Grabowski analyzes COLI valuation issue SCOTUS will decide

The U.S. Supreme Court has agreed to hear a case involving a valuation issue in order to resolve a circuit split. The issue is this: How should corporate-owned life insurance (COLI) designed to fund the redemption of a deceased shareholder’s stock impact the fair market value of the subject company and the value of the decedent’s gross estate?

Circuit split: In the Connelly case, the IRS argued that the insurance proceeds should be included for purposes of valuing the corporation for estate tax purposes. On appeal, the U.S. Court of Appeals for the 8th Circuit sided with the IRS, creating a split with the 11th Circuit, which, in the 2004 Blount case, ruled that it should not be included.

The petitioner in Connelly petitioned SCOTUS to resolve the differences between the opinions of the two circuits. There was also a brief in opposition the government filed as well as a reply brief by the petitioner. On December 13, SCOTUS granted the petition and will hear the case.

Flawed logic: In a new paper, Roger Grabowski (Kroll) does a detailed analysis of the Blount and Connelly cases as well as the petition to SCOTUS. His view is that the 8th Circuit has used flawed reasoning, and he gives an example of the implications of the court’s faulty logic. The paper will appear in the January 2024 issue of Business Valuation Update.

The Blount and Connelly cases are on the BVLaw platform. The SCOTUS petition and replies are available if you click here.

On-the-ground coverage of the NACVA super conference

There was a good crowd of about 400 attendees (including virtual) at the NACVA Business Valuation & Financial Litigation Super Conference in Fort Lauderdale, Fla., last week. While the weather outside was not very agreeable, the climate inside the conference was very agreeable—there were excellent sessions, top speakers, and opportunities to network face to face. Here are a few pieces of advice and takeaways from a few of the sessions we attended:

• A beta version of a DLOM calculator developed by Dr. Ashok Abbott (West Virginia University) using option modeling is available at dev.optionmodeldlom.com;

• A disturbing statistic from a BVR survey is that 82% of valuation firms polled do not solicit any feedback from clients on how satisfied they are with the work product;

• There was much talk about AI and some eye-opening examples of how to use it to make the valuation process much more efficient;

• Research shows that growth rates are different for companies at different points in their life cycle, lending support to the multistage DCF;

• The Van Vleet model is showing up in more cases regarding tax affecting S corps (which is not a settled matter, as some may think), and the IRS has used it in recent cases;

• Resolve to make at least one call a day to client prospects—and leave a voicemail if there’s no answer;

• It’s now more important to provide full details behind any analysis you present in court;

• Young BV practitioners need their firms to be flexible with work schedules to promote a work/life balance; and

• Judges say it’s just as important how you say something in court as what you say.

Detailed coverage of the conference will be in an upcoming issue of Business Valuation Update.

Practice opportunity in new SEC rules for private funds

There is a “big opportunity” for valuation practitioners as well as accounting and attestation firms as a result of the new SEC rules designed to enhance the regulation of private fund advisers, remarked Justin Kuczmarski (NAV Valuation & Advisory LLC) during a session at the 2023 ASA International Conference recently in New Orleans. Increased disclosures and reporting will trigger a greater need for independent valuations and advising clients on the more burdensome compliance needs. These new rules are “very contentious,” and there will be pushback charging that the SEC does not have the authority to promulgate these new laws, so this is something to keep an eye on.

ASA CEO Johnnie White to leave the organization

The CEO of the American Society of Appraisers, Johnnie White, will be leaving the organization. He will stay on until mid-February, during which the ASA will launch a search for a new CEO by forming a search committee and enlisting the services of executive search firm Association Strategies Inc. “We express our heartfelt thanks and sincere gratitude to Johnnie for his exceptional leadership and for the positive changes he has brought to ASA,” said Garrett Schwartz, ASA international president, in a statement. “Under his guidance, we have witnessed consistent improvement and innovation. We are proud of what he has accomplished and wish him success in his new role and future endeavors.”

Reminder: Preorder deal on the 2024 Business Reference Guide

The 2024 print edition of the Business Reference Guide (BRG) by Tom West is now available for preorder at a 20% savings if you click here (valid through December 31). Now in its 34th year, it contains the latest industry-related information including “rules of thumb,” pricing tips, benchmarking information with comparison data, industry resources, and general industry data on nearly 700 types of businesses. There is also an online version with a fully searchable database, and it includes the print version of the guide. The print edition will be available in February 2024.

New CBV Insight on ESG published

A new paper explores the value impacts of environmental, social, and governance (ESG) factors in private companies. The paper (available if you click here) examines:

• Emerging ESG trends: An analysis of the latest developments in ESG reporting and their implications for private companies;

• Expert perspectives: Insights from leading CBVs and financial experts on the complexities of ESG integration in business valuation; and

• Strategic insights: Practical advice and strategies for private companies to incorporate ESG considerations effectively into their business models and decision-making processes.

