BVR Logo June 26, 2019 | Issue #201-4

BVWire is your go-to source for the latest in the business valuation profession. Highlights for this week include:



 

Connecticut court's impermissible double dipping triggers remand

In a noteworthy decision, a Connecticut appellate court recently found the trial court double dipped when it divided the marital assets and calculated spousal support. Although attorneys from both sides had alerted the trial court to the risk of double dipping, the court awarded the nonowner spouse half of the value of the owner’s businesses and then considered all of the income from the businesses in setting the alimony amount.

‘Only significant stream of income.’ During the marriage, the husband built two companies that he owned and managed. The businesses provided the only source of income for the husband.

The trial court credited the valuation of the wife’s expert, who determined the companies were worth $904,000. The court also found the husband’s gross annual income from the two companies was $550,000. It awarded the husband complete ownership of both businesses and ordered him to pay the wife 50% of their value. In addition, the court granted the wife lifetime alimony of $18,000 per month. This award, the court decided, was not modifiable as to the amount and the duration.

In a post-judgment motion, the husband asked for clarification as to the court’s finding that the husband’s annual income was $550,000 per year. Specifically, he wanted to know whether this amount referred to the husband’s earning capacity. If so, was it earning capacity as to his two wholly owned companies “or what [the husband] can realistically be expected to earn elsewhere independent of said companies?”

The court responded the $550,000 was not “a finding of earning capacity, but of (gross) income from [the husband’s businesses].”

On appeal, the husband argued the trial court improperly counted a marital asset twice, for the purpose of property division and the determination of spousal support. The appellate court agreed. “The general principle is that a court may not take an income-producing asset into account in its property division and also award alimony based on that same income,” the reviewing court said. It noted, however, that there was no bright-line rule as to when a court double counted an income-producing asset for marital distribution and support awards. “In marital dissolution cases, each situation is fact specific and the court, in formulating orders, must take into account all of the assets in the marital estate as well as other statutory considerations.”

The appellate court found the trial court failed to consider that the husband’s gross annual income was included in the fair market value of the husband’s two businesses. Awarding the plaintiff alimony and half of the fair market value of the businesses, the trial court “ignored the economic relationship between the value of the businesses and the [husband’s] ability to earn income.” The businesses were “the only significant stream of income by which [the husband] could meet his alimony and other court-ordered payment obligations,” the appellate court pointed out.

The reviewing court remanded “for further proceedings on all financial issues because of impermissible double counting by the [trial] court.”

A digest of Oudheusden v. Oudheusden, 190 Conn. App. 169 (May 21, 2019), and the court’s decision will be available soon at BVLaw.

Reader comment on Kress case coverage

Responding to the attention the Kress case has received (at BVR and elsewhere), Harry Fuhrman, financial analyst with the Internal Revenue Service, gave us the following comments. (Note that this represents his opinion and not that of the IRS).

“In the excitement surrounding the Kress case (tried in the Eastern District of Wisconsin, not in tax court), let us not forget the many other tax court cases which address the issue of whether or not to tax affect a pass-through entities’ earnings:

  • “Gross v. Commissioner;
  • “Wall v. Commissioner;
  • “Rubin v. Commissioner;
  • “Heck v. Commissioner;
  • “Dallas v. Commissioner; and
  • “Gallagher v. Commissioner.

“The last decision included the following statement: ‘[T]he principal benefit enjoyed by S corporation shareholders is the reduction in their total tax burden, a benefit that should be considered when valuing an S corporation,’ which addresses the pass-through taxation directly, whereas the court in the Kress decision, on the other hand, did not even directly address the tax-affecting issue.

“If the government and taxpayer’s appraisers hadn’t tax affected earnings, I suspect the decision would not be receiving the level of attention you (and other valuation organizations and individuals) have been devoting to it.

