February 20, 2013 | Issue #125-3  

How will you grow your BV firm from the core?

What are your firm’s core competencies? What competencies do you wish your firm had? These two basic questions may determine not only the future of your business but the growth and development of the business valuation profession as a whole.

The questions are also at the core of our latest online survey. Participation will only take two minutes; the results may ripple over the evolution of a profession. Please add your voice by clicking here now. We will publish the results in coming issues.

Determining DLOM: a little like waiting
for Godot …?

: I can't go on like this.
Vladimir: That's what you think.
            —Samuel Beckett, Waiting for Godot

If any consensus came out of our last survey on the discount for lack of marketability, it was to acknowledge the frustrating lack of consensus. Or as one participant put it:

I am almost to the point of wishing that the IRS would just promulgate certain standardized discounts … so we could just use them for tax-basis BV reports. We would all benefit from this, financially, and our profession would achieve some uniformity. Right now, the legal field, the courts, and other professionals are frustrated with our profession's inability to arrive at an acceptable methodology. The mere fact that [the survey] lists 21 approaches to determining DLOM is representative of a broken theoretical model.

You don’t have to wait for the IRS. He’s no longer a chief engineer with the IRS, but Michael Gregory was the chief author of its DLOM Job Aid, which examines 18 approaches to determining the discount (and which furnished the basis for our survey choices, which Gregory also helped construct). The IRS’s comprehensive overview is worth reading, he says, but analysts should make sure to note its caveats, its standard document request and report writing components, and its expansion of the 10 Mandelbaum factors to 33.

Based on his 28 years with the IRS and the past two years in the private sector—and keeping in mind this is his own opinion—Gregory currently recommends a tripartite approach to determining DLOM: 1) a restricted stock analysis adjusted by the expanded (30+) subjective factors in the IRS study; 2) private placement data (from FMV Opinions, Stage 1, or Pluris) as adjusted by a similar, expanded subjective analysis; and 3) any method that makes sense and can be supported by the facts of the case and the type of valuation. The appraiser should then reconcile the approaches with sufficient explanation in the report. For a complete training pack from Gregory’s presentation, “What Business Valuators Need to Know When Preparing a DLOM for the IRS,” click here.

‘Secret’ effect of Taxpayer Relief Act on S corps

A couple of subscribers have recently asked for sources on how the just-passed American Taxpayer Relief Act of 2012 (ATRA) affects the valuation of S corporations, in particular Sec. 362 and the provisions regarding the recognition period for built-in capital gains.

BV appraisers aren’t alone; financial analysts are also struggling to fully understand ATRA’s impact on S corps. For instance, this Forbes article, “The Secrets of the Fiscal Cliff Deal,” posits that the act may actually usher in a new “golden age” of C corporations by discouraging entities from choosing S corp status now that the “pain” of double taxation is not so acute and the recognition period may only be five years (down from 10). After further thought, however, the author subsequently withdrew the discussion on built-in gains, posting this new article: “A Closer Look at the Fiscal Cliff Deal’s Impact on the Built-in-Gains Recognition Period for S Corporations.” In it, he concludes his initial assessment was “wrong,” and:

Despite … unnecessarily misleading language in the ATRA, it certainly appears that the new law will NOT shorten the 10-year recognition period for corporations electing S status in 2012 or 2013. Rather, if an existing S corporation would otherwise trigger built-in-gains in 2012 or 2013, provided the fifth year of the corporation’s recognition period preceded the year of sale, the corporation may exclude the built-in-gains. Keep in mind, however, that if this is indeed the case, then that same corporation will become subject to the built-in-gains again in 2014, provided the 10-year recognition period hasn’t otherwise expired.

How do you think the new tax law impacts S corp valuations? Email your thoughts to the editor.

Independent tax preparers challenge the IRS’s efforts to expand Circular 230 requirements
—and win

In 2011, the IRS expanded the definition of tax preparer under Circular 230 to reach an additional 600,000 to 700,000 non-CPAs and non-attorneys, or anyone who “prepares for compensation, or who employs one or more persons to prepare for compensation, all or a substantial portion of any return of tax or any claim for refund of tax.” The new regulations required each tax preparer to pass a qualifying exam, pay an annual application fee, and take 15 hours of continuing education courses each year.

Last year, three independent tax preparers filed suit to enjoin the regulations, claiming the IRS lacked authority to regulate their practice and the new rules would put them out of business. The federal district court agreed, and the IRS—backed by the Department of Justice—filed a request to stay the injunction pending an appeal. The agency had already spent more than $50 million to roll out 250 new testing centers for tax preparers, it said, receiving nearly 100,000 registrants so far.

