BVWire Issue #167-3 | August 17, 2016


Act now to avert tough new crackdown on estate valuation

Well-crafted comments can change the course of the dreaded proposed IRC Section 2704 regs designed to curb estate valuation discounts (prior coverage here). Newswires and social media have been buzzing over the proposed crackdown, and one thing is clear: It’s important for the valuation profession to submit comments by the November 2 due date. Also, there’s a public hearing in Washington on December 1.

Broad target: The IRS is targeting the technique of putting valuable property into entities such as family-owned partnerships or corporations just to reduce the value in the property and lower estate and gift taxes. The proposed regs (available here) address the treatment of some lapsing rights and restrictions on liquidation in determining the value of transferred interests in corporations and partnerships. Liquidation restrictions would be disregarded for valuation purposes. Bottom line: It appears that the proposed regulations eliminate almost all minority discounts for closely held entity interests, including operating businesses owned by a family.

The valuation community is stunned that the proposed regs include operating businesses. “The IRS could have easily made a distinction between active businesses and asset holding entities, as they do under other sections of the IRC,” says Curtis Kimball, a managing director at Willamette Management Associates in a blog post. “They really don't like LLC/FLPs with marketable securities, so they could have gone after those.”

Choose your words: The AICPA, ASA, and NACVA are forming task forces to study the regs and submit comments, and many other interested parties will do the same. However, the comments need to include a certain point, says Robert Kovacev, a partner at Steptoe & Johnson LLP. In an article in Trusts & Estates, he says that, if practitioners can successfully argue that changes the IRS has made in its rules don't make sense in real-life scenarios, a court could strike them down. Kovacek pointed to the Tax Court case Altera Corp. v. Commissioner, in which the court struck down 2003 IRS regulations because the Treasury ignored comments from practitioners who said the scenarios simply did not happen in real life. The court concluded that the rules were invalid because the government couldn't explain why it didn't consider the comments, which is in violation of the Administrative Procedure Act (APA).

Of course, valuation discounts are part of the real world when you have a closely held business with restrictions on transfers that make it harder to sell, so for the regs to ignore these restrictions is a problem. If the valuation community submits comments to the IRS expressing these concerns, the agency will be pressured to respond or risk being out of compliance with the APA, Kovacev said.

Details on how to submit comments are in the proposed regulations (REG-163113-02). The public hearing will be held in the IRS Auditorium at 10 a.m. ET on December 1. For more information, contact Regina Johnson at the IRS at 202-317-6901.

Extra: Kimball will conduct a webinar on September 29: The IRS’ Proposed Section 2704 Regulations: The Impact on and the Future of Estate and Gift Valuation.

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Tax Court’s revaluation is boon to Giustina estate

A short—but searing—critique by an appellate court triggered a revaluation by the Tax Court of an estate’s minority interest in a limited partnership that owned timberland. The Tax Court chopped down its original valuation from $27.5 million to $14 million, which vindicated the estate’s own valuation.

Two clear errors: The 9th Circuit Court of Appeals found the Tax Court made two clear errors: (1) it halved the company-specific risk premium the estate’s expert used without providing a good rationale; and (2) it gave some weight to the value of the assets even though a dissolution of the company was implausible.

The Tax Court’s revised valuation restored the estate expert’s company-specific risk premium (3.5%) and followed the appellate court’s order to use going-concern value, so it gave no weight to the assets of the company. This reduced the valuation difference by a whopping 93%.

The case is Estate of Giustina v. Commissioner, 2016 Tax Ct. Memo LEXIS 113 (June 13, 2016) (Giustina III). A case digest and the court’s opinion will be available in October at BVLaw. Digests of the two prior decisions and the courts’ opinions are already available at BVLaw.

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New paper says many courts overcompensate for lost profits

For a long time, most courts denied recovery of lost profits for new businesses. But now, a new business can recover lost profits as long as the evidence proves it with “reasonable certainty.” But it should not be as simple as that, contends a new paper, “The New Business Rule and Compensation for Lost Profits,” by Victor P. Goldberg, Jerome Greene Professor of Transactional Studies at Columbia University School of Law. He says that, in some cases, it is correct to deny recovery. The trouble is, courts are failing to grasp certain factors, resulting in many lost profits claimants being overcompensated. Earlier this year, Dr. Goldberg published a paper, “Reckoning Contract Damages: Valuation of the Contract as an Asset.”

