How business appraisers can do ‘the impossible’ in divorce

During these turbulent economic times, business appraisers and forensic accountants are “asked to do the impossible,” according to Karen Kaseno, principal of The Kaseno CPA Firm in San Diego, who spoke at the recent 2009 NACVA/IBA Consultants’ Conference in Boston. “We’re asked to put a value on a business in today’s world—and that’s tough.” A historically profitable business could be suffering unprecedented losses, she said. In divorce cases, in particular, appraisers and accountants often have to evaluate the marital business with incomplete records, an uncooperative owner, an anxious non-owner, and limited funds. BV professional standards make it difficult to do the “cheap” valuation that many family law practitioners want, Kaseno said, but the recession has made it difficult to perform the necessary work and get paid. What’s a competent, conscientious BV appraiser to do?

In cases when the parties are truly in a settlement mode, consider a calculation engagement, permitted under the AICPA’s SSVS-1, just to get an approximate value for the marital business. “We will do a calculated value report for settlement purposes only,” Kaseno emphasized. In addition, the parties and their attorneys are required to agree in advance on which valuation methods will be used, also permitted by SSVS-1. “We put this in the engagement letter. If it goes to trial, we will upgrade it [to a full-blown valuation report].” Kaseno’s firm will also get paid up front, before taking on any engagement.

Check around in your area for what your professional colleagues are doing, she advised. “Make sure you are comfortable with what you do.” Has she lost business because she won’t perform a calculated value for trial? “Yes.” Do attorneys understand the policy? “No. They may not know [BV professional] standards well enough to understand them,” she added. “It’s been the subject of a lot of conversations,” she said, and business appraisers can go a long way toward educating attorneys and their clients. They can discuss the limits and allowances of the standards as well as the advantages/disadvantages of various valuation approaches.

What happens when divorce assets continue to depreciate all the way up to trial? Many court jurisdictions fix the valuation date for appraising marital assets as of the filing of divorce proceedings. But what if a trial date is six months or even a year away, and the business value keeps declining during this economic downturn? The effect of subsequent economic events on appraising marital businesses will be a keynote topic at the BVR/NACVA/ASA 2nd Annual Summit on Business Valuation in Divorce. Conference co-chairs Jay Fishman, Bill Morrison, Sharyn Maggio will join a pre-eminent panel of top BV experts, judges, and lawyers to present the best standards of BV practice in Chicago Sept. 24-25 in "Projections, Post-Judgment Events, and the post-Bernie Madoff World."  To view the preliminary agenda, click here.

Access royalty rate intelligence that is available nowhere else

Since the landmark 1970 Georgia-Pacific Corp. v. United States Plywood Corp. case, in which the U.S. District Court (S.D.N.Y.) pulled together 15 concise factors from prior case law for establishing reasonable royalty rates, the courts have been asking experts to support their royalty rate damages estimates with sufficient economic and empirical data. To help solve what could otherwise be a tedious and expensive assignment, BVR is proud to partner with ktMINE, the most comprehensive source of hard-to-find royalty rate data available anywhere.

ktMINE is an interactive intellectual property database that provides direct access to royalty rates, the source licensing agreements, and detailed agreement summaries found from public sources, including the Securities Exchange Commission, foreign security filings, and the Web. You’ll find royalty agreements in ktMINE that you won’t find anywhere else–and they all include a link to their original source documents. Through a 30+ checkpoint process, ktMINE ensures that all of the key licensing terms are accurately captured and categorized, which uncovers the most relevant IP agreements. With precise search functionality, including the ability to search by agreement type, industry, and other criteria, ktMINE lets the user quickly find and analyze market comparables from over 13,000 public royalty rate, licensing, and lump sum agreements. While ktMINE currently contains a robust 18,000 “real world” royalty rate examples, 200+ new agreements are added to the database every month.

For more information on ktMINE, to request a demo, or to purchase a 2-day pass for $500, click here.

ASA’s proposed alliances generate BV buzz

The recent BVWire™ mention, “ASA ponders enhanced relationship with CICBV and RICS” garnered an interesting comment from a subscriber who asked to remain anonymous:

I worry that the business valuation profession in the U.S. is at great risk now from three directions. The first is that the regulators will recognize the AICPA as the sole voice of the profession, because they are used to working with the AICPA. The second is that our inappropriate connection, via ASA, with the real estate appraisal business will continue to diminish our professional esteem. The third is the influx of valuation professionals prepared to offer substandard work for low fees. The ASA BV[Committee] could counter these threats best by leaving ASA, aligning with CICBV in Canada to create the first truly international association of [business] appraisers, and replacing national standards (including USPAP) with international standards. This would give the BV profession higher credibility as professionals all around.

