Tax Court accepts tax affecting—grudgingly

In an important case litigated seven years ago, the Tax Court has issued a memo decision that accepts tax affecting - but noted that it did so because of the “unique setting at hand” in the case. The court emphasized that, although it allowed tax affecting here, it is “not necessarily holding that tax affecting is always, or even more often than not, a proper consideration for valuing an S corporation.”

All experts agree: The case involved a minority interest in the Biltmore estate tourist attraction in North Carolina, which was the family home of the Vanderbilts that became a museum and hotel. All of the experts in the case tax agreed that the income approach should be tax affected. Both the IRS expert and an expert for the taxpayer used the S corporation economic adjustment model (SEAM), developed by Daniel Van Vleet of the Griffing Group, in their analysis and agreed that a 17.6% factor applied. The court accepted the experts’ opinion, noting that, in the Michael Jackson estate case, the court observed that there “is not a total bar against the use of tax affecting when the circumstances call for it” (although the court rejected it in the Jackson case).

The case had other valuation matters, and the ruling was a mixed bag in terms of which experts prevailed. The taxpayer’s expert prevailed with his DCF valuation and 20% discount for lack of control. The court accepted the IRS’ expert’s discounts for lack of marketability. Experts on both sides included a discount for lack of voting rights, but the court rejected that.

Key point: Tax Court memos are not precedent, so the final chapter on tax affecting has yet to be written.

The case is Estate of Cecil v. Comm’r, T.C. Memo 2023-24, and a case analysis and full court opinion are available on the BVLaw platform.

Have you tried Abbott’s passive appreciation calculator?

In last week’s BVWire, we mentioned that Dr. Ashok Abbott (West Virginia University) has developed an online application that produces a passive appreciation factor on a national level for businesses in the retail sector. The application is live and available for testing purposes if you click here. Feedback is welcome!

How it works: The application embodies Dr. Abbott’s methodology from his peer-reviewed paper (click here), which identifies and then tests likely factors for their ability to impact the outcome for the business (causality). The factors that qualify as causal factors are then assessed for their economic impact (elasticity). To use the application, just choose the type of retail business and enter the beginning and end dates for the valuation. The result is a passive growth factor on a national level for that industry group for the time period selected.

For example, let’s say a car dealership is caught up in a divorce in a jurisdiction where passive appreciation is not marital property. The couple was married January 2000 and divorced December 2020 (valuation date). In the application, select those start and end dates and then select “New Car Dealers.” The results show that the impact of the relevant market factors produces a passive growth factor of 30.56%, so about a third of the increase in value for that type of business during that time period would be passive appreciation.

Note that these results are for the entire industry using nationwide data, so it gives an overall starting point that can be used in settlement negotiations. If need be, the results could be fine-tuned down to the county level using demographic data in the public domain. These local data should be used alongside observed revenues and free cash flows from the subject firm to make a specific estimate for that business. Further analyses should be done that identify spousal efforts that would separate any additional passive appreciation.

Dr. Abbott’s paper has the full details on his methodology and its inner workings. The analysis can be done by hand, but the calculator eliminates the heavy lifting.

Free report on public-company multiples

Salvidio & Partners has developed a quarterly research report that provides multiples for global operating public companies by industry. BVWire provides a sample copy of this report (for the fourth quarter of 2022) if you click here. The report has trading multiples for 79 industries and 190 subindustries, including historical medians, quartiles, means, highs, and lows, estimated over a five-year period at the end of the most recent quarter. The report also indicates how quarterly industry trading multiples are distributed by the expected growth of underlying denominators and by the market capitalization size of underlying companies.

Feedback wanted: Is this report useful to you? Salvidio also offers a database that is similar to the report, but it can be searched geographically. Would the searchable database be helpful? Let us know by sending comments to info@bvresources.com.

