BVWire Issue #171-1 | December 7, 2016

Record number of witnesses testify to fight Sec. 2704 regs

An amazing number of speakers descended on the IRS in Washington, D.C., to fight the controversial proposed Section 2704 regulations designed to curb estate valuation discounts for minority interests. Speakers testifying at the December 1 hearing said the rules are so broad and convoluted that they should be withdrawn permanently. If that’s out of the question, the regs should be revised, but they’re so far gone that they are beyond repair, speakers said. The IRS should go back to the drawing board and come out with a new version—and allow for another comment period.

In total, there were 37 witnesses—an “unprecedented” number, said the IRS—more than any other hearing in at least 30 years, an IRS attorney told BVWire. While the format of these hearings is simply for speakers to present their 10 minutes of comments, IRS and Treasury officials on the panel felt compelled to make some remarks in response to the strong concerns of valuation experts, attorneys, wealth planners, and family business owners who testified.

A common issue speakers brought up was the so-called “implied put right” that exists in the proposed regs. This is the ability of each member of the entity to force the company to buy back his or her interest for cash equal to a minimum value within six months of exercising the right. No such right exists in the real world, speakers told the panel, and it should be removed from the regs.

No put right: “It is not our intention for the regs to contain a put right,” said Charlotte Chyr, IRS Special Counsel. This appeared to put this matter to rest and short-circuited some comments by subsequent speakers.

Another recurring theme was the three-year rule, which would nullify discounts taken for certain transfers that occurred within three years of the transferor’s death. Speakers were concerned that the rule would apply to transfers that occurred prior to the regs being finalized. As written, the regs are unclear on this.

Not retroactive: The three-year lookback rule “will not be retroactive,” Chyr told the audience. It would only affect transfers made after the date the final regs are published.

While most of the speakers talked of technical legal and tax issues and appraisers discussed valuation theory and practice, the speakers representing family businesses, farms, and ranches added a poignancy to the proceedings. Clarene Law borrowed her parents’ life savings to open a small motel in 1962. She and her husband struggled to build the business from nothing into a thriving concern with multiple locations run by four generations of family members. Law, now elderly, has “high hopes” to pass on the family legacy to the next generation, some of whom own minority stakes. “The proposed regulations will severely disrupt the plans that are so dear to my heart,” she said, trying to maintain her composure. “We may have to sell out if minority discounts are compromised.” As her voice wavered, she said to the panel: “We had the opportunity to pursue the American Dream. Please let our children have the same chance.”

Discounts will remain: “We will make it clear that these regs will not eliminate minority discounts,” said Catherine Hughes, attorney-advisor at the Treasury. Audience members were happy to hear that, to some extent. Of course, this doesn’t mean that discounts won’t be significantly reduced, which they will be under the regs as written.

While the panel addressed a few issues, many more remain, such as how the regs have redefined long-accepted definitions of fair market value, marketability, and control. For example, the regs remove the hypothetical willing buyer and willing seller assumption from the definition of fair market value—and also the notion of an arm’s-length transaction. Lance Hall (FMV Opinions), in his testimony, said, “That’s like asking Michelangelo to paint the Sistine Chapel without the color blue.”

Not all of the witnesses were against the regs. A speaker from Americans for Tax Fairness fully supports the regs, saying they will close loopholes the wealthy use to avoid estate taxes. Everyone agrees that some abuses are going on that should be stopped, but why not focus the regs on those egregious cases without hurting the family business that was formed for legitimate reasons?

IRS hearings are very serious and formal proceedings, so we were happy that some speakers added a much-needed touch of humor. An owner of a White Castle hamburger franchise said that when he first heard “2704,” he thought it would make a “good price point for a Crave Case of burgers with sides and drinks.”

What’s next: The IRS will “seriously consider” the comments made at the hearing—and those about 10,000 people submitted on the IRS website. It is highly unlikely the IRS will finalize the proposed regs as written because of remarks officials made at the hearing. Some observers think the regs will be tweaked and rushed through before the Trump administration moves in, otherwise they will have little chance to see the light of day. Stay tuned!

BVWire applauds the incredible efforts of the valuation community in coming together to speak in a strong and compelling voice on these controversial regs. More details on the hearing will appear in the January issue of Business Valuation Update.

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U.S. goodwill impairment doubled in 2015: D&P study

U.S. publicly traded companies recorded $57 billion in goodwill impairment (GWI) in 2015—more than double the impairment recorded during the prior year, according to the 2016 U.S. Goodwill Impairment Study from Duff & Phelps. The study was prepared and issued in partnership with the Financial Executives Research Foundation (FERF).