The paper is from the CBV Institute, Canada’s valuation professional organization (VPO).

What’s in the January 2024 issue of Business Valuation Update

Here’s what you’ll see:

• “Valuation Impact of Corporate-Owned Life Insurance on SCOTUS’ Agenda” (Roger J. Grabowski, FASA). The goal of this paper is to inform readers about a valuation issue that is the subject of a petition put before the United States Supreme Court to resolve a circuit split. The issue is how does corporate-owned life insurance designed to fund the redemption of a deceased shareholder’s stock impact the fair market value of the subject company and the value of the decedent’s gross estate. The author examines the applicable U.S. Tax Court, district court, and two appellate decisions so the reader can understand the arguments made and the basis for the legal conclusions.

• “BV Year in Review 2023: Recruiting Push” (BVR Editor). The business valuation profession continued to thrive in 2023 amid ongoing challenges, such as how to reflect uncertainty, inflation, and market volatility in valuations. But another issue loomed large in the profession: attracting and retaining new young talent.

• “Fair Market Value: A Complicated Standard” (Mark O. Dietrich, CPA). This article was triggered by a recent article by Jim Hitchner that maintained that it is a “myth” that fair market value assumes a financial buyer, without synergistic benefits. The author believes the answer to the question is more nuanced than the term “myth” suggests, which prompted him to revisit his thinking on the concept.

• “What to Know From the 2023 ASA International Conference, Part 2” (BVR Editor). More takeaways from the ASA’s annual conference, on the topics of personal goodwill, new SEC valuation requirements for PE/VC funds, customer concentration, buy-sell agreements, equity compensation, real estate-centric entities, and more.

• “BVLaw Review: The Top Valuation Cases of 2023” (Jim Alerding, CPA/ABV). The BVLaw platform added approximately 70 cases during 2023, bringing the total to about 4,300 cases in the database. The cases are all related in some way to valuation, economic damages and lost profits, and other litigation. This article is a rundown of some of the more important cases for 2023.

• “Future Plans for the AICPA FVS Section” (BVR Editor). The AICPA Forensic and Valuation Services (FVS) section has some impressive plans going forward, a panel revealed at the FVS conference in Las Vegas this past November. Their plans include strengthening their training offerings, increasing education opportunities, career development support, and outreach to universities to raise awareness among students.

The issue also includes:

• A full 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,” “FactSet/BVR Control Premium Study” “Economic Outlook for the Month,” and the “Cost of Capital Center”; and

• BVLaw Case Update: The latest court cases that involve business valuation issues with one case featured in a detailed analysis.

To stay current on business valuation, check out the January 2024 issue of Business Valuation Update.

BV movers . . .

People: Robert Allen, CFA, ABV, has been promoted to a partner at Fort Worth, Texas-based Whitley Penn; he is forensic, litigation and valuation managing director … Jamie Burress, CFA, CPA/AVB, has joined Houston-based MaloneBailey as valuation managing director to lead the firm’s new corporate valuation consulting practice; she has over two decades of experience performing valuations for a wide range of purposes.

Firms: Dubuque, Iowa-based Honkamp has added the St. Louis metro area firm Schowalter & Jabouri, a full-service attest, tax, and business advisory firm with more than 30 employees … Naperville, Ill.-based Sikich will acquire the federal government practice of CliftonLarsonAllen LLP … New York City-based EisnerAmper will acquire Raleigh, N.C.-based Hughes Pittman & Gupton, a firm with more than a dozen partners and a staff of almost 100 who provide services such as advisory, outsourcing, audit and accounting, tax, and risk and governance.

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

CPE events

Catch Me If You Can: Mitigating Compliance Risk Related to Provider Compensation, Jan. 23, 2024, 10:00 a.m.-11:40 a.m. PT/1:00 p.m.-2:40 p.m. ET. Featuring: Kathryn A. Taylor (ECG Management Consultants). CPE credits: 2.0.

The Department of Justice (DOJ) will maintain its focus on enforcing actions against healthcare providers who prioritize their financial gains over patient well-being and unlawfully siphon funds from government programs.

Next in Line! Valuing a Limited-Service Restaurant, Jan. 25, 2024, 10:00 a.m.-11:40 a.m. PT/1:00 p.m.-2:40 p.m. ET. Featuring: Lynton Kotzin (JS Held). CPE credits: 2.0.

A valuation expert provides insight into value drivers, methodology, approaches, and special considerations for limited-service eating places.

Holiday Break

BVWire will take time off for the holidays and will be back on Wednesday, Jan. 10, 2024. We wish you a safe and happy holiday season!