BVWire Issue #164-4 | May 25, 2016


S corp valuation model poised for debut in Tax Court

At the recent NYSSCPA business valuation conference in New York City, Daniel Van Vleet (Stout Risius Ross) told the audience that the Van Vleet model (S corporation economic adjustment model) is being used for the first time in a pending U.S. Tax Court case. What’s more, both the IRS and the taxpayer are using it in this case, says Van Vleet.

Ongoing conflict: A much-debated issue in the valuation community is tax affecting the earnings of a pass-through entity (PTE), and there is no definitive answer. The tax-affecting issue has been argued in a number of Tax Court cases (most notably the Gross case). In all of these cases, the IRS and the Tax Court have refuted the notion that shareholder-level taxes affect a firm's value, so the valuation conclusions in these cases were based on earnings not being tax affected. The valuation community disagrees, so a number of models were developed that are designed to reflect the impact of shareholder taxes on value.

The pending case is Cecil et al. v. Commissioner of Internal Revenue, and it involves a gift of shares in the Biltmore Co., which operates the famous Biltmore estate, a Gilded Age mansion built by the Vanderbilts that is now a tourist attraction. The Cecils (descendants of the Vanderbilts) valued the stock gift at $20.88 million, but the IRS said those shares are actually worth $95.29 million. The valuation difference is due to the Cecils’ use of going-concern value, while the IRS says a liquidation value makes more sense. Details of the case and specifics on the valuations have not been disclosed because the case is ongoing.

Model update: In addition to the Van Vleet model, the other models include the quantitative marketability discount model (QMDM) by Z. Christopher Mercer, the Roger Grabowski model, the Christopher Treharne model, and the Delaware Chancery model. Regarding the Delaware Chancery model, Van Vleet wrote an article in the Summer 2015 issue of the ASA Business Valuation Review titled “Delaware Open MRI and the Van Vleet Model.” This article addresses application issues as well as the mathematical relationship of the Delaware Chancery model and the Van Vleet model.

In addition, a recent book provides a suggestion for a new, more direct approach to PTE valuation. The book is Taxes and Value: The Ongoing Research and Analysis Relating to the S Corporation Valuation Puzzle,by Nancy Fannon (Meyers, Harrison & Pia) and Keith Sellers (University of Denver). The book draws on extensive academic research to demonstrate how historical market returns can be adjusted to estimate a cost of capital appropriate for the valuation of a PTE.

A large percentage of closely held companies operate as PTEs, so valuation experts need to be aware of the techniques that can be used to determine the additional value such an entity may have because of its tax status.

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Expert’s market approach withstands Daubert challenge in IP case

Of note, particularly to users of ktMine and similar royalty rate databases, is a Daubert decision in a patent infringement dispute in which the plaintiff’s expert based his reasonable royalty rate on a market-based analysis instead of the customary Georgia-Pacific framework.

Georgia-Pacific is ‘outmoded’: The plaintiff alleged the defendants violated two of its patents covering a healthcare provider reimbursement system. In calculating a reasonable royalty, the plaintiff’s expert declined to apply the Georgia-Pacific factors, saying they were “outmoded” and not appropriate in this case. The defendants’ rebuttal expert criticized the expert’s decision not to use the factors.

In challenging the royalty calculation, the defendants argued the plaintiff’s expert should be precluded from offering opinions or conclusions regarding Georgia-Pacific. The plaintiff countered that precluding the expert on this basis would leave him “unfairly attacked without giving the jury an opportunity to hear his response to the criticism of the Defendants’ expert.”

The court sided with the plaintiff. The expert’s opinions “were based on sound and reliable methodology,” the court said. The expert “should be able to explain why he chose not to use the Georgia-Pacific factors in his analysis.”

Takeaway: The Georgia-Pacific framework is not the only way to calculate a reasonable royalty. At least for Daubert purposes, courts may accept a market-based analysis if it is based on sound reasoning and data.

The case is StoneEagle Servs., Inc. v. Pay-Plus Solutions, Inc., 2015 U.S. Dist. LEXIS 79971 (June 19, 2015). The court’s opinion is available at BVLaw.

