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August 28, 2013 | Issue #131-4  

‘Bad’ valuation of King of Pop estate, says IRS

Intellectual property, business interests, and a “contingency nonappearance and cancellation” policy are among the assets the IRS says have been overvalued by the estate of Michael Jackson. The estate is fighting back, filing a petition in Tax Court.

Not black or white: An article in Forbes points out how subjective valuation can be, which is heightened by this case. For example, it could be argued that the value of Jackson’s image and likeness at the date of his death was depressed because the star was mired in scandal and his star power wasn’t what it used to be. However, Jackson remains “firmly near the top of the Forbes list of Top Earning Dead Celebrities.” The estate “is likely going to argue that the singer’s future earning power was actually depressed and the subsequent boon to the estate, while nice, could not have been predicted as of the date of death,” says the article.

In terms of celebrities, valuation hinges on how the public views the celebrity. But the public has a short memory, so people can soon forget about the “bad stuff, including the scandals, the violence and the addictions. Sometimes, at death, the drunk becomes the artistic genius.”

The case is: Estate of Michael J. Jackson, Deceased, John G. Branca, Co-Executor and John McClain, Co-Executor, Petitioner(s) v. Commissioner of Internal Revenue, Respondent (017152-13 U.S. Tax Court).

FASB PCC issues exposure draft on VIEs

The fourth installment in a series of exposure drafts (EDs) on top-of-the-mind areas for private companies has been issued by the Private Company Council (PCC), which was created by FASB’s parent, the Financial Accounting Foundation. The new ED outlines an alternative within GAAP for applying consolidation guidance to leasing companies under common control.

Key point: The proposed GAAP alternative, Applying Variable Interest Entity Guidance to Common Control Leasing Arrangements (formerly FIN 46(R) and FAS 167), would exempt many private companies from applying variable interest entity (VIE) guidance to lessor companies under common control. A VIE is a company in which controlling financial interest is not established based on a majority of voting rights.

“This proposal is intended to help lenders and other users better align the information used in assessing the financial position of private companies that prepare financial statements,” said FASB Chairman Russell G. Golden. “We look forward to receiving feedback on the effectiveness of the proposal from private company stakeholders.” Comments are due Oct. 14, 2013.

Recently, the PCC issued three other proposals designed to address the concerns of private companies about accounting for intangible assets acquired in business combinations, goodwill, and certain types of interest rate swaps (see the July 17 BV Wire)

Which business type has the highest effective tax rate?

S corporations will pay the highest average effective tax rate in 2013 (31.6% of their income), reveals a study from the National Federation of Independent Business and the S Corporation Association.

Pecking order: The study, by Quantria Strategies, compares the tax burden different business entities will shoulder in 2013. After S corps, partnerships will pay the next highest effective tax rate (29.4%), followed by C corporations (17.8%) and sole proprietorships (15.1%).

This is only the second time the tax burden of S corps and other pass-through entities has been measured.

Speaking of S corps: In pass-through entity valuation, confusion remains despite voluminous dedication to a single, simple approach. Perhaps no expert has dedicated more research, thought, and experience to this pursuit than Nancy Fannon (Meyers, Harrison & Pia). On September 12 in S Corps … What a Long, Strange Trip It's Been, Fannon joins BVR to examine how academic research, appraisal experience, and judicial opinion can be synthesized to create an effective, reliable, and defensible technique for pass-through entity valuation.

Sir David Tweedie in Accounting Hall of Fame

Our congratulations to Sir David Tweedie, chairman of the International Valuation Standards Council (IVSC), who has been inducted into the Accounting Hall of Fame. Sir David's induction occurred at the American Accounting Annual Meeting in Anaheim, Calif. The Accounting Hall of Fame is located at Ohio State University and has honored 90 accountants since its inception in 1950.

Sir David is the former chairman of the International Accounting Standards Board (IASB) and was also chairman of the U.K. Accounting Standards Board. He overhauled U.K. GAAP and spearheaded the adoption of IFRS in over 100 countries.

Call for participants: 2014 BVR/SPU Valuation Challenge

Training the next generation of valuation analysts is crucial to advance the profession. One great way to participate in this effort is to lend support to the BVR/SPU Valuation Challenge, held annually at Seattle Pacific University (SPU). Public accounting firm Moss Adams gives teams of students a real-world private company to appraise. Then, armed with tools supplied free by BVR, they compete for the best valuation presentation.

How you can help: Consider involving your firm—or your alma mater—in supporting the next challenge, to be held in May 2014. Challenge organizers are looking for finance and accounting professors at AACSB accredited business schools who will enlist and be in charge of participating student teams. Letters are going out to 500 deans of these schools inviting the first 24 respondents to participate.

For more information, go to the Valuation Challenge website.

Unjust enrichment and divorce

Join George Roach (George Roach Litigation Consulting) on September 10 for Unjust Enrichment, Part 7 of BVR's 2013 Online Symposium on Economic Damages. Attendees will learn how to quantify unjust enrichment given the complex understanding of economic and accounting methods, legal theories, and jurisdictional idiosyncrasies required.

BVR's Advanced Webinar Series on Business Valuation in Divorce kicks off on September 13 with Double Dipping: Incomes, Assets, and Double Counting in Divorce. This critical look at how courts view the double counting of assets and incomes, and how appraisers can best avoid these pitfalls, features expert appraisers Stacy Collins (Financial Research Associates) and Donald DeGrazia (Gold Gerstein Group) alongside attorney Adam John Wolff (Kasowitz Benson Torres & Friedman LLP).

Be sure to join BVR for all the installments of our Advanced Webinar Series on Business Valuation in Divorce, curated by James Alerding (Alerding Consulting), including:

Holiday break

BVWire will take a brief break for the Labor Day holiday next week. We will resume publication on September 11. Have a happy and safe holiday!


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Copyright © 2013 by Business Valuation Resources, LLC
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