BVWire Issue #142-4 | July 30, 2014


‘Wild and woolly’ Richmond decision: Bogdanski’s perspective

The Tax Court’s decision in Estate of Richmond set the appraisal community abuzz. Since then, many have commented on the two most obvious points: 1) the use of the net-asset-value method to determine the value of a holding company whose assets are mostly marketable securities; and 2) discounting for the built-in-capital-gains (BICG) tax by determining the present value of the future BICG tax liability.

But in his recent BVR webinar, Prof. Jack Bogdanski (Lewis & Clark Law School) a long-time observer of the Tax Court, offered a unique perspective beyond the technical details. He called the decision a significant win for the IRS—If not from a numbers point of view, then from a theoretical standpoint.

BICG discount: Even though the court agreed that a BICG liability discount was appropriate, it plainly rejected the estate’s proposed dollar-for-dollar approach, which was based on rulings in the Court of Appeals for the 5th and 11th circuits. The Tax Court could do so, Bogdanski explains, because it is not bound by those decisions. What matters is the law of the circuit in which the executor resides. Here it was Pennsylvania, which is in the 3rd Circuit. Since the 3rd Circuit has not yet ruled on the issue, the Tax Court was free to come up with its own method. Assuming the estate will appeal—which it still has time to do—the 3rd Circuit would weigh in. But, Bogdanski stresses, don’t count on its overturning the Tax Court on this issue, particularly since the 2nd and 6th Circuits have disagreed with the 5th Circuit.

Executor shopping? Bogdanski reminded listeners of the need to know the law of the circuit in which the case will be heard. But he goes further. What sounds like “crazy advice,” he says, nevertheless has a ring of truth, The estate may want to check whether there is a plausible executor in a “friendlier” jurisdiction.

Problematic judicial administration: Bogdanski finds one aspect of the court’s discussion of the accuracy-related penalty particularly troublesome. The estate, it said, never explained why it changed its tune, relying first on a valuation that claimed the decedent’s interest was worth a mere $3.1 million and later at trial relying on another valuation that stated a higher, $5 million, value. In other words, Bogdanski says, it held the estate’s concession making against it. This, he says, is bad judicial administration because it discourages reasonable behavior, in this case, moving toward the IRS as the facts developed.

Freelancing: The court’s approach does not make for a lot of precision, Bogdanski observes. When it came to establishing the BICG discount, it rejected the actual 70-year holding period of the stock, but relied on either a 20- or 30-year holding period without explaining where these numbers came from. It also used four discount rates, “employed in various contexts in this case,” it said, to arrive at a range of present values for the BICG. As Bogdanski puts it, the Tax Court at times “freelances” as valuator. Even when both sides offer expert appraisals, certain judges prefer to craft their own appraisals. This can be frustrating for litigants, Bogdanski acknowledges. In Richmond, he said, the court’s approach makes for a “wild and woolly opinion.”

Find a digest and the court’s opinion of Estate of Richmond, 2014 Tax Ct. Memo LEXIS 26 (Feb. 11, 2014), at BVLaw. A recording and transcript of this webinar can be pre-ordered here.

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Damodaran on narrative in valuations

A recent blog posting by Dr. Aswath Damodaran (Stern School of Business, New York University) talks about the dangers of using numbers without any narrative when constructing valuations. One danger is that valuations become “plug-and-point exercises, tools to advance sales pitches or confirm pre-conceived values.” A valuation needs a marriage of narrative and numbers. “In a good valuation, the numbers are bound together by a coherent narrative, and storytelling is kept grounded with numbers,” he says in the blog.

His inspiration: It is this combination of narrative and numbers that attracted Damodaran to valuation in the first place. In a recent interview with Business Valuation Update, he explains how he got interested in business valuation. “I’ll tell you, it’s the narrative/numbers thing,” he says. “I didn’t want to become an accountant. It’s too numbers-driven for me. I didn’t want to be a strategist because it’s too much storytelling. So in a sense, I wanted something that would help me expand the creative component of business—coming up with great valuation ideas with discipline. So that’s what always attracted me to valuation. Not the model-building, not the spreadsheets, not the number-crunching, and not the accounting.”

He continues: “It’s a fact that if you do a good valuation, it’s like composing a tune, and the tune should actually sound good. So it forces you if you’re a storyteller to be disciplined. And it forces you if you’re a numbers person to think about the narrative. And to me that’s an exciting place to be.”

Read more: The September issue of Business Valuation Update will include the full interview with Damodaran. In the interview he talks about problems caused by the confusion over value versus price and also what he sees as other key issues faced by the valuation profession today. Damodaran will also be discussing the value versus price issue during a special live event on September 10 in New York City. 

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FASB issues two proposed updates

As part of its simplification initiative, the FASB has issued two proposed Accounting Standards Updates intended to simplify the measurement of inventory and eliminate the requirements for extraordinary items.

Inventory (Topic 330): Simplifying the Measurement of Inventory would eliminate existing requirements to consider the replacement cost of inventory and the net realizable value of inventory less an approximately normal profit margin.

Income Statement—Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items would, as its title states, remove the concept of extraordinary items from GAAP. The FASB believes that eliminating the concept would save time and reduce costs for preparers who would not assess whether a particular event or transaction event is extraordinary.

Comments on these proposed updates are due by Sept. 30, 2014. For more information, click here.

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Healthcare M&A spending is up 171% in 2Q14 over 1Q14

Spending on healthcare M&A hit a new record in the second quarter of 2014, according to Health Care M&A News. The combined total for M&A activity in the second quarter reached $135.2 billion, up 171% compared with the first quarter spending total ($49.9 billion). M&A spending is also 152% versus the same period in 2013.