Extra: Weston Anson (Consor), who was the plaintiff’s damages expert in the case, will be the presenter of a June 28 webinar, Litigation Dynamics and Daubert Challenges. Stay tuned.

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Help needed in research on fair value estimation

Last year, the Public Company Accounting Oversight Board (PCAOB) issued for public comment a staff consultation paper on potential standard-setting activities related to the auditor using the work of specialists, including valuation professionals. The University of Wisconsin-Madison is conducting a survey on the role of specialists in developing and evaluating the fair value estimates used in audited financial statements. This research may help in the PCAOB’s standard setting in this regard. You can take the survey if you click here. When you complete the survey, you will receive a $10 Starbucks gift card.

At the recent NYSSCPA business valuation conference in New York City, BVWire had the pleasure of speaking with one of the principal investigators on this research. Stephani A. Mason (DePaul University) told us that the data collected will be confidential and that a second phase of the study will involve optional interviews of survey respondents. Mason provided us with the following explanation of the research:

“As the use and complexity of financial instruments that require fair value measurement (FVM) has increased, so has the complexity of audit procedures required to determine the reasonableness of FVMs. Several studies and regulators have observed that some aspects of FVMs are relatively new and difficult for auditors as well as their clients. This difficulty in FVM has led to the widespread use of valuation specialists (specialists) by clients and auditors. Studies have focused on the auditors’ role in evaluating the clients’ FVMs and auditors’ use of valuation specialists’ reports, however there is little understanding on the valuation specialist’s process. Audit firms, the PCAOB (the Board) and academics have all indicated a need for a better understanding of what specialists do and how auditors work with specialists as evidenced in PCAOB Staff Consultation Paper No. 2015-01 The Auditors’ Use of the Work of Specialist and the comment letters issued in response to the more than forty questions raised by the Board. This study is designed to fill this knowledge gap and is important for several reasons. First, examining how specialists analyze FVMs is key to understanding the preparation of and the audit processes surrounding FVMs. Second, our study will also provide insights to auditors by enhancing the understanding of how specialists perceive and perform their tasks. Lastly, our research will inform regulators on the role valuation specialists play in determining and evaluating FVMs, and inform accounting educators seeking to prepare students with the procedural knowledge and skills necessary for effective preparation and audits of FVMs. This study has been funded by the IAASB (International Auditing and Assurance Standards Board).”

Extra: Two sessions have been added to the agenda of the 11th Annual Fair Value Conference in Los Angeles on June 8: Transaction Due Diligence Considerations with Mike Kim (Ernst & Young) and Contingent Consideration Task Force Update with Alok Mahajan (KPMG LLP). Check out the full agenda to this outstanding event.

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Has Trump inflated the value of his brand?

Donald Trump exaggerating? Really? When he announced his candidacy last year, Trump estimated that the value of his personal brand was $3.3 billion. But Forbes magazine, after consulting with brand experts, pegged the likely value at about $125 million.

Show the returns: While Trump recently released financial disclosure documents, he won't release his tax returns until an ongoing audit is finished. Trump says "there's nothing to learn" from the feet-high stack of income tax returns that he's posed with for photos, according to a report from The Associated Press. But tax experts disagree. In terms of his brand value, the returns could offer information about how much licensing income he receives, providing new clues about the true value of his brand, according to Joseph Thorndike, director of the Tax History Project at the nonprofit Tax Analysts. "It sheds light on the issue but it's not going to be a slam-dunk answer," he says.

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Joan Rivers settlement underscores risks of ASCs

When valuing an ASC, experts need to be aware of potential serious risks these entities face, especially with older patients, who represent a major segment of ASC customers. The high-profile case of Joan Rivers illustrates this, as a visit to an endoscopy clinic for a routine procedure ended in her death. The clinic has just settled a lawsuit filed by Rivers’ family (terms not disclosed), according to reports.

Risk assessment tool: In addition to treatment-related risks, valuation experts need to examine other risks. In the BVR Training Library, a webinar by Todd Sorensen and Kevin McDonough (both with VMG Health) discusses the valuation of ASCs and presents a tool for assessing the risks inherent in ASCs. The ASC Risk-Assessment Matrix measures risk along the following lines: contracting, service-area growth, competition, physician ownership, nonowner utilization, concentration by specialty, out-of-network concentration, staff and supplies efficiency, location and condition of the facility, and equipment.

