BVWire Issue #188-1 | May 2, 2018


Internal IRS memo unearthed re:
S corp valuations

During a webinar, Michael Gregory (Michael Gregory Consulting LLC) discussed an internal IRS memo he recently obtained via a Freedom of Information Act (FOIA) request that has implications for valuing noncontrolling interests in S corps. Gregory, a former IRS manager, filed the FOIA request for the memo after the IRS denied his request to see it.

The key points, Gregory notes, quoting from the memo, are that: “In valuing the subject entity, if an income approach is used, please assume a zero percent tax rate in the subject entity’s earnings stream.” Also, the report should clearly state: “[A] zero percent tax rate was used at the request of the Examiner.” However, the valuer is “to consider” the IRS Job Aid (it does not say which one, but the implication is the noncontrolling interests in S corps, but it can also include the Job Aid on DLOMs) and Revenue Ruling 59-60. Implications of the internal memo include:

  • Not tax affecting a noncontrolling interest;
  • Thinking about increasing the risk for the discount rate for reasons related to the disadvantages of an S corp;
  • Taking into account the impact on the discount for lack on marketability (DLOM) consistent with the Job Aid;
  • Considering the impact on the discount for lack of control (DLOC); and
  • Potentially considering pretax cash flows should be discounted with pretax tax rates, but this is not uniformly accepted by all IRS valuers.

The authors of the memo, dated April 8, 2015, are the director of engineering Large Business and International (LB&I) and the director of policy Small Business Self-Employed (SBSE) at the IRS. Gregory notes that the IRS has 13 divisions, and this is only a policy request from SBSE to the LB&I engineering and valuation area. It has no policy impact on any other divisions at the IRS. Also note this is a request for a calculation only. This is not a request for an appraisal consistent with Revenue Notice 2006-96 nor does the content requested meet the IRS Internal Manual Requirements in 4.48.4 Business Valuation Guidelines. It is simply a request for a calculation by an employee of SBSE. The subject is “S Corporation Valuation Procedures.” The full text of the memo is included in Gregory’s newest book, Business Valuations and the IRS: Five Books in One.

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DOL sues over ESOP; trustee launches Daubert attack

In a developing ESOP case, the court recently excluded a chunk of the government expert’s damages testimony and dismissed one of the counts for lack of damages evidence. However, the trustee’s multifaceted attack on the expert’s qualifications was not successful and the government’s “overpayment” claim is still alive.

Unreliable methodology: In 2004, the owners of a Virginia company sold 48% of their company stock to an ESOP for $220 per share. Late in 2010, they decided to sell the remaining 52% interest. An independent trustee and an independent valuation firm acted on behalf of the plan. In an early draft, the valuator said it would be fair to the ESOP to pay $405.73 per share based on the present value of the company’s future cash flow. The trustee noted a valuation from a year ago indicated a $285-per-share price. The valuator explained the increase in value by noting, among other things, the ESOP owners would control the company as a result of the transaction. The trustee accepted the explanation. A final appraisal said a price between $405.73 per share and $408.58 per share would be fair to the ESOP. On recommendation of the trustee, the owner ultimately accepted $406 per share.

The Department of Labor sued, alleging the trustee breached its fiduciary duty to the ESOP by causing the plan to pay more than fair market value. In a separate count, the government alleged the trustee improperly allowed the value of existing stocks to decrease as a result of the transaction. The government relied on expert testimony to support its claims.

The trustee challenged the damages expert’s qualifications under Federal Rule of Evidence 702 and claimed the expert’s calculations were unreliable under Daubert. The expert did not have business valuation experience, was not a CPA or CFA, and was not part of the ESOP community—that is, he did not know the standard applicable to ERISA transactions, the trustee noted. The court disagreed, finding the expert had been qualified as a witness in many other ESOP cases. It said the expert had significant experience in the private equity industry, a background that “provides guidance on the sort of diligence required in this transaction.”

However, the court agreed with the trustee that there were some insurmountable problems with valuation methodology or the way the expert applied a valid methodology. In terms of the overpayment claim, the court found the expert incorrectly applied the guideline public company method and precluded him from using it for his valuation. Further, the expert’s approach to determining damages that existing shareholders allegedly incurred due to the transaction “does not provide any basis to figure out what those damages would be.” Because there was no damages testimony to sustain this count, it collapsed. The rest of the case will go forward.

A digest of Acosta v. Vinoskey, 2018 U.S. Dist. LEXIS 64094 (April 17, 2018), and the court’s opinion, will be available soon at BVLaw.

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USPAP 2020-21 exposure draft due in May

A first exposure draft of proposed changes for the 2020-21 edition of the Uniform Standards of Professional Appraisal Practice (USPAP) will be published in May 2018. This was announced during the April 20 meeting of The Appraisal Standards Board (ASB) of The Appraisal Foundation, which BVWire attended. On June 8, there will be a live online briefing that will involve reviewing the exposure draft and soliciting feedback. The April 20 meeting also included a review of the Discussion Draft of Potential Areas of Change for the 2020-21 edition of USPAP. The ASB encouraged the public to send any suggested USPAP revisions to

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Firms unprepared for new lease accounting

Only one in five finance, accounting, and other professionals say their companies are “extremely” or “very” prepared to comply with the Financial Accounting Standards Board’s (FASB) and International Accounting Standards Board’s (IASB) respective new lease accounting standards, according to a recent poll from the Deloitte Center for Controllership. The rules, effective next year, will thrust a huge dollar amount onto the balance sheets of listed companies using IFRS or U.S. GAAP. These companies will also show higher operating profits, but total cash flows would be unaffected overall, according to the IASB.