What do you think? We here at the ‘Wire would love to know, but more importantly, the key is to read John Barton’s recent “message from the chair” column—which thoroughly points out the possible pros and cons of each option. Committees named to consider each option are scheduled to report to the ASA’s Board of Governors at this week’s International Conference in Orlando.

Get ready for the coming wave of impairment-related valuation

In the wake of recent economic turbulence, the volume, complexity, and continued growth of goodwill impairment cases has placed a burden on all appraisers to be able to recognize, test, and account for these declines in intangible values. On Thursday, July 23 10:00 am PT/1:00 pm PT, H. Edward Morris, Jr., R. James Alerding, and R. Brian Steen will present a hands-on tutorial of what every appraiser needs to know in “Goodwill Impairment in a Troubled Economy,” a 100-minute teleconference presented by BVR. Two CPE credits available. Click here for more information or to register.

Taxpayer wins one, loses one in latest FLP case

After a slew of “bad facts” cases concerning family limited partnerships (FLPs), the latest opinion by the U.S. Tax Court, Estate of Miller v. Commissioner (May 27, 2009), provides an interesting “split” decision for the taxpayer, in which one FLP asset transfer successfully escapes the pull of IRC Sec. 2036—but the other does not. What made the difference? 

In this case, the Miller FLP was comprised of marketable securities worth over $3.8 million. After its formation and funding in 2002, an appraisal for gift tax purposes applied a 35% discount for lack of marketability. Within a year, however, Mrs. Miller was diagnosed with a terminal illness. Her son—also the FLP’s managing partner—caused her to transfer all remaining assets (about $900,000) into the partnership. When she died a few weeks later, her estate valued the FLP at $2.59 million, after application of the 35% discount, and used some of the assets to pay estate taxes. The IRS assessed over $500,000 in deficiencies and the estate sued for a refund.

The IRS didn’t contest the 35% discount, but instead argued that the taxable estate should include the full value of the FLP per IRC Sec. 2036(a). The FLP served no legitimate and substantial, non-tax purpose, it said, citing the “bad facts” in Estate of Stone (2003), Estate of Bongard (2005), Estate of Hurford (2008), and Estate of Jorgensen (2009).

But the estate claimed the FLP served several legitimate purposes, chief among them the continuation of the family’s specific investment strategy—and the Tax Court agreed, at least insofar as the initial funding was concerned. Citing Estate of Mirowkski (2008), the court held that an FLP’s activities “need not rise to the level of a ‘business’ under the Federal income tax laws in order for the [bona fide transfer] exception under section 2036(a) to apply.” The first asset transfer did not deplete the founder’s assets and the stock portfolio was actively managed by the son. By contrast, the driving force behind the May 2003 transfers was the precipitous decline in Mrs. Miller’s health, the desire to reduce her taxable estate, and to pay her estate taxes. Accordingly, this second funding did not escape the reach of Sec. 2036(a).

Where can you find all FLP cases, the good and the bad? A complete abstract of the Miller case will appear in the next (August 2009) Business Valuation Update. In addition, copies of all important FLP court decisions are currently available to subscribers of BVLaw.

Fair value still maligned by BV experts and other professionals

Fifty-eight percent of respondents to a recent survey conducted by Valuation Research Corporation (VRC) believe that market turmoil negates the validity of fair value accounting (FVA). Interestingly, of those who believed FVA was flawed and potentially not valid during market turmoil, some 34% suggested a temporary return to historical cost accounting as an alternative. (For questions on survey results, e-mail Jody Lowe at VRC). Additional findings reveal that:

  • Survey respondents are unsure about the capability of publicly traded banks to reasonably estimate their own level 3 financial assets—assets that are not publicly traded and don’t have easily accessible values. Forty-four percent believed the bank values were within an accuracy of 10% and another 40% thought those values were as much as 30% off. Only 3% believed bank reported values are within 3% of an accurate value, while another 12% thought the accuracy was within 5%.
  • The experts queried said that the accuracy of hedge fund and private equity valuations of level 3 assets, determined by the funds themselves, were even further off the mark. Thirty-six percent believed hedge fund and private equity values were only within an accuracy of 10% and a full 49% thought those values were as much as 30% off.
  • When asked if external auditors had caused them to revise their projections, 30% of respondents said “yes.” Of those who had to revise projections, 9.6% needed to change purchase allocation projections (FAS 141), 19.3% needed to revise goodwill impairment projections (FAS 142), and 14.5% had to revise fair value estimates (FAS 157).

Survey participants also opined on who provides the best valuation of level 3 assets. Sixty-one percent thought the owner/purchaser working together with an external valuation firm provided the best valuation. Only 19% of respondents believed the owner/purchaser working on their own was best and another 19% said an external valuation firm working on their own was best.

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