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Facebook in court over value of intangibles

Facebook has been ordered to appear in court to show why it shouldn't be compelled to comply with several IRS summonses concerning the valuation of intangibles transferred to an Irish subsidiary, according to Tax Notes Today. Facebook recently received a Statutory Notice of Deficiency from the IRS related to an examination of the company's 2010 tax year. The company could owe between $3 billion and $5 billion in additional federal taxes, plus interest and penalties. Facebook says it does not agree with the position of the IRS and will file a petition in U.S. Tax Court challenging the deficiency notice. The case is United States v. Facebook Inc. and Subsidiaries (No. 3:16-cv-03777).

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FASB seeks help developing to-do list

The FASB has issued an invitation to comment seeking suggestions on which accounting and financial reporting topics should be added to its project plan.

Some ideas: FASB’s various advisory groups offered several suggestions: intangible R&D assets, pensions, post-retirement benefit plans, separating liabilities from equity, and reporting performance and cash flows. At the recent ASA Fair Value Conference in Los Angeles, Adam Kamhi, a valuation fellow at the FASB, mentioned that it is interested in possibly adding a project on internally generated intangible assets. Current rules don’t allow recognition of internally generated intangibles on the balance sheet. He pointed out that the IFRS has a model for capitalizing development costs, but the model has its critics.

Extra: In separate news, the FASB has released an exposure draft proposing changes in its conceptual framework related to how items are presented in a financial statement.

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GAAP is now useless for investors, says new book

Investors find standard GAAP backward-looking financials flawed and insufficient, according to a new book, The End of Accounting and the Path Forward for Investors and Managers, by Baruch Lev (New York University) and Feng Gu (SUNY Buffalo). GAAP was fine when there was an industrial economy comprised of hard assets. But the new economy is built on hard-to-quantify intangible assets and GAAP hasn’t evolved enough to capture this new reality, says the book, which is now available here.

FV is one culprit: The authors say that part of the problem is the move to fair value, which results in one-time hits to the income statement from changes in fair values of assets and liabilities, impairments of assets, write-offs of goodwill, and so on. This “noise” helps to camouflage normal earnings. They offer a solution they call the “Value Creation Report,” which includes new indicators that focus on strategy and execution to identify and evaluate a company's true value-creating resources.

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Reminder: Comments due August 24 on new fair value initiative

You have one week to comment on two important exposure drafts that relate to the ongoing fair value quality initiative (FVQI) designed to improve financial reporting valuations for U.S. publicly traded companies. The ASA, AICPA, and RICS have spearheaded the initiative that includes the development of a new credential for valuation professionals. The credentialing process will be subject to ongoing quality oversight and compliance with a “mandatory performance framework,” which is the subject of the new exposure drafts.

The two exposure drafts are: Proposed Mandatory Performance Framework for the Fair Value Quality Initiative and Proposed Application of the Mandatory Performance Framework for the Fair Value Quality Initiative. Written comments should be sent either to the AICPA, ASA, or RICS.

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Global BV news:
Machine tool brand values worldwide

When talking about brand value, most people do not think of special-purpose machinery. Still, not everything in this sector is about technical features alone; awareness and reputation are important success drivers. To understand more about the importance and value of special-purpose machinery brands, MARKABLES analyzed businesses in this industry. The peer group contains 24 different machine tool businesses including Schuler, Homag, Pentair, Müller-Weingarten, Thermadyne, and others from eight countries.

One word: plastics: The average valuation multiple of 1.0x revenues is not very high for technology businesses, indicating a stagnating market in a world where plastics and other materials are gaining ground against metal. The median trademark royalty rate is slightly above 1% on revenues (see chart below), and trademarks account for 10% of enterprise value on average. This is not much, but it’s more than for such seemingly brand-driven businesses such as computers (see the June 15, 2016, issue of BVWire).

The key takeaways of this peer group analysis are:

  • Trademark value correlates with business size. Specialized niche suppliers show higher brand values than larger multisegment multitechnology suppliers.
  • Machine tool businesses have a lot of repeat businesses from customers they know well. The value of customer relations is five times higher than trademark value.
  • Surprisingly, German machine tool suppliers have trademark value below average, despite the strong German engineering know-how. Maybe, German technology is better than their names.
  • Most machine tool brands are established, and their installed branded fleet will persist long into the future. Not surprisingly, the remaining useful lives of machine tool brands is much longer than for other technical equipment such as computers or communication equipment.

MARKABLES, based in Switzerland, now has a database of over 8,200 trademark valuations published in financial reporting documents of listed companies from all over the world. The database reports value solely for the use of trademarks (not bundled with other rights).