Hard-hit industries: For the second year in a row, the energy sector was the hardest-hit industry, with GWI of $18.2 billion in 2015, compared to $5.8 billion in the prior year. Energy accounted for nearly one-third of the aggregate GWI in 2015, with 56% of energy companies that carry goodwill on their balance sheets recording an impairment. The IT industry was also significantly impacted in 2015, as two of the three overall largest impairments took place in this industry and total GWI more than tripled, to $12.9 billion compared to 2014. The consumer discretionary industry and industrial sector also saw steep increases in 2015, more than doubling impairment levels of the prior year.

The study examines general and industry goodwill impairment trends through December 2015 for over 8,500 U.S. publicly traded companies. It also reports results from an annual survey of Financial Executive International (FEI) members, representing both privately owned and publicly traded companies.

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Friction point between valuation and M&A experts

Valuation experts sometimes assume that M&A deal terms have no impact on value. “Terms have a huge impact on the value transfer,” says investment banker Michael Poole (PCE Investment Bankers Inc.). Speaking at the 2016 ASA Advanced Business Valuation Conference, Poole said this often comes up when doing fairness opinions and there may be a tendency to not take the terms into account. The trouble is, when valuation experts look at market multiples, they often have no idea as to the terms. Did the seller take some financing back? Did the buyer get stock that was deeply subordinated? You can’t simply assume the multiple is based on an all-cash deal. Yes, some of the reported transactions will disclose terms—there are always exceptions—but most will not.

For more details, see the article, “Transaction Valuation Tips From an Investment Banker,” in the December issue of Business Valuation Update.

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Global BV News
News from the IVSC annual meetings

During the recent annual meetings of the International Valuation Standards Council (IVSC) in Bali, there was a session, Around the World in 80 Valuations, hosted by the International Institute of Business Valuers (iiBV). The session demonstrated the range of international business valuation issues and complexities, reports Michael Badham, executive director of iiBV.

Worldwide standards: Badham and Edwina Tam, a partner at Deloitte and chair of the iiBV, attended the IVSC meetings, which focused on the rollout of the IVSC’s 2017 Standards (IVS 2017) and the implementation of the IVSC’s organizational and strategic plans for the next two years. IVS 2017 is set to be issued in early 2017, and the IVSC will push for worldwide adoption. At the Standards Board meeting, Sir David Tweedie said, bluntly, that “valuation is not a profession. If valuers wish to become a profession, and continue with self-regulation, then VPOs must adopt IVS and enforce compliance—no exceptions.” The pre-publication draft of IVS 2017 has been is released and is available here.

For more of Badham’s coverage of the event, click here.

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Timely symposium on cannabiz December 13

During the presidential election, voters approved marijuana initiatives in eight of the nine states where it was on the ballot. That means a total of 31 states and jurisdictions now have legal marijuana in some capacity. This is a situation that business valuators simply can’t ignore.

The New York State Society of CPAs has put together an event, the Marijuana Symposium: Business, Tax and Legal Implications, to be held in New York City on December 13. Among the speakers will be Ron Seigneur (Seigneur Gustafson LLP), who is a valuation practitioner based in Colorado, one of the first states to legalize adult recreational cannabis. He will cover valuation nuances based on lessons learned in his state. Seigneur is a contributor to a new guide, What It’s Worth: Value and Business Challenges in the Budding Cannabis Industry.

BVWire will cover this event, and we hope to see you there! Can’t make it to the Big Apple? Don’t worry—you can attend online. To register, click here.

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Room with a view—of Earth

Humanity won’t last another 1,000 years on Earth, so everybody has to move to another planet to survive, according to noted theoretical physicist Stephen Hawking. Although this massive bug-out is a long way off, some entrepreneurs and investors are already boldly going where no man has gone before: the commercialization of space. This means a new world of opportunities for appraisers.

Final frontier: The private space commercialization industry is involved in everything, from satellite launch and operation to cargo deliveries to the International Space Station, space tourism, mineral prospecting, and colonization. True, it’s a relatively small industry today, but it promises to expand as technology improves, terrestrial resources become scarce, and ideas for deriving value from space exploration proliferate. To learn about the opportunities for appraisers in this industry, join Michael Blake (Arpeggio Advisors) for a webinar on December 15, Down-to-Earth Considerations for Appraising Private Space Commercialization Companies.

One piece of advice: When it’s time to relocate to another world, choose a reputable firm—don’t accept a ride from the Kanamits.

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AICPA honors outstanding valuation and forensic experts at Nashville event

BVWire attended the AICPA’s Forensic and Valuation Services (FVS) Conference in Nashville, where the organization honored some of its own.

Honorees: The Business Valuation Volunteer of the Year Award went to Stacy Preston Collins (Financial Research Associates) and the Forensic & Litigation Services Volunteer of the Year Award recipient was Scott Bouchner (Berkowitz Pollack Brant Advisors and Accountants LLP).