NACVA to offer free BV training to judges

The CVA credential may get some burnishing in the eyes of judges under a new educational program. The National Association of Certified Valuators and Analysts (NACVA) is collaborating with the American College of Business Court Judges (ACBCJ) to deliver a series of virtual training sessions designed to help judges better understand business valuation and damages experts who appear in their courts. Seven sessions are currently on the schedule, the first one being April 20. The 90-minute virtual sessions are free of charge (no CLE or CPE), and on-demand recordings of the sessions will be provided to registrants after each training event. For more information, click here.

Healthcare compensation pros conference April 26-28

The National Provider Compensation Conference will be held in Nashville April 26-28. This is an in-person event sponsored by the American Association of Provider Compensation Professionals (AAPCP), a relatively new nonprofit group whose members advise and lead healthcare organizations on provider compensation, contracting, planning, recruitment, retention, strategy, and valuation. The fair market value of physician compensation and related arrangements is an area subject to increasing scrutiny and complex regulations. Staffers at healthcare systems as well as external valuation experts handle the determination of FMV, and both these groups are among the ranks of AAPCP members. For more information on the conference, click here.

The AAPCP and BVR collaborated on the Complete Guide to Fair Market Value Under the Stark Regulations, published last year and written by Tim Smith (TS Healthcare Consulting LLC).

Metaverse and ESG at CBV Congress June 8-9 in Toronto

A very interesting program is being offered at the CBV Congress 2023, hosted by the CBV Institute, Canada’s valuation professional organization (VPO) and standard-setter. Some of the topics of note include valuation in the metaverse, automated valuation models, the role of financial experts in ESG litigation, a “ladies of litigation” panel on damages, and much more. The event will be in-person and livestreamed. There is an early bird discount if you register by April 30. For details, click here.

BV movers . . .

People: Harsh Patel has been promoted to vice president at Prairie Capital Advisors Inc.; he is part of the ESOP advisory team focusing on valuation, feasibility, and transaction structuring; he is a member of the National Center for Employee Ownership (NCEO) and the ESOP Association … The CBV Institute, Canada’s valuation professional organization (VPO) and standard-setter, has announced 2023 awards and honors recipients: Jim Horvath, FCBV, ASA, CVA, CPA, MBA, received the honor of CBV Life member; Thomas Lee, CPA, CA, FRM, ASA, FCBV (KPMG Canada), received the CBV Fellow designation; Neil de Gray, CPA, CA, CBV, CFF (KSV Advisory), is the recipient of the 2023 Top CBV Under 40 Award; Lucas Terpkosh, CPA, CA, CBV (Blair Mackay Mynett Valuations Inc.), was recognized as the 2023 Ambassador of the Year; and Ashley James, CPA Auditor, CBV (Deloitte), received this year’s Scholastic Achievement Award for excellence in the 2022 CBV Program of Studies.

Firms: San Ramon, Calif.-based Armanino LLP grows its entertainment industry services by adding music business management firm Blue Sky Group of Nashville, Tenn., and music rights and royalty auditing firm Royalty Compliance Organization of St. Peters, Mo. … Dallas-based Ryan is adding RTC Consulting of Pointe-Claire, Québec, a firm that specializes in the preparation of claims for various tax credit programs across more than 30 different fields in science and technology.

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

CPE events

• Artificial Intelligence and the Future of Valuation. March 29, 10:00 a.m.-11:40 a.m. PT/1:00.p.m.-2:40 p.m. ET. Featuring: R. James Alerding (Alerding Consulting). CPE credits: 2.0.

Artificial intelligence is definitely coming to valuation, so here are some thoughts on how it might impact the appraisal of a business.

• DLOM: A Practical Look at a Complex Matter (Part 2)—Replay. April 4, 10:00 a.m.-11:40 a.m. PT/1:00 p.m.-2:40 p.m. ET. Featuring: Pasquale Rafanelli (Empire Valuation Consultants). CPE credits: 2.0.

This is a rebroadcast of a well-received webinar, and the speaker will be on hand live to answer all your questions. Participants are eligible to receive two CPE credits.