(Click image to view full size)

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Global valuation insights at IACVA Malaysia event September 18-20

Practitioners from Malaysia, China, Korea, the Middle East, Australia, and others will share valuation developments in their countries during one of the sessions at the IACVA 2016 Malaysia International Business Valuation Conference in Kuala Lampur. So far, valuation experts from six continents will be attending in order to share insights on valuation theories and practices in today’s global economy. Other sessions include a panel discussion on performing a valuation due diligence in different parts of the world, an update on global valuation standards presented by Robert Brackett (Crandall & Brackett, USA), and the latest in valuation research tools, presented by James Horvath of ValuQuest Limited—Canada.

There’s a lot going on in valuation around the world! For details and how to register, click here.

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Preview of the September issue of Business Valuation Update

Here’s what you’ll see:

  • “Economic Obsolescence: An Adjustment That Is Often Overlooked” (Gary R. Trugman). If a valuation using the asset approach is much higher than under the income or market approach, what’s the reason? It could be economic obsolescence, a topic not readily found in a lot of valuation textbooks or course materials.
  • “Experts Size Up Controversial IRS Estate Valuation Regs” (BVR editor). Valuation experts were anxiously awaiting the proposed IRC Section 2704 regulations designed to crack down on estate valuation discounts. Now that they have been released, they have triggered strong reactions from the valuation community, the legal profession, and others.
  • “Expanding the Cost of Capital Horizon Beyond CAPM” (Adam Manson). Two sessions devoted to cost of capital were conducted at the recent annual conference of the National Association of Certified Valuation Analysts in San Diego.
  • “Top BV Experts Field Tough Questions at NACVA ‘Hardball’ Session” (BVR editor). A star-studded panel of valuation experts tackle no-holds-barred questions about such critical topics as the market approach, discounts, cost of capital, valuation reports, and more during a special double session at the recent annual conference of the National Association of Certified Valuation Analysts in San Diego.
  • “Valuation Characteristics and Methodologies for Urgent Care Centers” (Aaron Murski and Elliott Jeter). Hospitals are snapping up urgent care centers as they seek to become bigger players as the market consolidates. This article covers the latest considerations for valuations.
  • “Latest Data on Private-Company Transactions in the United Kingdom” (BVR editor). Some key data on transaction multiples being paid for U.K. private companies as well as some M&A insights.
  • “How to Help Ensure a Valid Survey for a Damages Analysis” (BVR editor). Some pointers and an example from Dr. Leon Kaplan (Princeton Research and Consulting Center) and Dr. Larry Chiagouris (Brand Marketing Services and Pace University).

The issue also includes:

  • Regular features: “BV News At-a-Glance,” “Ask the Experts,” “Tip of the Month.”
  • BV data spotlight: Pratt’s Stats 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, see the September issue of Business Valuation Update.

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BV movers . . .

People: Nathan Fyock was promoted to associate principal in the Grand Junction, Colo., office of Dalby, Wendland & Co., the largest accounting firm in western Colorado … Mary Beth Koester has joined Rea & Associates, a regional accounting and business consulting firm in Ohio, to manage the firm’s business valuation team. Previously, Koester worked on succession planning and ownership transitions exclusively for veterinary owners … Ankura Consulting Group, a business advisory and expert services firm, announced that Robert Mundy has joined the firm as managing director and Briana Gordon as director. Both Mundy and Gordon are based in Atlanta and will support the firm’s growing healthcare valuation practice.

Please send your professional and firm news to us at

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CPE events

Early Stage Companies: Mastering Valuation from Start-Up to Success (Advanced Workshop) (August 18), with David Dufendach (Alvarez & Marsal), Jason Andrews (Alvarez & Marsal), John Sawyer (Alvarez & Marsal), and Tommy Tu (Alvarez & Marsal Valuation Services).

Cost of Capital: An Anti-Cookbook Approach to Understanding (August 24), with Michael Crain (The Financial Valuation Group).

Valuing Hospital-Based Coverage Arrangements (August 30), with Schaeffer Smith (Horne LLP) and Christy Street (Horne LLP). This is Part 4 of BVR's Special Series presented by the BVR/AHLA Guide to Healthcare Industry Finance and Valuation.

Income Inaccuracies: Common Errors and Tips to Avoid Them (September 1), with Bethany Hearn (CliftonLarsonAllen LLP) and Sahan Totagamuwa (CliftonLarsonAllen LLP).

Important note to webinar attendees: To ensure that you receive your dial-in instructions to BVR’s training events, please make sure to whitelist

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We welcome your feedback and comments. Contact Andy Dzamba (Executive Editor) or Sylvia Golden (Executive Legal Editor) at:
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In this issue:

2704 action

Giustina U-turn

Lost profits paper

Facebook intangibles

FASB update


FVQI comments due

Global BV news

BVU preview

BV movers

CPE events

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