BVR Logo April 17, 2019 | Issue #199-3

BVWire is your go-to source for the latest in the business valuation profession. Highlights for this week include: 



 

Kress v. United States signifies approval of
S corp tax affecting

In a gift tax case teeming with valuation issues, one notable aspect was that, in valuing the minority shares of an S corporation, both parties’ experts applied a C corporation tax rate to the company’s earnings and the court, without ado, accepted the practice. To what extent this court’s position reflects a wider agreement among judges adjudicating tax cases and government tax specialists that tax affecting is the appropriate method for valuing nontaxable entities remains to be seen.

Taxpayer prevails: The flashpoint was a very successful, family-owned packaging company that was organized as an S corp. As part of their estate planning, the taxpayers gifted minority shares in the company to junior family members. The IRS claimed that, for three tax years, the taxpayers paid insufficient gift taxes. The plaintiffs chose to amend their tax returns, pay, and then sue in federal district court for a refund.

At trial, both parties presented testimony from highly qualified valuation experts. The taxpayer retained two experts: a primary expert, who used the market approach, and a secondary expert, who valued the company based on a combination of market and income approaches The government’s expert also used a combination but gave a different weight to each result: 60% to the market approach and 40% to the income approach. He said the market approach was most “effective at capturing the financial conditions at the time in the marketplace and industry.”

The parties’ experts tax affected. The government’s expert also applied an S corp premium to account for perceived tax advantages to the company flowing from the S corp status. The taxpayer’s experts said the S corp status here did not add value to the gifted stock because the minority shareholders could not change the status of the corporation. The court declared itself “neutral” on the issue. If there were benefits to S corp status, it was unclear that the minority shareholders would enjoy them, the court found.

The court credited the taxpayer’s primary expert, commending his profound understanding of the company (he had worked with the company since 1999) and his detailed examination of its unique aspects. He analyzed the company on a “‘holistic’ basis to determine a value that best fit the guideline companies,” the court noted. It only made a minor downward adjustment to the expert’s marketability discount.

What’s the impact? In deciding how far this opinion goes toward ending the tax-affecting controversy, valuators should note that this is not a U.S. Tax Court memo or a precedent-making decision from a U.S. Court of Appeals. Further, the court here does not get into a larger discussion on tax affecting (e.g., models) and does not address prior landmark decisions, including Gross v. Commissioner. At the same time, the court’s ruling and the government’s position signal a recognition that there are tax consequences to the owners of S corps and other pass-through entities that need to be accounted for in a valuation. It’s not clear whether the government will appeal the ruling.

Stay tuned: We will report on other aspects of the case at a later date. A digest of Kress v. United States, 2019 U.S. Dist. LEXIS 49850; 2019 WL 1352944 (March 26, 2019), and the court’s opinion will be available soon at BVLaw.

Extra: Short on tax-affecting detail, the opinion leaves valuators yearning for further information. For example, what S corp model did the IRS’s expert use? Our quick research revealed the parties’ exhibits list, which lists the financial and valuation information the parties’ experts considered. Click here for the list.

 

AICPA launches CVFI credential

First announced in 2017 (see our coverage), the American Institute of CPAs has launched its new credential, the Certified in the Valuation of Financial Instruments (CVFI), with an accompanying performance framework. This new credential is not just for CPAs but for any valuation professional who performs fair value measurements of financial instruments for financial reporting purposes, according to a news release. To obtain the credential, qualified candidates must meet education requirements covering the CVFI Body of Knowledge, an exam based on the Financial Instruments Performance Framework and the Body of Knowledge, and more than 3,000 hours of experience related to fair value estimates for financial instruments in the five years preceding the application. The CVFI can be considered a companion of sorts to the Certified in Entity and Intangible Valuations (CEIV), which was developed jointly by the AICPA, ASA, and RICS. But, unlike the CEIV, this new credential was not developed in collaboration with other valuation professional organizations (VPOs). For more information, the AICPA has a special CVFI webpage.

ASB unanimously adopts 2020-21 USPAP

The Appraisal Standards Board, an independent board of The Appraisal Foundation, adopted unanimously the 2020-21 edition of the Uniform Standards of Professional Appraisal Practice (USPAP). The new edition will be released in the fall of 2019 and will be effective from Jan. 1, 2020, until Dec. 31, 2021. The Appraisal Foundation encourages appraisers to acquire the 2020-21 edition before it becomes effective to ensure that all appraisal services are compliant during this transition period.

Updated goodwill chart and map for divorce cases posted

BVR recently updated its complimentary download “Charting Goodwill Jurisprudence” to give you an at-a-glance look at a state’s basic position toward enterprise and professional goodwill. There is an expanded discussion of the law to include excerpts from foundational cases that highlight the concepts (e.g., salability, transferability, solo practice, noncompete agreements) underlying a state’s position. The additional information gives insight into how different courts emphasize different concepts and how much discussion there is within a jurisdiction around the basic rule. BVR welcomes input from readers concerning precedent-making new cases or legislative changes in order to keep the chart current.

Extra: A session on enterprise vs. personal goodwill in divorce will be presented at the upcoming National Divorce Conference in Las Vegas May 8-10, presented by BVR and the American Academy of Matrimonial Lawyers (AAML). Joy Feinberg (Boyle Feinberg PC) and Barry Sziklay (Friedman LLP) will present the session.