Damodaran posts 2019 edition of ERP paper

The “dean of valuation,” Professor Aswath Damodaran (New York University Stern School of Business) has posted “Equity Risk Premiums (ERP): Determinants, Estimation and Implications—The 2019 Edition.” The 135-page paper is the 11th update of this work, which provides a detailed picture of ERPs as well as a great deal of data, which are all free. In general, there are two approaches to estimating ERP: the ex post approach (using historical information) and the ex ante approach, which is forward-looking. Damodaran is a strong proponent of the use of the ex ante approach, or “implied” ERPs, which are forward-looking estimates that are extracted by examining stock prices today and expected cash flows in the future. Damodaran’s implied ERPs are one of the options available in BVR’s Cost of Capital Professional online platform for estimating the cost of equity. In his paper, Damodaran seeks to dispel what he calls widely held misconceptions about equity risk premiums. One of them is that ERP estimation services “know” the risk premium. Historical data are available to everyone, so “there is no reason to believe that any service has an advantage over any other, when it comes to historical premiums,” he claims.

2019 CBV Institute National Business Valuation Congress—Fantastique in Montréal

“We are pretty proud of Canada for setting the stage worldwide,” stated Chartered Business Valuators Institute (CBV Institute) President and CEO Mary Jane Andrews. After a spectacular Congress last week she—and everyone at CBV Institute—definitely has the right to vaunt its successes. “It is a borderless and multidimensional world— and the future of the profession is here,” she went on to observe. The Congress agenda certainly represented best-in-class global learning, and BVR was delighted to be on the ground in Montréal covering the event.

In addition to a top-notch program, CBV Institute also connected with a local philanthropic organization, as it does every year in the Congress host city. In lieu of speaker gifts, CBV Institute donates to a charity that aligns with the values of its CBV community. This year’s partner was Centre Philou, a nonprofit that provides support for severely handicapped children and their families. Diane Chênevert, the founder and executive manager, shared a profoundly moving history of Centre Philou. Diane was inspired to create Centre Philou after her second child, now 19, was born with multiple disabilities. Needless to say, there were very few dry eyes in the house!

Mark your calendar for June 11-12 for the 2020 Congress to be held in Toronto. Thank you, CBV Institute, for the inspiration!

Participate in BVWire's cost of capital surveys

BVWire is a conducting a series of short surveys to investigate how appraisers derive cost of capital in their valuations of private companies. The first survey examines the overall approaches experts use, and future surveys will examine the various inputs and other aspects of the process. This first survey is only five questions, so it will just take a minute or so to complete. All responses are anonymous, and we will present the results here. To take the first survey, please click here. Thank you!

Top BV pros to reveal how they built successful practices

At the recent NACVA conference in Salt Lake City, we ran into Rod Burkert (Burkert Valuation Advisors LLC), who is not only a highly regarded valuation expert, but he also helps other professionals build their practices. He tells us he will be starting a new webinar series in July called Practice Development INSIDER that will feature some of the leading valuation practitioners revealing the secret sauce behind building a practice. These will be live, online interviews with an incredible lineup that includes Chris Mercer (July 12), Jim Hitchner (August 2), and Nancy Fannon (September 6). Here’s your chance to get answers to questions such as: Where do they spend their marketing budgets? What would they do to promote their firms if they were starting over today? These promise to be extremely interesting sessions, so, for more information, go to Burkert’s website.

NACVA honors 40 under Forty

Rising stars in the profession were honored at NACVA’s recent Annual Consultants’ Conference in Salt Lake City. The 40 Under Forty program recognizes emerging leaders for their past accomplishments and their contributions yet to come. To see all of the 2019 honorees, click here.

Recording available of ASA Energy Valuation Conference

Last month, BVR webcast the Energy Valuation Conference, which was presented by the Houston Chapter of the American Society of Appraisers (ASA). The recording is now available. Included are an MP4 video file, MP3 audio file, complete transcript, slide presentation in PDF format, and any additional reading materials. The conference featured presentations from nationally recognized speakers who are profession leaders, such as: Reserve Definitions (Delores Hinkle, Prior Oil & Gas Reserves Committee), Oil & Mining Appraisals in Exploration, Development & Production (John Gustavson, Mineral Appraisal LLC), Valuation of Ground Water in Permian Basin (Gabriel Collins, Rice University Baker Institute), Tax Issues in the Energy Field (Bryant P. Lee, Latham & Watkins), and Valuation of Power Plants (John Ray, BVA Group).

