New Jersey adopts key Daubert factors for expert admissibility determination
In an important ruling, the New Jersey Supreme Court recently took a big step toward Daubert but failed to embrace it completely. The ruling arose out of a civil mass tort action against the maker of Accutane, a prescription drug for acne. The plaintiffs alleged a causal connection between the drug and Crohn’s disease. The first lawsuits began in New Jersey in 2005. Since then, a number of epidemiological studies have found no such connection. However, the plaintiffs’ experts rejected the studies and, relying on other facts and data, contended a causal connection can be shown. The trial court found the experts’ methodology flawed because the experts did not interpret the relevant data and apply them to the facts of the case as other experts would. The appellate division reversed, and the defendants asked for review by the high court. Among other things, they wanted the court to clarify the expert witness standard, which meant deciding “whether the Daubert standard’s factors would further elucidate our own standard for the admissibility of expert testimony.” The court’s short answer was: “We believe that they would.”
By way of background, the state Supreme Court pointed out that it was “in the vanguard of courts” that decided to switch from the “general acceptance” standard for testing the reliability of scientific expert testimony to a methodology-based approach. Two years later, the U.S. Supreme Court, with its Daubert decision, did the same. But, even though the state’s civil standard and the federal standard “moved in the same direction and toward the same goal,” New Jersey “never adopted Daubert or incorporated the factors identified in Daubert” for the trial court’s use when performing its gatekeeper role, the New Jersey high court explained.
The court’s recent ruling reconciled the state standard for the admission of expert testimony with the federal Daubert standard. “We are persuaded that the factors identified originally in Daubert should be incorporated for use by our courts,” the high court said.
At the same time, the New Jersey Supreme Court stopped short of declaring New Jersey a “Daubert jurisdiction.” The court said it “hesitate[d] to embrace the full body of Daubert case law as applied by state and federal courts,” noting the “discordant views about the gatekeeping role among Daubert jurisdictions.” Moreover, the court said it would adhere to the general acceptance test for reliability in criminal matters.
The New Jersey Supreme Court concluded that in the case at bar the trial court engaged in rigorous gatekeeping when it asked whether the scientific community would accept the methodology the plaintiffs’ experts employed and would use the underlying facts and data as they did. The trial court’s exclusion of the plaintiffs’ experts was well supported and well reasoned, the high court said.
The case is In re Accutane Litig., 2018 N.J. LEXIS 988 (Aug. 1, 2018).
New York Times serves up scathing look at appraisers in Trump exposé
“Friendly” valuations are the main characters in a brilliantly written and fascinating article in the New York Times about President Trump’s involvement in “dubious tax schemes” and “outright fraud” to increase the fortune he received from his father. The extensive investigation by the Times revealed that manipulated real estate appraisals and sham companies were used to transfer the elder Trump’s wealth to Donald and other heirs while slashing estate and gift taxes to the bone.
Big discounts: One of the many techniques the article describes was the splitting up of the elder Trump’s real estate empire into two grantor retained annuity trusts (GRATs): 49.8% going to father Fred Trump’s GRAT, 49.8% into the mother’s GRAT, and the remaining 0.4% split up among their four children (including Donald). The real estate assets were undervalued and then discounted by 45% because each parent was now a minority owner and the assets were subject to a marketability discount. This plus other maneuvers added up to the transfer of $1 billion in wealth to children taxed at a rate of just 5%—not the 55% federal rate that was in effect at the time.
The article makes it a point to say that “appraisers can arrive at sharply different valuations depending on their methods and assumptions” and they have been known to “massage those methods and assumptions in ways that coincide with their clients’ interests.” Of course, attorneys and CPAs were also involved in these shady dealings, which, for the most part, got past the IRS.
Extra: Last week, BVR conducted a webinar, Agree to Disagree: Perils of Bias in Valuation, that explores the key assumptions that create significant deviations between appraisers and potentially expose bias.
The use of restricted stock studies is the most cited methodology for quantifying a discount for lack of marketability (DLOM), according to the results of our DLOM survey. Of those who use this methodology, about two-thirds say they use the “benchmark average approach,” while the other third say they use the “restricted stock comparative analysis approach (RSCAA).”
Red flag: Is the benchmark average approach an in-depth analysis? The court in one case said this: “[The valuation expert] simply lists the average discounts observed in several such studies, effectively asking us to accept on faith the premise that the approximate average of those results provides a reliable benchmark for the transferred interests.” [Peracchio v. Commissioner, T.C. Memo. 2003-80 (Sept. 25, 2003)]
The late Tax Court Judge Laro spoke on this topic and said that more analysis is needed on data that must be current. The analysis should tie the restricted stock study to the characteristics of the subject company. The most widely used restricted stock transaction database is the Stout Restricted Stock Study (formerly FMV Opinions), which is updated quarterly. The database (used by 39% of survey respondents) includes the Stout Calculator, which embodies the RSCAA, and is driven by the financial characteristics of the subject company as well as the volatility of the market.