The tool produces a single score but gives different weights to different categories and subcategories based on their relative importance to measuring risk. The weighting may be adjusted based on specific facts and circumstances, but, typically, the highest weights are assigned to categories that directly affect volume and reimbursement expectations (e.g., the physician utilization profile, market reimbursement risk analysis, and market competition).

Extra: Sorenson is the author of a chapter on valuing ASCs in the new BVR/AHLA Guide to Healthcare Industry Finance and Valuation, 4th edition, which is now available from BVR.

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Global BV news:
Task force recommends an ‘IBV’ global designation

An iiBV task force has issued a report on establishing an international designation for business valuers. One of the recommendations is the creation of a designation to be known as the “IBV” (International Business Valuer) that would be appended to the qualified VPO’s designation and administered by the VPO.

In an interview, two task force members were asked about the main benefit of the international designation to the valuation profession globally. “An international designation for business valuers will provide a minimum level of standard, both for the professionals as well as the clients engaging these professionals so that there are no expectation gaps in terms of technical and professional standards to be followed in a valuation engagement,” says Edwina Tam (Deloitte Hong Kong). “Especially in Asia, where valuation practices can diverge quite significantly, this will help improve and provide a minimum level of uniformity for the profession and provide assurance to buyers of valuation services that the analysis is consistent with other areas around the globe.”

“The international designation will give professionals credibility,” adds Jeannine Brooks (EPR Canada Group Inc.), chair of the task force. “They will be recognized everywhere in the world as providing confidence for business owners making financial decisions. The recognition and reputation of the BV profession will be enhanced by the consistency in high standards in education and accreditation.”

The iiBV is developing an implementation plan for the global designation that is scheduled to launch in 2017.

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BV movers . . .

People: The members of the Association for Corporate Growth (ACG) elected Angie MacPhee, CEO of Denver-based RGL Forensics, to serve as finance chair … The AICPA recognized Stephen Romig, an advisory director of the Tax Services Department for LaPorte CPAs & Business Advisors based in Metairie, La., with its “2015 Public Service Award for Individuals.” Throughout his career, Romig has volunteered at a variety of nonprofits; currently every Monday, he volunteers at the Harry Tompson Center, coordinating services for the homeless and lending a welcomed ear to members of this underserved population … HORNE LLP made history with the election of Kathy Watts as the company’s first female to serve as chair of the board. She currently serves as partner in charge of healthcare services out of the Jackson, Tenn., office.

Firms: The Milwaukee Business Journal ranked Sikich LLP as No. 10 among Milwaukee-area management consulting firms in its annual “Book of Lists,” up one spot from last year … Pamela Wickes has launched Wickes Forensic Accounting & Consulting LLC, Albany, N.Y., and will provide forensic accounting, litigation support, consulting, and collaborative divorce financial services.

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Upcoming CPE events

Advanced Rebuttals Using Financial Forensic Techniques (May 25), with Darrell Dorrell (Financial Forensics).

Valuing Trucking Companies: Assessing Risk and Return (May 31), with Erin Hollis (Marshall & Stevens) and Andy Manchir (Katz, Sapper & Miller).

Valuing and Auditing Contingent Consideration (June 2), with Brad Koranda (RSM) and Paul Diegnau (RSM). This is Part 3 of BVR's Special Series on Fair Value.

Today’s Leading Edge Tools For Practice Growth (June 14), with Mel Abraham (Mel Abraham Inc.) and Rod Burkert (Burkert Valuation Advisors).

Important note to webinar attendees: To ensure that you receive your dial-in instructions to BVR’s training events, please make sure to whitelist

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Holiday Break

BVWire will not be published next week due to the Memorial Day holiday, and it will return on June 8. Have a happy and safe holiday!

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We welcome your feedback and comments. Contact Andy Dzamba (Executive Editor) or Sylvia Golden (Executive Legal Editor) at:
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In this issue:

Tax affecting PTEs

Daubert win

Fair value research

Trumped up value

Joan Rivers case

Global BV news

BV movers...

CPE events



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