September 26, 2012 | Issue #120-3  

Five ways to reduce the costs of financial experts, according to new AICPA FVS study
After 18 months of study and analysis by a special task force—including a comprehensive member survey—the AICPA’s Financial Valuation Services (FVS) executive committee has just released its new study, “Another Voice: Financial Experts on Reducing Costs in Civil Litigation.” Working with the Institute for the Advancement of the American Legal System (IAALS) (University of Denver), the FVS study proposes five basic reforms to maximize the effectiveness and efficiency of financial experts in the pretrial process:

  1. Judges should manage cases early, actively, and consistently. Specifically, court continuances can drive up an expert’s case preparation costs by 11% to 25%, the majority of FVS survey respondents indicate.
  2. Clients and attorneys should involve experts early. One of the “major themes” to emerge from the FVS survey focuses on engaging the expert as early as possible in the litigation to reduce overall costs.
  3. Attorneys should streamline expert depositions and discovery. For example, although expert depositions are a “valuable tool” in litigation, say FVS respondents, just about half (44%) of their testimony and time are wasted on nonsubstantive questions.
  4. Daubert challenges should be timely and targeted. The use of Daubert-like challenges by attorneys can potentially reduce the time and total costs of cases involving financial experts, says the FVS study, but significant savings will only come with the implementation of all the recommended reforms.
  5. Attorneys and the court should encourage opposing experts to cooperate. The vast majority (71%) of FVS survey respondents believes that by allowing experts to talk with one another before the trial—and without attorneys—would decrease case preparation costs. A formalized system of expert collaboration is “vastly underutilized,” one respondent said.

“Although the expert voice is not typically heard in connection with reforming civil pretrial processes,” says the FVS task force, it hopes the new study will help “continue the conversation” with the bench, the bar, and rulemaking authorities.

Appraisers may not have to comply with Circular 230 after all

“For those of you who practice in the tax arena, the IRS has announced some proposed changes to Circular 230,” says Linda Trugman, chair of the ASA’s BV committee, in her most recent e-update to members. Review of the proposed amendments suggests “that the IRS does not consider appraisers to be practitioners after all, which may mean that we do not need PTINs (Preparer Tax Identification Numbers),” Trugman says. “Of course these are only proposed regulations so it’s impossible to tell what the next step will be.”

ASA active in two additional legislative areas. The ASA is also still working on the “appraiser as fiduciary” issue with the Department of Labor. Although the DOL has not reintroduced its proposal to treat appraisers as fiduciaries, “we are trying to ‘cut them off at the pass’ by pushing forward a legislative alternative,” Trugman reports.

Finally, the ASA’s BV standards subcommittee is currently drafting a letter to the Appraisal Standards Board (ASB) in response to the second exposure draft of the 2014-2015 USPAP. “Once the BV committee has reviewed and approved it, it will be posted for the membership,” Trugman tells ASA members. “Just as a reminder, the more our voices are heard, the more likely we will have some influence on the process and the final version of the standards. So, please take the time to read the latest exposure draft and comment by October 5.”

NY court denies ‘whopping’ 25% DLOM in statutory FV decision

The determination of statutory fair value in New York is a bit confusing, to say the least. Although several cases have said that the state courts “must” take into account the illiquidity of a closely held company’s shares, others have limited the discount only to the firm’s goodwill value. In trying to translate the mixed messages in one of his earliest blogs, attorney Peter Mahler concluded that the statutory fair value standard in New York “means whatever the court says it means.” More recently, Mahler highlighted Chris Mercer’s (Mercer Capital) comprehensive recap of the state of fair value in New York.

New case adds clarity for asset holding companies. Just last month, a New York appellate court tried to send a clearer message concerning the fair value of a company that held $13.5 million in real property (gross). For purposes of a judicial buyout and appraisal of a 10% shareholder’s interest—and despite prior state precedent—the company was “not entitled to a whopping 25% lack of marketability discount for what is essentially real property placed in a limited liability company package,” the court held, particularly when those assets were so “easily marketable.” Since there was no evidence concerning what (if any) lower discount might be appropriate, the court did not apply any DLOM to the company’s net asset value of just over $10.4 million. (Note: Mercer was the expert for the minority shareholder.)

Read the complete digest of Chiu v. Chiu, Actions No. 21905/07 and 25275/07 (Sup. Ct. N.Y., Aug. 30, 2012) in the November Business Valuation Update; the court’s opinion will soon be posted at BVLaw.

Navigate the ‘matrix’ of tax-related discounts with new free download

A new discussion on LinkedIn asks for the citation to any cases in which the Tax Court adopted a combined minority and marketability discount “of 40% or higher on a 50/50 partnership interest.” One commentator suggests Estate of Bailey v. Commissioner, T.C. Memo 2002-152, in which the court applied a 50% combined discount (20% DLOC, as agreed by the parties, and 30% DLOM, as cobbled by the court from the respective appraisals).