IVSC needs members for a new board in Europe

The International Valuation Standards Council (IVSC) has created a new board, the Europe Membership and Standards Recognition Board, and high-profile individuals are being sought to fill the seats. The new board will give a voice and leadership to valuation in Europe. Successful applicants will be based in a European country and will be either a leader in valuation from a professional body or a valuation business and have the backing of that organization. Board members will assume their roles in late 2019. For an application, click here (due July 31) and for more background, click here.

Agenda available for international valuation conference in New Zealand

An impressive program has been set for the ICVPME 11th International Valuation Conference in Auckland, New Zealand, on September 9-11. The theme is “Valuation in the Digital Age,” and topics include valuation regulation and standards, valuation education, valuation in the international context, and more. Speakers include Lee Hackett (ASA, USA), Bob Brackett (IACVS, Canada), Dana Ababei (ANEVA, Romania), Jeff Tarbell (Houlihan Lokey, USA), Roger Grabowski (Duff & Phelps, USA), Alexander Lopatnikov (AAR, Russia), and many others. The IVSC, ASA, China Appraisal Society, and many other national and international valuation organizations support the conference.

 

BV movers...

People: Bill Murray, CPA/ABV/CFF, ASA, has joined Lawrenceville, N.J.-based Management Planning Inc. as a managing director and will open the firm’s new office in Westport, Conn. … Daniel Korsman, CPA/ABV, J.D., was recently named a partner with Eden Prairie, Minn.-based Boulay; he joined the firm in 2017 and previously worked in the valuation and financial advisory groups of national and regional CPA firms … Ben Vance, CPA, ABV, has been promoted to a consulting director at Louisiana-based Postlethwaite & Netterville; he’s in the Baton Rouge, La., office and focuses on business valuation and litigation support … Jonathan Marks, CPA/CFF, CITP, CGMA, CFE, a partner at Chicago-based Baker Tilly Virchow Krause in the firm’s specialized forensic litigation valuation services consulting practice, has been appointed to the AICPA’s Forensic and Litigation Services Fraud Task Force … Maria Milanesi has joined the Ithaca, N.Y., office of Insero & Co. CPAs as a senior accountant; she has a background in auditing and business valuations and will focus on the firm’s municipal and school-district clients.

Firms: Cleveland-based Skoda Minotti has launched an Emerging Companies Group, which delivers an array of services to early-stage companies … New York City-based Constellation Advisers has opened a new office in Los Angeles to support its growing client base in California and the western region … Burke and Associates of Massachusetts has opened its new office in Rockland … Bauknight Pietras & Stormer PA of Columbia, S.C., has outgrown its office space and will move into a 20,000-square-foot space; the firm has a total team of 70 professionals.

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

Upcoming BVR training events

  • Active/Passive Appreciation in Divorce (June 25), with Bill Dameworth (Forensic Strategic Solutions).

    Learn how general divorce statutory regimes across the U.S. pertain to the requirement to perform an active/passive appreciation analysis and how varying state law impacts the key elements typically required to perform a reliable analysis. A case study is included.
  • Appraisals and ESOP Litigation: Top 10 Causes of Trustee Troubles (June 27), with James F. Joyner III.

    A recent survey of DOL litigation against ESOP fiduciaries reveals that valuations are the focus of ESOP litigation. This session will give you a review of 10 controversial areas in valuation, plus a review of the recent cases, current insights, and new tactics.

Holiday break
BVWire will take a break next week for the Fourth of July holiday. We’ll be back on Wednesday, July 10. We wish you all a happy and safe holiday!




We welcome your feedback and comments. Contact Andy Dzamba (Executive Editor) or Sylvia Golden, Esq. (Executive Legal Editor) at: info@bvresources.com.


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