We received 96 responses to the survey, which was conducted from September 19 to September 28. We’ll have more results in next week’s BVWire, and we will prepare a document with the full results that will be available to everyone. Thank you for your participation!
S corp group comments on Section 199A proposed rules
In August, the IRS issued proposed regulations explaining the new tax law’s “qualified business income” (QBI) deduction for pass-through entities (PTE) that will impact all business valuations. IRC Code Section 199a allows a 20% write-off of QBI for sole proprietors, owners of S corporations, and members of partnerships/LLCs. The S Corporation Association has submitted comments that are positive overall about the proposed rules. “Treasury made a good-faith effort to get the new regime right,” the association says in a statement. “But with any new proposal this big, there are lots of details to work out, and the S-Corp comments include a number of recommendations as to how Treasury can improve the final rules.”
Deadline looming to participate in the BVFLS study
Don’t miss your chance to find out about firm performance, compensation, billing rates, marketing, practice development, and more by taking part in the largest and most thorough analysis of best practices in the business valuation and forensic litigation services (BVFLS) profession, BVR’s Firm Economics Study. Once all responses are compiled, you’ll see how your firm stacks up against others. Those who participate will receive a free Executive Summary of survey results, plus a special offer to purchase the full report for $99 (regular price is $299) and a chance to win a free year of BVResearch Pro (a $1,595 value). The deadline for responses is October 19. Click here to participate now.
Conveniently assembled into one article are a series of session takeaways from the National Association of Certified Valuators and Analysts (NACVA) and the Consultant’s Training Institute (CTI) 2018 Annual Consultants’ Conference that took place in Las Vegas this past June. These takeaways had appeared in BVWire over several weeks along with some NACVA organizational news.
BVR offers a free download of Industry Betas for the Third Quarter 2018, which contains global levered and unlevered betas for 134 industries and “regional” betas for 10 geographical areas (including North America, the EU, and Western Europe). The data are from Salvidio & Partners, a Rome, Italy-based business valuation firm headed by Ascanio Salvidio.
The report is distinctive in that it combines industry and geographical perspectives and also features two separate series of levered and unlevered betas. The first series includes levered and unlevered betas estimated for any selected company, regardless of whether its gross debt is higher or lower than its cash and cash equivalents. The second series excludes “net liquidity” to represent companies where “decisions taken by management, all other circumstances being equal, may be different in case of the company’s gross debt being higher or lower than cash and equivalents,” according to Salvidio.
Comments welcome: Salvidio welcomes feedback from BVWire readers on how to improve the study, and you can contact him here.
People: John-Henry Eversgerd and Fiona Hansen have left PPB Advisory to launch FTI Consulting’s Australian valuation practice … Jonathan Marks has joined Chicago-based Baker Tilly Virchow Krause as a partner in the firm’s specialized forensic litigation valuation services consulting practice … Casey Karlsen has joined BerryDunn as a senior business valuation analyst in the firm’s Portland, Maine, office … Jonathan Jackson is the new executive director at the National Association of Certified Valuators and Analysts (NACVA), replacing Pam Bailey, who retired after 15 years in that post.
Firms: Allinial Global has announced that LJ Soldinger Associates of Deer Park, Ill., has joined the accounting association … Louisville, Ky.-based MCM CPAs & Advisors has joined with Kramer Consulting Inc. (KCI) of Crestwood, Ky., provider of outsourced IT consulting services, to form a new affiliate organization, MCM Kramer Technology Solutions … Antares Group of Conyers, Ga., will acquire the Franchise Group with Canton, Mass.-based Gray Gray & Gray; the two firms are renowned for their work with restaurant franchisees and the combined group will operate under the Antares Group name … New York-based EisnerAmper will partner with CENTRL, a risk and compliance technology company … The latest expansion into western Canada for Toronto, Ontario-based Collins Barrow National is a merger of Collins Barrow Vancouver,Wolrige Mahon and CW Group … Englewood, Colo.-based Richey May & Co. has acquired two IT consulting firms, Arrow Partnership and Corporate Blue …Chicago-based Baker Tilly Virchow Krause and Houston-based MiddletonRaines+Zapata intend to merge by the end of the year.
The ability to evaluate the contributions intellectual property and intangible assets make is becoming a required component of the business manager’s toolkit and is particularly important in the context of disputes and damages.
Are you struggling with applying option pricing models to estimate a discount for lack of marketability (DLOM)? This session will clearly and practically explain various models and how to apply them.
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:
We welcome your feedback and comments. Contact Andy Dzamba (Executive Editor) or Sylvia Golden, Esq. (Executive Legal Editor) at: info@bvresources.com.