Once again, the district court sided with the taxpayer. Its ruling did not require the IRS to dismantle its scheme. The agency might very well keep some testing centers open for independent tax preparers who believe the additional credentials will distinguish them from others. Tax preparers must still obtain a tax ID number, the court said, but the agency could not condition PTIN eligibility on meeting the registration requirements. Moreover, any stay of the injunction “would only lead to more confusion for preparers and their clients as the tax season gets underway," the court said, leaving the government’s only hope for extending the reach of Circular 230 with the appellate circuit.

Note: Although the court’s decisions invalidated the registration requirements of Circular 230, in her recent webinar on tax law updates, Linda Trugman (Trugman Valuation) questioned whether the rulings may have invalidated other provisions as well. Read the complete case digests of Loving v. IRS, 2013 U.S. Dist. LEXIS 7980 (Jan. 18, 2013) and 2013 U.S. Dist. LEXIS 13878 (Feb. 1, 2013) in the April Business Valuation Update; the district court’s decisions will be posted soon at BVLaw.

Poll shows appraisers evenly split over excess earnings method

During his recent webinar, The Excess Earnings Method, James Alerding (Alerding Consulting) conducted a live poll of participants, asking first whether they used the method in their standard valuation practices. The pool appeared almost evenly split, with 51% saying they still apply the EEM and 48% saying they do not.

A second question asked for further clarification. In response, 38% of participants said they used the traditional EEM and 9% use the excess compensation method; only 13% used both methods and 39% said they used none.

Two new valentines from the FASB

On February 14, the Financial Accounting Standards Board (FASB) released its Proposed Accounting Standards Update, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.

“The proposed accounting standard would measure financial assets based on how a reporting entity would realize [their] value as part of distinct business activities, while the measurement of financial liabilities would be consistent with how the entity expects to settle those liabilities,” according to FASB chair Leslie Seidman, in an accompanying statement. The revised proposal responds to feedback on the board’s 2010 exposure draft by simplifying “the multitude of classification methods currently in use,” she added, and “offers an opportunity for convergence with the IASB’s proposal issued last November.” Stakeholders are asked to provide written comments by May 15, 2013.

Also last week—in their first joint standard-setting effort—the FASB and the Private Company Council (PCC) agreed to seek additional public input on a proposed private company decision-making framework. The framework outlines criteria to determine whether and in what circumstances it is appropriate to adjust financial reporting requirements for private companies following U.S. GAAP.

In its second-ever meeting, the PCC also agreed to keep three items from its original agenda—consolidating variable interest entities, accounting for “plain vanilla” interest rate swaps, and measuring various IP assets acquired in business combinations—but dropped a fourth item (accounting for tax uncertainties), according to a release. Lastly, the council directed the FASB staff to develop research on two potential additional topics: stock-based compensation and early-stage enterprises.

CEO succession in family businesses: Article aimed at corporate counsel misses role of BV appraisers  

Tensions naturally underlie a corporate succession, says a new online article in Corporate Counsel (Law.com). Add the logistical and emotional dynamics of a family-controlled business, and succession planning can become a minefield for any board of directors or general counsel to navigate.

A sound selection process can mitigate CEO-succession risks, and general counsel can help advocate best practices, the article says, quoting a management consultant and attorney. Independent board members can represent the company’s interests and a family “council” can channel those of employee and nonemployee relations. But anyone involved with the family business must be “super careful” to maintain the appearance of objectivity, the article says.

Too bad it didn’t ask a BV appraiser. Who ultimately is in the best position to help a family business maximize value and reduce risk through a sale, management buyout, or family succession? “Our job is to help business owners to understand the trade-offs of each,” said Ron Seigneur (Seigneur Gustafson), as recently quoted in a BVWire article. Succession planning is “a great opportunity and a great supplement to litigation work,” agrees James Anderson (Burr Pilger Mayer). But first BV appraisers must get the word out, and contacting their corporate counsel referrals—and the publications aimed at this critical referral base—might be a good place to revisit.

Beat the February doldrums with CPE symposia

It’s a short month, but February can drag before the first signs of spring (and the busy tax season) begin. Help move your winter along with these fast-paced, cutting-edge training sessions:

  • On February 26, Part 2 of BVR’s Online Symposium on Healthcare Valuation continues with attorneys James Pinna and Matthew Jenkins (both Hunton & Williams) discussing The Stark Law and Anti-Kickback Statute, an important overview and update of current regulations for appraisers in the healthcare sector.
  • On February 28, the Online Symposium on Economic Damages begins with the Advanced Workshop on Lost Profits Calculations, featuring Robert Gray and James O’Brien (both ParenteBeard). This intensive, four-hour workshop is free to subscribers of the full Symposium and will cover the process of calculating lost profits from start to finish, using case studies and “live” examples. For more information, click here.


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Copyright © 2013 by Business Valuation Resources, LLC
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