After a quick search of BVLaw—which contains Bailey as well as an additional 280 tax-related valuation cases—we came up with an array of additional decisions regarding various levels of percentage interests, from Furman v. Commissioner, T.C. Memo 1998-157 (40% combined discount) to Keller v. United States, 2009 WL 2601611 (S.D.Tex.) (47.5% combined discount), which is currently on appeal to the 5th Circuit. N.B.: Only Tax Court opinions as well as those by federal district and circuit courts are binding precedent; tax court memoranda are fact-specific and bind only the parties.

Based on this case law as well as market realities, even the IRS recognizes that “discounts for lack of marketability and lack of control related to FLP interests are ‘real,’” writes John Porter (Baker Botts), in a recent BVUpdate article,“FLP Appraisals: Plan for the New Matrix.” The article also includes a convenient chart summarizing all estate and gift tax decisions related to discounts. To help BV appraisers navigate this legal “matrix,” we’ve just posted the article to our free downloads page.

Get current on the future of discounts. Join Porter on Tuesday, October 2 as he launches BVR’s 5th Annual Symposium on Estate & Gift Tax with his presentation “Family Limited Partnerships: The Current Landscape.” In this 100-minute webinar, Porter will present a complete regulatory and case law update as well as an overview of the most recent Tax Court decisions in which the taxpayer has sustained “substantial” discounts on FLP values.

FAF appoints members to new private company council

Drawing from over 100 applications, the Board of Trustees of the Financial Accounting Foundation (FAF) has just appointed the chair plus nine inaugural members to its newly created Private Company Council. The PCC will work with the Financial Accounting Standards Board “to determine whether and when to modify U.S. Generally Accepted Accounting Principles (U.S. GAAP) for private companies,” according to a FASB release.

Billy M. Atkinson, former chair of the National Association of State Boards of Accountancy (NASBA) and former audit partner at PricewaterhouseCoopers, will serve as the first chair of the PCC. Joining him will be nine additional members, each of whom “has demonstrated a strong appreciation for the importance of independent standard-setting and unwavering commitment toward greater clarity and well-informed decision making in private company financial accounting and reporting,” says FAF president and CEO Teresa Polley. “Their diverse backgrounds and perspectives will provide valuable insights and leadership to the PCC and the FAF.”

Is it time to add an express caveat when using public market data to value private companies?

Despite the recognition among academics and “financial sophisticates” of the “many faults” associated with the excess earnings approach—and despite the IRS “all but abandoning” the excess earnings ideology—it still enjoys wide acceptance among family law courts, both at the trial and appellate levels, for valuing small, closely held businesses, says Jerome Karsh (Karsh Consulting) in the current American Journal of Family Law (Fall 2012) (subscription only).

In his article, “Bringing Business Valuation Out of the Dark Ages,” Karsh attributes the entrenchment of the excess earnings method not only to its historical use and precedential value, but also to its “simplicity in both form and substance.” Further, “it has emerged as the method of choice in family law valuations of most professional practices where little or no market for such can be defined.” After exploring the many criticisms of the method—as well as the problems with using public market data as a proxy in private market valuations in general—Karsh concludes:

Perhaps it is time to add the same caveat as contained in Rev. Ruling 68-609, modified to read regarding the use of public securities data for the returns in the private market: Public securities data may be used in determining the fair market value of closely held business interests only if there is no better basis for making the determination.

CICBV changes exam/membership requirements

During its “state of the union” address at its annual conference in Vancouver, B.C., last week, the Canadian Institute of Chartered Business Valuators (CICBV) announced “important changes” to its by-laws concerning new members, reports Megan Kennedy, its communications manager.

Effective September 19, the Membership Entrance Examination (MEE) will be called the Member Qualification Examination (MQE). “After writing the MQE, registered students will have three years to complete the experience requirements and apply for membership,” Kennedy says. “Registered students who have had difficulty completing the experience requirements will benefit, since they will not have to delay writing the final examination until after they’ve completed the experience segment of the qualification process.” A formal announcement will be coming soon; for more information in the interim, contact the Institute:

Kick off the fall season with new CPE

Tomorrow—September 27— BVR’s Online Symposium on Healthcare Valuation continues with Medical Practice Valuation in Divorce, featuring Kathie Wilson and Robert Levis (Levis Consulting), who will focus on one of the most frequently litigated entities in divorce cases: the private medical firm. The discussion will focus on the recurring sources of many of those disputes: goodwill values, accounts receivable, patient records and files, noncompetition agreements, regulatory concerns, and more.

On October 4, join Richard Miller (Richard J. Miller & Assoc.) for Valuing Oil & Gas Properties, a discussion of how to identify and value energy-producing properties using the most common methods, as adapted for the particular complexities of this vital, fast-growing industry.


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