IRS proposes ruling Kohler out

The Internal Revenue Service fired the first shot in March, when it announced its decision not to acquiesce in the Tax Court’s ruling in Kohler v. Commissioner (see BVWire™ #66-2).  The second shot came last Friday, when the IRS published new rules in the Federal Register that would permit estates to elect the alternate valuation date (per §2032(a) and Form 706) only when market conditions and not “other post death events” have reduced the gross value of the estate.

The Service points to §2032’s legislative history as well as conflicting court decisions to explain its proposal.  Congress enacted the predecessor to §2032 after the Depression, when market values decreased so materially from the date of death to the date of distribution that at times, “many estates were almost obliterated by the necessity of paying a tax,” the IRS says.  Since then, two cases have interpreted the provision differently.  In 1972, a federal district court in California excluded any reduction in an estate’s value that resulted from the trustee’s “voluntary acts.”  But in 2006, the Kohler decision permitted the Tax Court to consider a post-death reorganization of the company that resulted in discounts (due to transfer restrictions) on the value of the estate’s stock holdings.  To resolve the apparent conflict, the IRS now seeks to amend §2032(f) so that only “market conditions” will make the alternate valuation date available:

The term market conditions is defined as events outside of the control of the decedent (or the decedent's executor or trustee) or other person whose property is being valued that affect the fair market value of the property being valued.  Changes in value due to mere lapse of time or to other post-death events other than market conditions will be ignored in determining the value of decedent's gross estate under the alternate valuation method.

Would the Kohler outcome be any different?  In its factual findings, the Tax Court noted several legitimate corporate reasons for the Kohler Company’s reorganization, including removing outside shareholders and keeping the longstanding private company within the family’s control.  The estate—which owned 12.5% of the voting stock, “could not have blocked or approved the reorganization on its own,” the court said.  Nor did it have the power to change management, the board of directors, or the company’s articles of incorporation.  While the Tax Court did not specifically find that the reorganization was a corporate event—if it was beyond the estate’s control, then would the market value of the estate’s shares necessarily reflect the resulting transfer restrictions, no matter the valuation date?  For example, the date of death would reflect the expectation that the reorganization would take place, while the alternate valuation date, six months later, would reflect the actual restructuring.  Comments to the IRS proposed rules are due July 24, 2008; see the Federal Register excerpt for instructions and addresses.  The full-text of the Kohler opinion is available to subscribers of BVLaw™.   

Look at appraiser liability before leaping into risky areas

Last week’s item on the hedge fund industry—and potential new business opportunities for valuation specialists—prompted a note of concern from some leaders in the profession.  “Valuation practitioners should assess business risks before accepting a new engagement,” says Mike Crain (FVG International).  “Performing valuations of assets owned by hedge funds has business risks for appraisers that are different from those of valuations for other reasons,” such as tax, financial reporting, and litigation.  “If a hedge fund goes bad, investors might file a lawsuit against anyone involved with the fund,” Crain warns, “including the appraisers who valued its assets.  In these cases, investors and a bankruptcy trustee will look at anyone who has ever touched the hedge fund and still has money in order to try to recover damages.”

Case (almost) in point: In Maxwell v. KPMG (March 21, 2008), the bankruptcy trustee claimed over $600 million in damages against the Big Four auditors, for approving an allegedly inflated income statement prior to a merger (which later went bad in the 2001 economic bust).  The U.S. District Court tossed out all the claims—and the Seventh Circuit affirmed, dismissing not only the suit but the supporting valuation by a financial analyst, which it called “outlandish.”   (An abstract of the Maxwell case appears in the May 2008 Business Valuation Update™.)  Thus the words of warning could cut both ways.  Many have predicted a securities litigation boom in the wake of Sarbanes-Oxley, the credit crisis, and the current economic bust.  (See BVWire #66-4).  Valuation specialists will want to subject any new assignment in these emerging but potentially volatile areas to sound risk management policies and procedures.

On your iPod: Rolling Stones, U2—and valuation greatest hits

You can now stay on top of cutting-edge BV topic anywhere, any time—at no cost.  BVResources is in the process of posting free podcasts with highlights from our most popular teleconferences: We’ve condensed the 100-minute sessions into ideal 15- and 20-minute portions for the busy practitioner to download directly onto an iPod or MP3 player.   For instance, listen to highlights from the recent teleconference on Healthcare Valuations (February 2008), featuring Mark Deitrich, Don Barbo, Carol Carden, and J.D. Epstein, with commentary by BV analyst (and podcast producer) Stuart Weiss.   Or tune into the Valuing Community Banks teleconference (September 2007) led by Keith Sellers and Doug Southard.  The podcasts are currently available at BVR’s Free Downloads page.  In the future, look for podcasts on valuing S Corporations, using the Butler Pinkerton Model™, and more.

USPAP comments focus on enforcement, ethics, education

The Appraisal Standards Board and the Appraisal Qualifications Board have received “hundreds of written comments” to their Invitation to Comment on USPAP and USPAP education, in addition to oral comments at a public meeting in March.  (See BVWire #64-1 and #65-2)  “We have been very pleased with the number and quality of the responses,” the Boards say, in a new update.  Overall, the comments from the diverse constituencies—including business appraisers—fall into two categories: those related to USPAP (under ASB’s jurisdiction); and those related to USPAP qualifications and education (under the AQB).  In light of the feedback, the Boards are considering numerous areas of concern, including improving the understandability of USPAP and its enforcement. 

Respondents applauded recent changes to the Departure Rule and Scope of Work Rule, and noted that perhaps now would be a good time to clarify the Reporting Concept and its requirements.  Respondents also noted improvements to the Standards 9 and 10 (Business Appraisal, Development and Reporting), “and future revisions should be based on appropriate representation from the discipline.”  Representatives from BV (as well as personal property appraisers) requested more practical examples illustrating and applying to their respective practices.  The ASB and AQB are still soliciting feedback at by May 30, 2008.

FASB strengthens ties with China

More evidence that valuation is going global: The Financial Accounting Standards Board (FASB) and the China Accounting Standards Committee (CASC) have just released a Memorandum of Understanding (MOU) articulating their commitment “to strengthen cooperation and communication between the two standards-setting organizations,” says the news release.  FASB Chairman Robert Herz and Liu Yuting, CASC member and Director-General of the Accounting Regulatory Department of the Ministry of Finance, signed the MOU at the April 18th meeting of the FASB in Norwalk, Connecticut.  The MOU focuses on: enhancing communications and technical understanding between the two accounting boards; facilitating the exchange of experience in standard setting and implementation; and sharing views on convergence of international accounting standards.

AITF meeting features updates from King, Fishman, Glass, et al.

The Appraisal Issues Task Force (AITF) meets on May 13, 2008 in Chicago (Wyndham, O’Hare) to discuss, among other matters, the status of two working groups sponsored by The Appraisal Foundation.  Jay Fishman will lead the discussion on the first TAF working group on Contributory Assets and Economic Rents, while Carla Glass will provide an update on the second working group, on Customer Relationships.  Jerry Mehm will present the latest from the FASB’s Valuation Resource and Al King will explain whether “valuation differences exist between GAAP and IFRS.”   Other topics include EITF Issue No. 02-13, Issue 1 (whether the fair value of a reporting unit should be estimated by assuming a taxable versus nontaxable transaction), also presented by Mehm; and cross-charges in dual excess earnings model, by Greg Barber.   Attendees will also decide the date and location of the next quarterly gathering.  AITF meetings are open to all valuation professionals and interested parties; however, pre-registration is required.  To inquire about attending, please contact Margaret Schlachter at

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