Also announced were the recipients of the AICPA’s second annual Standing Ovation program, which recognizes 25 CPAs aged 40 and under for their significant accomplishments in the areas of business valuation and forensic accounting. They are (in alphabetical order):

  • Michelle Avery—Veris Consulting, Reston, Va.;
  • Joshua Brummett—LBMC, Brentwood, Tenn.;
  • Bryan Callahan—BKD, Indianapolis;
  • Julian Dozier—Thomas Howell Ferguson, Tallahassee, Fla.;
  • Chris Ekimoff—Resolution Economics Group, Washington, D.C.;
  • Jessica Giresi—WithumSmith+Brown, Princeton, N.J.;
  • Daniel Golish—Skoda Minotti, Westerville, Ohio;
  • Mark Hughes—Gorman Consulting Group, Phoenix;
  • Geoffrey Ihnow—FTI Consulting, Chicago;
  • Robert Kester—Blue & Co, Louisville, Ky.;
  • Brad Koranda—RSM, Minneapolis;
  • Jeffrey Kotch—Brendon Pierson, Wall, N.J.;
  • Joseph Lesovitz—Citrin Cooperman, Philadelphia;
  • Scott Lockhart—Oxdale Ventures, Birmingham, Mich.;
  • Jeremy McGannon—FTI Consulting, Chicago;
  • Chris Miller—SteelGate Advisors, Wexford, Pa.;
  • Matthew O’Leary—Baker Tilly, New York, N.Y.;
  • Paul Peterson—Grant Thornton, McLean, Va.;
  • Paris Powell—Perkins & Co., Portland, Ore.;
  • Erum Randhawa—BlumShapiro, West Hartford, Conn.;
  • Zachary Reichenbach—Ellin & Tucker, Baltimore;
  • Sean Saari—Skoda Minotti, Mayfield Village, Ohio;
  • Benjamin Vance—Postlethwaite & Netterville, Baton Rouge, La.;
  • Alexander Walther—Baker Tilly Virchow Krause, Friendswood, Texas; and
  • Laurie-Leigh White—The BVA Group, Houston.

BVWire congratulates this year’s honorees. Next year’s AICPA FVS conference will be at Caesar’s Palace in Las Vegas.

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BV movers . . .

People: Larry Autrey, managing partner of Whitley Penn, has been named to DCEO Magazine’s “Dallas 500” list of the most powerful business leaders … HLB International has appointed Leon Janks as chairman of HLB USA … Atlanta-based HDH Advisors has added Kyle Landers as managing director … Catherine O’Toole has joined Miami’s Kabat, Schertzer De La Torre, Taraboulos & Co. as a staff accountant in the forensic and business valuations practice … Rob Popovitch has joined San Francisco-based Andersen Tax as managing director of the Dallas office’s private client service group.

Firms: Armanino has acquired valuation firm Financial Strategies Consulting Group of Lafayette, Calif., effective Jan. 1, 2017. The FSCG team will relocate to Armanino’s offices in San Ramon early next year … BKD has acquired Kiesling Associates, which has offices in Iowa, Nebraska, Colorado, and Wisconsin, bringing BKD’s number of offices to 35 across 16 states … Detroit’s Clayton & McKervey launched a German-language web site for German companies looking to expand to the U.S. … West Coast firm Gallina will merge with CliftonLarsonAllen, assuming the CLA name, effective Jan. 1, 2017 … Sikich LLP was named to the Chicago Tribune’s 2016 “Top Workplaces” list, ranking No. 16 in the “Midsized” category. It’s the company’s fifth appearance on the list.

Please send your professional and firm news to us at

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Upcoming CPE events

Valuing CINs, ACOs, PHOs, and IPAs: Bringing Clarity to Healthcare Combinations (December 7), with Karin Chernoff Kaplan (Veralon), Stu Schaff (Veralon), and Jessica Stack (Veralon). This is Part 8 of BVR's Special Series presented by the BVR/AHLA Guide to Healthcare Industry Finance and Valuation.

SPECIAL FOUR-HOUR EVENT: DLOM Day: An Advanced Workshop (December 8), with Chris Treharne (Gibraltar Business Valuations), Alina Niculita (Morones Analytics), William Quackenbush (Advent Valuation Advisors), Martin Greene (Greene Valuation Advisors LLC), and Bruce Johnson (Munroe, Park & Johnson Inc.).

Measuring Unjust Enrichment (December 14), with George Roach (George Roach Litigation Consulting). This is Part 7 of BVR's Special Series presented by The Comprehensive Guide to Economic Damages.

Down-to-Earth Considerations for Appraising Private Space Commercialization Companies (December 15), with Michael Blake (Arpeggio Advisors).

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 hearing

Impairment study

M&A deal terms

Global BV news

Cannabiz summit

Valuators in space

AICPA honorees

BV movers

CPE events

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