Why do 95% of the 29,000 tax cases filed each year end up in US Tax Court? 

Anyone can file claims in US District Court, the US Court of Federal Claims, bankruptcy court, or other venues.   Judge David Laro, friend of the appraisal profession and recent speaker at the NYSSCPA/FAE Business Valuation Summit, reminds us that there’s one main reason:  “you don’t have to pay your taxes first” to file a claim in US Tax Court. 

Where do these claims end up?  There are four levels of decision.   If they’re small (less than $50,000), they go to small claims, and have no precedential value.   The majority go to the second level—the Tax Court Memo.   “Mandalbaum was a TC memo,” says Laro.   Some of the 19 judges consider these cases to be precedential, but it’s not mandatory, so lawyers and experts need to know the judge they’re appearing before prior to citing TC memo cases (like Gross).  The third level of decision is the Tax Court Opinion, which is published by the Tax Court, and is binding on every judge.  The highest level of decision is the Reviewed Opinion, which is released in the rare cases where two Tax Court judges have conflicting decisions, or “in a case of great importance.”   One judge drafts an opinion, which is then sent to a conference of all judges until consensus is achieved.  BVR publishes Tax Court Memos, Tax Court Opinions, Reviewed Opinions, and provides analysis and abstracts.  Visit BVLibrary for more information.

The debate continues—what is size premium data really telling you?

There has been much discussion regarding the category 10b data found in Morningstar's Stocks, Bonds, Bills and Inflation Valuation Yearbook (SBBI) when determining a size risk premium (or equity risk premium) in the build-up or modified capital asset pricing model.  SBBI uses the market value of equity as the sole measure of company size (as opposed to other size measures). 

In a recent July Q&A, Jim Hitchner, CPA/ABV, ASA (The Financial Valuation Group, Atlanta, GA) highlights some issues that appraisers who use this data should be aware of (read the Q&A here).  Jim notes that “using the market value of equity as a measure of size can be deceiving,” and references Cost of Capital Applications and Examples, Third Edition (Shannon P. Pratt and Roger J. Grabowski, 2008) in which Chapter 13 highlights examples of the disconnect between size as measured by market value of equity and size as measured by a different criteria. The Duff & Phelps Risk Premium Report still stands as an alternative to SBBI for size and equity risk premiums, providing information for 25 size-ranked portfolios using 8 alternative measures of company size (learn more here).

Business Valuation Resources acquires LexisNexis division

BVR is proud to announce that it has acquired the assets of the LexisNexis continuing legal education (CLE) division.  This acquisition gives BVR the capability to offer CLE credits to lawyers who attend BVR events, teleconferences, and other training opportunities (including BVR/ASA Divorce: A Hands-On Workshop for BV Practitioners and University of San Diego School of Law/BVR Summit on Discount for Lack of Marketability events).   “We know how important it is for business appraisers who want to grow their business to network with lawyers, and this will allow us to bring the communities together frequently,” said Lucretia Lyons, BVR’s President. BVR’s legal products division will be run by publisher Tom Hagy, and our professional and legal education division will be under the leadership of director Sharon Boothe.

New leadership at the Institute of Business Appraisers

ValuSource and the Institute of Business Appraisers (IBA) have agreed to terms whereby IBA’s assets have been acquired by a partnership of investors, including the National Association of Certified Valuation Analysts (NACVA).  Howard Lewis has left his position as National Program Manager for Valuation Programs at the IRS to replace Michele Miles as Executive Director of the IBA.  Michele will be staying with the IBA as a consultant and is working with BVR on a series of new products targeted at training litigators on BV topics.  Some IBA and NACVA training events have already been merged.   BVR anticipates that, under Lewis’ leadership, IBA members will benefit—and that some of the confusion created by the existence of four professional associations in the BV profession will be diminished as the IBA, NACVA, and ValuSource combine operations and resources. 

Remember that a story is as important as the numbers

At a recent FAE/BVR meeting, Mel Abraham CPA, CVA, ABV, ASA, reminded appraisers that “any report can confirm a business had $1 million in cash flow last year.”   But, if the jury knows that it’s a family business, the mother just fired the son who ran operations, and the brother who owns the real estate is suing to evict the business, “it’s easier to explain why no one would want to be a minority partner,” he said.  “The jury can follow you, the opposing expert, or create their own path.  Stories pave the way to make it easier for them to follow you.”  

Lyman offers competing damages projections, stresses need for objectivity

Appraisers should keep their eyes out for Lyman v. St. Jude Medical, S.C. (May 27, 2008).  This opinion by the US District Court (E.D. Wisconsin) deals with competing Daubert challenges by both parties to the expert damages testimony offered by the other.  When the defendant medical center terminated an exclusive, 10-year agreement with the plaintiff to sell cardiac rhythm management products just two years into the contract, the plaintiff sued to recover alleged damages stemming from the breach.  Both parties’ experts were CPAs with extensive appraisal experience; the court had no trouble finding them qualified.  However, the experts took very different approaches to their damages projections. 

After critiquing both of the appraisers’ work, the court’s decision stresses the need for thorough, independent appraiser analysis, as well as the importance of data verification.  The full abstract of Lyman appears in the just-released August 2008 issue of the Business Valuation Update, available here.  The full text of the court’s opinion is also available to subscribers of BVLaw here.

When your business is dead

BVR has spoken with a number of appraisers who focus on the valuation of businesses in the funeral industry and who are seeking further information. Carpenter Hawke & Co. posted an executive summary of the funeral industry a few months back that the BVWire wanted to share with our readers as a nice freebie (available here).