 

Cost of capital parameters in Europe

ValueTrust has released the second edition of the “European Capital Market Study.” The study serves as a comprehensive compilation of capital market parameters such as cost of capital and implied as well as historical risk premiums for European countries. The study also includes trading multiples and total shareholder returns across a wide range of industries.

ACVA's first BV conference in India April 25

The Association of Certified Valuators and Analysts (ACVA)—India Chapter will hold its inaugural advanced business valuation conference on April 25 in Mumbai at the Hotel Sahara Star, Domestic Airport. ACVA was formed by the National Association of Certified Valuators and Analysts (NACVA) through its global training and credentialing partner, the Global Association of Certified Valuators and Analysts (GACVA). The Insolvency and Bankruptcy Board of India (IBBI) recognizes ACVA as a registered valuer organization (RVO) for securities or financial assets. Effective this year, a valuation professional in India must be a registered valuer (RV) to conduct valuations under both the financial and insolvency regulations.

Later this month, ACVA will start training in India for both the Certified Valuation Analyst (CVA) as well as RV, according to its website.

Preview of the May 2019 issue of Business Valuation Update

Here’s what you’ll see:

  • No End in Sight to Size Effect Debate” (Michael A. Crain). A look at several recent articles on the so-called size premium that perpetuate the debate on this topic. Some appraisers feel that the size effect has diminished or disappeared since it was first documented in 1981 while others feel it is alive and well.
  • Industry Snapshot: Automobile Dealers” (BVR Editor). An at-a-glance overview and update on current trends, value drivers, and valuation approaches in the complex world of automobile dealerships.
  • Appraiser Shuns Public Data for Private Cost of Capital” (BVR Editor). One appraiser has done hundreds of valuations of small owner-operated firms by looking to private capital markets to estimate cost of capital. This eliminates the need to make all of the many assumptions and adjustments to convert data from actively traded stocks into proxies for private-company valuation.

The issue also includes:

  • An expanded section of “BV News and Trends/Global BV News and Trends.”
  • Regular features: “Ask the Experts” and “Tip of the Month.”
  • BV data spotlight: “DealStats MVIC/EBITDA Trends,” “ktMINE Royalty Rate Data,” “Economic Outlook for the Month,” and “Cost of Capital Center.”
  • BVLaw Case Update: The latest court cases that involve business valuation issues.

To stay current on business valuation, check out the May issue of Business Valuation Update.

 

BV movers...

People: The National Association of Certified Valuators and Analysts (NACVA) has named Ronald D. Rudich, the founder of Business Valuation Group LLC, a Baltimore area business valuation and litigation support services company, Outstanding Member for the first quarter of 2019 … Two developments at global consulting firm Berkeley Research Group that expand its presence in Singapore: Dr. Peter Bird has been appointed as a managing director based in Singapore where he will focus on providing expert evidence on economic and financial issues in international arbitration; and Tigran Ter-Martirosyan, a director, is a business valuation and forensic accounting expert who has relocated to the Singapore office from London … Ron Ewing, ASA, CFA, senior vice president at Valuation Research Corp., has retired; he joined the firm in 1999 as an analyst specializing in business and intangible asset valuations … Samit Shah has joined Dixon Hughes Goodman as a principal in the firm’s Transfer Pricing Services Group; he will be based in DHG’s Atlanta office and will focus on international tax services and global transfer pricing consulting projects.

Firms: Duff & Phelps received the award for Best Valuations Firm for Hard to Value Assets at the 11th Annual HFM European Hedge Fund Services Awards in London … New Philadelphia, Ohio-based Rea & Associates plans to merge with Tucker & Tucker CPAs, effective May 1; the merger will add six more employees and one partner—who will work out of Rea’s Cambridge, Ohio, office—to the firm … Anders CPAs + Advisors of St. Louis is expanding its service offerings for businesses in the cannabis industry in the wake of the legalization of medical marijuana in Missouri … The American Society of Appraisers and RICS have announced a cooperation agreement to further the work of shared standards, training, and resources to support business valuation professionals internationally.

Please send your professional and firm news to us at editor@bvresources.com.

Upcoming BVR training events

  • The New ROI: Return on Individuals (Keynote Quarterly) (April 18), with Dave Bookbinder (CFGI), Laura Queen (29Bison), Al Cini (Al Cini & Partners), and David Nast (Nast Partners).

    They say a company’s most valuable asset walks out the door every night. But other assets, such as intellectual capital (e.g., patents and trademarks), show up as being more valuable than a company’s human capital. Why?

New and trending LinkedIn discussions

Using a Calibration Model for an Early-Stage Enterprise Investment

The Absence of a Size Effect Relevant to the Cost of Equity

OPM Backsolve and Convertible Debt Financing

Your discussion could be featured here—BVR’s LinkedIn group is a place for valuation professionals to share, discuss, and learn about compelling BV topics. If you’re not already a member, request to join today.




We welcome your feedback and comments. Contact Andy Dzamba (Executive Editor) or Sylvia Golden, Esq. (Executive Legal Editor) at: info@bvresources.com.


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