washington, DC for the AICPA annual BV meeting

The last of the “big-three” valuation conferences, the AICPA National Business Valuation Conference, features a great program with emphasis on both valuation fundamentals and valuation for financial reporting. It’s coming up in just under a month November 7-9 at the Washington Hilton.  Register here.   We hope to see you there—and there’s the advanced BVR Tax and Valuation Summit in DC the following day—November 10th—as an added incentive to join us there. 

And, for new staff looking for certification:  ASA announces new BV201 course

The American Society of Appraisers announces the new BV201 course, Introduction to Business Valuation - Part I, and encourages attendance at the forthcoming course in Chicago (Skokie, IL) November 11 – 14.  The course, written by Gary Trugman, deals with valuation theory and the market approach, including guideline public companies and transactional analysis.  This course is designed for students seeking a better understanding of market evidence in business valuation assignments as well as for those seeking the premier accreditation in business valuation.  Click here for more information or call ASA at 800.ASA.VALU.   Members $995, non-member $1,195.

Finally…last chance to complete the 2010 BV Firm Best Practices survey!

The only survey of business valuation firm management is going on right now and the deadline for participating is October 20th. Results will be available for participants in the next 45 days to help with year-end planning

Complete the survey questionnaire now by clicking here to receive all the participant benefits.


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