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Valuation benchmarks for ASCs

HealthCare Appraisers Inc. has interviewed ambulatory surgery centers(ASCs) to determine trends in the value and characteristics of ASC ownership interests. It has just released the “2018 ASC Valuation Survey” for which it compiled data that represent over 700 ASCs throughout the country. Here are just a few of the findings:

Single-specialty centers (controlling interest):

  • 76% of respondents reported valuation multiples of 6.0x to 7.9x EBITDA; and
  • 23% of respondents reported valuation multiples of 5.0x to 5.9x EBITDA.

Multispecialty centers (controlling interest):

  • 64% of respondents reported valuation multiples of 7.0x to 7.9x EBITDA; and
  • 29% of respondents reported valuation multiples of 6.0x to 6.9x EBITDA.

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Newest valuation data for A/E firms

The latest transactional data on the fair market value of businesses in the architecture, engineering, and environmental consulting industries (A/E firms) is now available in the Architecture/Engineering Business Valuation and M&A Transaction Study, 5th edition. This study includes data from 169 distinct stock transactions along with supplemental data from publicly available sources. This is the most comprehensive and reliable study of its kind for this industry. Rusk O’Brien Gido + Partners’ team of accredited business appraisers with decades of experience valuing privately held A/E firms conducted the research and wrote the study.The prior editions of this study are also available for comparison purposes.

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Valuing paving contractors

BVR just released a new installment in its series of What It’s Worth guides: Valuing Paving Contractors. This report will automatically be loaded into your library if you’re a Digital Library or BVPro subscriber. Otherwise, you can purchase it à la carte. Like the other guides in the series, it includes methodologies and special valuation nuances for this type of business, case studies, specific value drivers, benchmarking data from Pratt’s Stats, and more. A number of valuation experts have contributed to this new guide.

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Time to rethink the control premium

When you use the guideline public company method, do you always apply a control premium? You may want to reconsider because recent guidance has challenged this practice. You can’t automatically assume that premiums paid in prior transactions give an indication as to a premium for control that may apply to your subject business. Therefore, appraisers must be careful when simply relying on historical data regarding premiums paid to determine a control premium. The guidance is contained in The Appraisal Foundation’s Valuation for Financial Reporting (VFR) Valuation Advisory #3, The Measurement and Application of Market Participant Acquisition Premiums. A very timely session at the upcoming ASA/USC 13th Annual Fair Value Conference in Los Angeles on May 10 will include a discussion of best practices for measuring enterprise value and minority interest given this new framework. The ASA has announced that this event is sold out for in-person registration. But you can still attend—thanks to BVR, which will broadcast a live streaming webcast of the full event.

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Global BV News

Valuation insights in China

Duff & Phelps has released a Greater China edition of its Valuation Insights series, which examines issues such as the updated list of “sensitive sectors” for outbound investment, CFIUS reform, relaxed restrictions on foreign investment within the Free Trade Zone, the Hong Kong Stock Exchange allowing dual-class shares for listing companies, and more.

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Corona is most valuable brand in Latin America

Mexican beer Corona is the most valuable brand in Latin America, overtaking Brazil’s Skol, which has held the title for the past two years, according to the sixth annual BrandZ Top 50 Most Valuable Latin American Brands. Corona took the top spot in the ranking after seeing an 8% brand value growth, to $8.3 billion, edging out Skol, which grew by just 1%.

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BV movers . . .

People: Pittsford, N.Y.-based The Bonadio Group named Kristen Gill Clark as OMP of Syracuse, N.Y; she will oversee a team serving the central New York region … Houston-based Briggs & Veselka expands its risk advisory practice with the addition of Sonny Brandtner as senior director … Lehigh Valley Business named Gretchen G. Naso of Pennsylvania firm RKL LLP as one of its 2018 “Women of Influence” … Lynne Triplett (Grant Thornton LLP) has been appointed to the Financial Reporting Executive Committee (FinREC) for the American Institute of Certified Public Accountants (AICPA).

Firms: New York-based firms Grassi & Co. and Marcum LLP offer free CLE courses to bring lawyers (and potential business) through the door; courses include accounting and business valuation … Alerding CPA Group of Indianapolis is celebrating its 20th anniversary; founding partners, Mike Alerding, Mike Staton, and Mike Farmer started Alerding CPA Group on May 1, 1998 … Chicago-based Baker Tilly Virchow Krause broke into the top 10 of Vault Accounting’s 50 best accounting firms to work for; PwC maintained its position at the top … San Francisco-based SD Mayer & Associates LLP has joined BDO Alliance USA, a nationwide association of independently owned accounting, consulting, and service firms … BerryDunn of Bangor, Maine, moved to larger offices within the city to allow for future growth … Canfield, Ohio-based HBK CPAs & Consultants’ affiliate HBKS Wealth Advisors is acquiring a minority stake in Erie, Pa.-based K·Coe Isom LLP’s subsidiary K·Coe Wealth Management LLC.

Please send your professional and firm news to us at

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CPE events

  • Fundamentals of Financial Modeling (May 16), with Mark Shirley (V&L Consultants). This is Part 3 of BVR’s Special Series on Advanced Modeling and Methodologies.

    An introduction to the logical structure of decision theory (problem solving) applied in constructing financial models, including a mathematical model structure for spreadsheet application.

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New and Trending
LinkedIn Discussions

BV Experts Clash Over Statistics

The “Value” of Beer—and Breweries—Is Rising!

Thoughts on the Usefulness of Historical Private Company Transaction Multiples?

Your discussion could be featured here—BVR's LinkedIn group is a place for valuation professionals to share, discuss, and learn about compelling BV topics. If you're not already a member, request to join:

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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:

S corps

Daubert attack

USPAP 2020-21

Lease rules

ASC valuations

A/E firms

Paving contractors

Control premium

Global news

BV movers . . .

CPE events

LinkedIn discussions

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