Bankruptcy court ‘isolates’ Med Diversified decision

The case still sends chills through the BV Community. First, the In re Med Diversified bankruptcy court (E.D.N.Y.) disqualified one side’s expert for lack of appropriate valuation credentials. And then it struck the report of a highly-credentialed BV expert for its use of common benchmarking methodology, which the court found unreliable (see BVWire # 47-3 and #47-4).  Analysts were worried they’d begin to see Med Diversified used to bolster more Daubert challenges—which at least in the bankruptcy arena, they have (see BVWire #51-1).

But now one decision appears to have backed off the draconian ruling: In In re Doctors Hospital of Hyde Park, Inc. (March 2, 2007), an Illinois bankruptcy court entertained a late (post-trial) objection to the very same expert whom the Med Diversified court disqualified for lack of BV credentials.  In denying the motion, the Doctors Hospital court distinguished the context—rendering an insolvency opinion versus a valuation opinion, as well as the particular methods applied.  The lateness of the motion was also a key factor (presumably, the Med Diversified case was reported after the trial in Doctors Hospital).

The Doctors Hospital case does emphasize the need for appropriate credentialing for BV experts rendering valuation opinions, but nowhere does it discredit the profession or the practitioner, concluding that, in this case, “the isolated Med Diversified decision…does not diminish the force of his opinions.” 

The exhaustive opinion (60+ pages) also contains notable rulings on tax affecting for nonprofit S corporations, application of a company specific risk premium related to the troubled healthcare organization, and more.  A complete case abstract will appear in the next Business Valuation Update™, and a copy of the full-text court opinion is now available to subscribers of BVLaw™ at

Fair value not always the standard in shareholder actions 

It’s a common misconception, to presume that statutory fair value is the appropriate standard of value in every shareholder dispute.  But a new Colorado appeals case confirms just how complex and nuanced the use of “fair” in connection to a shareholder remedy can be.  The minority shareholder in Kim v. The Grover C. Coors Trust (March 8, 2007) alleged a breach of fiduciary duty by directors for approving a $100 million sale of preferred stock to raise badly-needed revenue.  It was not a dissenters’ rights action, the appeals court said, which would have invoked the state’s provisions of the Model Business Corporations Act (MBCA) applying the fair value standard and precluding the application of discounts to minority interests.

Instead, this case involved “the question of whether a transaction was fair,” and thus the fair market value standard applied, including the consideration of appropriate discounts.  The case is an excellent reminder that standard of value is the first and most important topic of discussion between analysts and attorneys in any engagement; for a copy of the Colorado opinion, click here.

IRS penalties wipe out white shoe law firm

Last week the IRS announced a $76 million settlement with Jenkens & Ghilchrist, the 56 year-old national law firm accused of promoting abusive and fraudulent tax shelters to high-net-worth individuals.  The IRS estimates that 1,400 investors are affected by the firm’s tax advice and may now face interest and penalties on any underpayments.  Meanwhile, the Dallas-based law firm is winding down its legal practice and business affairs.  For more details, click here.

FASB to give guidance on renewable intangibles

At a late-March meeting, the Financial Accounting Standards Board (FASB) added a project to provide guidance on determination of the useful life of renewable intangible assets.  The Board directed its staff to explore various alternatives, including revisiting comments received on the proposed FSP FAS 142-d (Amortization and Impairment of Acquired Renewable Intangible Assets) and considering factors such as the pattern of economic benefit and an entity’s historic use.  To read the full project update, click here

PE deals down in 1Q 2007

Based on the preliminary numbers, private equity deals were down for the first quarter of 2007, according to a recent edition of PE Week Wire.  “Moreover, private equity has actually lost global M&A market share, as total M&A volume is expected to top $1 trillion for the second consecutive quarter”—a first since the end of the year 1999.  This data trend is at odds with the “consensus storyline” and perhaps forecasts that the hot PE market is cooling off. 

Could increasing shareholder litigation be one cause?  Although it’s now “commonplace” for shareholders to sue based on an alleged missed opportunity or flawed process (see our write-up of the Netsmart case in BVWire # 54-3), at least one buyout firm has now sued its acquisition target for choosing another buyer.  The same PE Wire Week describes Apollo Management’s efforts to enjoin a buyout of EGL, Inc. by its CEO and two PE firms for $38 per share, saying that it willingly offered $40 per share.  On March 27th, CEO of the buyer released a statement to “set the record straight,” but then four days later, an EGL shareholder filed another lawsuit against the company, according to a separate news report, claiming the $38 per-share price is “grossly inadequate.” 

AICPA responds to FASB ITC on valuation standards

The AICPA has now responded to the FASB’s Invitation to Comment on the need for valuation standards, bringing the total comments up to twelve, or more than twice the number from just last week as the April 15th deadline approaches (see BVWire #54-4). The gist of the AICPA’s position: “We believe that measurements of fair value in accordance with GAAP will improve if the financial reporting community receives (1) authoritative conceptual valuation guidance from FASB and (2) non-authoritative detailed implementation guidance from the marketplace.”  To read all comments, click here.

Where will the IRS focus this year’s audits?

One of the best ways to gauge audits for a coming tax season is to evaluate the Service’s enforcement activities over the preceding term, which it publishes once a year.  The most recent information, for fiscal year ending Sept. 2006 (posted by Dean Dorton & Ford, confirms the trend toward heightened enforcement:

  • The number of field audits increased nearly 23% over the prior year.
  • Audits of individuals with income of $1 million or more increased 33%. Taxpayers in that category had a 1 in 16 chance of being audited.
  • Audits of individuals with income of $100,000 or more increased 18% to more than 257,000, reaching their highest level in more than a decade.
  • Audits of S corporations increased 34% to almost 14,000, and audits of partnerships increased 15% to almost 10,000.

The nonprofit sector is also a target: The IRS is sending some pretty strong signals these days that it is going to be looking hard at compensation and benefit levels for nonprofit executives,” says, which noted the just-released IRS report on its Executive Compensation Initiative Project.  Of particular interest, although the report found high compensation in “many cases, generally they were substantiated based on appropriate comparability data.”   In compiling its report, the IRS developed new compliance contact techniques, which the Service plans to use in particular industries in the future “to better assess and understand compliance levels and…to identify and concentrate our efforts on noncompliant taxpayers.”

And in its own audit, IRS shows ‘serious’ deficiencies

In its recent audit of the IRS’s Fiscal Years 2006 and 2005 Financial Statements, the U.S. General Accounting Office (GAO) found “serious internal control and financial management systems deficiencies.”  Because of these flaws, the IRS did not “maintain effective internal controls over financial reporting (including safeguarding of assets) or compliance with laws and regulations, and thus did not provide reasonable assurance that losses, misstatements, and noncompliance with laws material….to the financial statements would be prevented or detected on a timely basis.”

Importantly, the IRS “agreed with the report’s findings and that it fairly presents IRS’s progress and challenges…in addressing financial management issues.”  To read the highlights of GA0-07-136, click here.  A copy of the full GAO report is here.

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