Can the IRS subpoena your draft report, despite FRCP 26?
Recent amendments to Rule 26(2) of the Federal Rules of Civil Procedure (FRCP) now preclude the discovery of expert draft reports, with some exceptions. (See BVWire #96-1 and BVWire #99-3.) At the same time, the recent case United States v. Richey (see BVWire #102-3) confirms that the IRS has the broad power to subpoena an appraiser’s work files (presumably including draft reports) during the investigation of a claim, even after the taxpayer has paid the deficiency—and especially if the taxpayer is still considering litigation.
What if the taxpayer does sue for a refund: has Richey effectively opened a “back door” during claims investigation for the IRS to procure an appraiser’s draft reports? In that case, would a court deem the taxpayer to have waived any privilege that might otherwise apply under Rule 26(2)?
The questions first came up last month at the ASA National IRS Symposium in Los Angeles, and IRS representatives have promised to research the issue for the ‘Wire and respond. In the meantime, appraisers may want to heed the recommendations of attorney John Porter (Baker Botts LLP), who spoke at the recent Valuation Roundtable meeting in Orinda, CA. “I worry about relying too heavily on [the amended Rule 26],” Porter told VRT attendees, “because a lot of the work you do is for tax preparation purposes.” Moreover, the U.S. Tax Court has not adopted FRCP 26. So for now, appraisers should assume that all of their work on a tax engagement, in particular, will be subject to some form of disclosure. Appraisers may also want to consider forum-sharing software such as Webex (Cisco) that allows meeting participants to view and discuss draft documents on a computer/video screen.
PwC updates study on Daubert challenges to financial experts
PricewaterhouseCoopers has just released its Daubert Challenges to Financial Experts: An 11-year study of trends and outcomes, which surveys federal cases since the U.S. Supreme Court’s 1999 Kumho Tire decision expanded Daubert’s reach to financial experts. Highlights of this year’s report include:
- This past year (2010) saw the most challenges and the second highest exclusion rate for all expert witnesses during the past 11 years (2000-2010).
- During that time, plaintiffs’ financial experts were challenged more frequently than defense experts, but courts ultimately excluded only 45% of plaintiffs’ experts vs. 48% of defense experts.
- Challenges to economists, accountants, and appraisers accounted for 55% of all challenges to financial experts (perhaps because they are the most frequently engaged group). Although attacked more often, this group was less likely to succumb to a Daubert review (42%, 40%, and 34%, respectively) than other financial experts (53% excluded).
- For the 11th consecutive year, lack of reliability was the top reason that courts excluded financial experts (7 out of 10 cases), most often due to the lack of valid data or the lack of a valid analytical framework for the data.
- For the first time since 2001, the number of challenges to financial experts fell (by 11%); however, the success rate rose to its highest level in six years: in 2010, courts excluded 50% of all financial experts, compared to the 11-year average of 45%.
As always, the PwC study highlights the continuing trend to use Daubert as a pre-trial weapon to attack economic experts and evidence in damages and other cases, often leading to dismissal. One way to bulletproof appraisal experts against Daubert: tune into BVR’s upcoming Online Symposium on Litigation and Economic Damages. Starting in September, the four-part webinar series consists of: Working with Financial Experts, Calculating Damages for Insured Claims, Supporting Your Case: Discovery and Evidence, and Getting the Information You Need: a Guide to Electronic Discovery.
Senate amendment opposes DOL/ESOP fiduciary proposal
“Senator Kelly Ayotte (R) of New Hampshire has proposed an amendment to S.782 that would amend ERISA to make clear that appraisers of private company ESOP stock are not ERISA fiduciaries,” reports The ESOP Association’s blog. For more information—including a sample letter to send your Senators and a link to the full text of the amendment— click here.
Economists offer guidelines to valuing patents after Uniloc
The recent Uniloc U.S.A. v. Microsoft Corp. decision—in which the U.S. Court of Appeals for the Federal Circuit abolished the 25% rule of thumb in patent infringement cases—“reaffirms the need for case-specific analysis of reasonable royalty damages,” say David Blackburn and Svetla Tzenova (NERA Economic Consulting). “NERA economists have long been performing this type of case-specific analysis by using the following structured two-step approach,” the authors add in their article, “The 25 Percent Rule in Patent Damages: Dead and Now Buried.”