Tech is hot: The vast majority (91%) of combined M&A spending came from transactions on the healthcare technology side, while healthcare services contributed the remainder (9%). Dollar volume for technology exploded by 229% over the first quarter of this year. Dollar volume for services was down 3% compared to the first quarter.

“Now that the health information exchanges are functioning, investors have decided that health care is a good place to be,” says Lisa E. Phillips, editor of Health Care M&A News. “The equity markets are still rewarding the big deal makers, as well. At this point, it looks as if this momentum could carry well into the third quarter.”

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The Private Company BV Challenge draws near—sign up now!

The Private Company Business Valuation Challenge for U.S.-based college students is starting to gear up for the competition that begins this fall and concludes in late spring.

Great feedback: Teams of students from around the nation will work with their finance and accounting professors to value a real private company. Their presentations will be critiqued and evaluated by a panel of esteemed judges who will provide the teams with valuable feedback and select the winners. Feedback from past participating students has been overwhelmingly positive, with many learning about private company valuation for the first time and others turning it into their careers.

The challenge is still accepting entrants so we encourage you to pass this information along to any contacts who are finance or accounting professors. Consider involving your firm—or your alma mater—in supporting the next challenge. To learn more about the challenge, click here. To sign up, click here

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Deadline looms to join Appraisal Foundation boards

The Appraisal Foundation is seeking candidates for vacancies on the Appraisal Qualifications Board (AQB) and the Appraisal Standards Board (ASB). This year, up to four individuals may be appointed to the AQB and up to five to the ASB. The ASB develops, interprets, and amends the Uniform Standards of Professional Appraisal Practice (USPAP). Members are appointed for three-year terms, and they may serve two consecutive terms.

The deadline for completed applications is August 4, for a term that begins Jan. 1, 2015.

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BV movers . . .

People: David Benick joins Gavin/Solmonese LLC as senior director and will provide financial expert witness testimony as part of the firm’s growing litigation consulting team at its headquarters in Wilmington, Del., as well as in New York City … David Blish joins Katz, Sapper & Miller, Indianapolis, as a manager and healthcare consultant … Don Clayton, a chairman at Clayton & McKervey PC, Southfield, Ill., was bestowed the “Lifetime Achievement” award by the Detroit chapter of the Association for Corporate Growth … Marty Magida, a partner at the Northbrook, Ill., firm Chunowitz, Teitelbaum & Mandel Ltd, is the new vice president of the National Franchise Consultants and Accountants … Tom Martin is now the managing partner of the Trenton, N.J., firm Klatzkin & Co. LLP … Karen Mosteller, partner at the Fort Myers, Fla., firm Markham Norton Mosteller Wright & Company PA has been appointed the chair of the Health Care Statistics Committee with the National Society of Certified Healthcare Business Consultants … Noah M. Sanders, CPA, AM, is now a partner at Gilliam Coble & Moser LLP of Burlington, N.C. … Greg Westfall, principal in the forensic and valuation services practice at Grant Thornton LLP, has been appointed assistant managing principal at its metro New York office … Brad Whitfield, who specializes in business valuation for litigation, tax, mergers, due diligence, and consulting engagements, has joined Costal Consulting Management Group of Savannah, Ga.

Firms: BLDS LLC is opening a new Chicago office to be led by Dr. Brendan Burke and Nicholas Schmidt, who will be joining the office as a director … CBIZ Inc. was selected as the Accounting Firm of the Year by the Association for Corporate Growth New York Chapter … Ernst & Young announced its merger with the Parthenon Group, a global strategic consultancy firm, which will join EY's transaction advisory services … The St. Paul, Minn., firm HLB Tautges Redpath Ltd. has officially changed its name to Redpath and Company

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CPE events

A great roster of summertime CPE webinars.

Fairness Opinions (July 30), featuring John Ashbrook (FMV Opinions). The Advanced Webinar Series on Valuations for Business Transactions concludes with a discussion on the purpose, preparation, and best practices of fairness opinions.

Valuing Hospitals (July 31), featuring Don Barbo (Deloitte Financial Advisory Services) and Robert Mundy (Pershing Yoakley & Associates). Find out how regulatory, economic, and market trends are affecting the values and valuations of the largest players in the healthcare economy.

Valuing Staffing Agencies (August 5), featuring Mandeep Sihota (Citrin Cooperman). Learn how to assess the value of a business closely tied to the labor market, with low barriers to entry and stiff competition.

Advanced Workshop on Determining Volatility and Market Yield: Developing Inputs for the Valuation of Options and Debt Securities (August 7), featuring David Dufendach, Oksana Westerbeke, and Jared Hannon (all Grant Thornton). In valuing both options and debt securities, appraisers face the challenge of providing a valuation that will account for market changes. Learn how to harness market data, separate fact from fiction, and create sound and defensible measures of volatility and market yield through this intensive, four-hour workshop with three of the most knowledgeable voices in the field.

The Cost Approach in Measuring Contributory Assets (August 12), featuring Nathan DiNatalie (SC&H Group). The Appraisal Foundation's continued guidance on intangible asset valuation has put the spotlight squarely on contributory assets. Learn how to comply this guidance when utilizing the cost approach in measuring contributory assets.

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We welcome your feedback and comments. Contact the editor, Andy Dzamba at: or (503) 291-7963
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In this issue:

Richmond case insight

Damodaran on narrative

Two FASB updates

Healthcare M&A heats up

BV Challenge signup

TAF seeks board members

BV movers

CPE events







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