Early-stage valuation prompts active BV discussion
Dalius Budvytis (Delta Partners) recently wrote on the Business Valuation & Advisory Network group on LinkedIn: “I am valuing an early-stage venture using a DCF (cash flows to firm and cash flows to equity). The business turns cash-flow positive in year five, equity holders infuse money in the initial four years.” Budvytis finds two points perplexing: 1. Cost of capital. 2: Investor commitments. Several valuation practitioners have responded to Budvytis; read their lively discussion here.
Quackenbush’s last ASA E-letter offers food for thought
For years Bill Quackenbush (Advent Value) has provided thoughtful leadership as ASA’s BVC Chair. As he passes the baton to Linda Trugman (Trugman Valuation Assoc.) at the end of this month, Quackenbush encourages valuation practitioners to continue to develop the BV profession along the highest professional and analytical standards. In the latest (and his last) ASA E-letter, Quackenbush points out: “What was considered a best practice 10 years ago—or even 5 years ago—may no longer be considered, so as we develop our theory and courts, regulators, or other controlling bodies raise the bar or change the rules. Can we rely solely on benchmarking for discounts?” he asks. “Have we fully considered the modifications to fair value for financial reporting by FASB regarding market participant perspective and contingent price considerations?” Quackenbush also advises appraisers:
- To maintain currency in their professional acumen
- To actively and aggressively pursue opportunities to educate the marketplace, proactively work to shape the forces that affect them, and hold high their expectations regarding the demeanor and activities of their members
- To work together cooperatively with other BV organizations to positively impact the profession
- To foster the development of valuation theory and practice in a way that is meaningful and reliable.
Damodaran on valuing companies with intangible assets
In his recent blog post, “From revenues to earnings: Operating, financing and capital expenses,” Aswath Damodaran (Stern School of Business, NYU) opines about the accounting issues in Groupon’s recent S-1 statement such as R&D and customer acquisition costs. “I do know that there are valuation questions that will come up with the IPO, but talking about them will lead me to repeat earlier points that I made about the Linkedin and Skype valuations: the value will depend upon revenue growth and potential operating margins.” The professor reminds readers to check out his paper, “Valuing Companies with Intangible Assets.”
Law firm confidence high
Because so many valuation practitioners work with attorneys, they stand to benefit from law firm leaders’ current positive outlook. “Overall economic performance is rebounding,” says Altman Weil Law Firms in Transition Survey 2011, “with two-thirds of all firms surveyed reporting increases in gross revenue in 2010 and nearly three quarters reporting increases in revenue per lawyer and profits per equity partner.” The number-one trend identified: “94% of law firms believe that the focus on practice efficiency is a permanent change in the profession. Click here for the survey and highlights.
BVR Guides now e-Book and Kindle-friendly
As the premier publisher of business valuation resources, we are pleased to announce that many of our publications, such as BVR’s Guide to Personal v. Enterprise Goodwill, 2011 Edition and BVR's Guide to Discounts for Lack of Marketability, 2011 Edition, are now available in e-Book and Kindle formats. E-Books offer several advantages, including instant access, searchability, and portability. As more people have become accustomed to e-Book readers, BVR has seen an increase in requests for e-Book versions of our titles, and we are now happy to fulfill them. BVR e-Books can be read on virtually all readers; Kindle users should choose the Kindle-friendly format, while all others can use the e-Book format.
Experts provide insight on valuing law practices
Join BVR on June 29 for the latest installment in our Industry-Spotlight Series, “Valuing Law Firms.” Two of the most-experienced experts in the field, consultant and law firm operations expert Pete Peterson (Maxfield Peterson) and expert appraiser Ron Seigneur (Seigneur Gustafson)(also a former CFO of a 50-attorney firm) will provide in-depth discussion covering all the nuances, pitfalls, and emerging trends in law firm appraisal.
Copyright © 2011 by Business Valuation Resources, LLC
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