| IRS internal memo: any agent can now assess penalties against you under 6695A In a troubling glimpse into its procedures, the Internal Revenue Service issued an internal memorandum to examiners, estate and gift attorneys, and appellate officers regarding “Procedures for Implementing the Penalty for the Substantial and Gross Valuation Misstatements Attributable to Incorrect Appraisals Under IRC Section 6695A.” The memo—written in August 2009—only recently came to light after requests under Freedom of Information Act, according to Jay Fishman, who moderated a tax update at the 2009 ASA Advanced BV Conference in Boston this week. Among its provisions, the memo permits IRS agents and examiners—even those lacking BV accreditation or appraisal experience—to issue a penalty citation without consulting the appraiser or Field Specialist Engineer:
“I’m very troubled by this,” said Howard Lewis, former IRS Engineering Program Manager and ASA panelist. An appraiser would only become aware of the pending assessment after receiving a “Penalty Appointment Information Letter” (“4477 Letter”). “It’s a dangerous situation,” he added, that may lack due process safeguards (an attendee in the session noted that, whether or not a penalty is assessed, an appraiser who receives a notice will never have a clean record again when asked “have you ever been cited by the IRS”). Penalties do not apply if it is "more likely than not" that the appraisal value is correct—but even the IRS admits that “the statute does not define ‘more likely than not’” and “forthcoming regulations will provide further guidance on this standard.” The ASA has requested an emergency meeting with the IRS to discuss the ramifications of the memo, said Fishman, also a member of the IRS Standing Advisory Council. “But that doesn’t guarantee they’ll listen.” Until further developments, Lewis encouraged all BV appraisers to read the memo. And should they ever receive a 4477 Letter, “do not go alone.” The Murphy Oil Corp. grew from a small, family owned business into a multinational conglomerate, with over $2 billion in market cap. During the 1990s, the CEO and son of the founder set out to preserve his holdings and his investment philosophy for the benefit of his children. He formed a family limited partnership (FLP with an LLC as general partner, in which he retained a 49% interest and two of his kids took a 51% interest, leaving them in charge. When all was formed and funded, the father owned a 96.75% LP interest in the FLP. He also retained $1.3M in assets, sufficient to pay his living expenses and estate taxes after death. Five years later, the father died unexpectedly. After his estate paid over $46M in taxes, the IRS cited an additional $34M in deficiencies, including those related to the FLP transfers. Not surprisingly, the estate lacked sufficient liquidity to pay the assessment, because its only remaining assets were tied up in the FLP’s non-controlling, non-marketable interests. It borrowed from the children’s trusts and sued the IRS for a refund. At trial, both parties’ experts asserted minority and marketability discounts, plus Rule 144 discounts for large blocks of stock. Held: In each determination, the federal district court (W.D. Ark) found the taxpayer’s appraiser (Donald Barker, HFBE) more credible than the IRS’s expert, and adopted his 32.5% combined discounts versus the government’s 10%. (Notably, the IRS’s “option collar approach” to valuing the Rule 144 blocks failed just as it did in Litman v. U.S.; see BVWire™ #60-1). The 50-page decision in Murphy v. U.S., issued October 9, 2009, makes fascinating reading: As with every other major FLP case, an abstract of Murphy will appear in Business Valuation Update™ and the full-text court opinion at BVLaw™.
In a poll of ASA BV Conference attendees, at least half raised their hands when speaker and Lawrence Hamermesh (Univ. of Penn.) asked if they used an implied minority discount when adjusting data from comparable public companies to value a non-marketable, minority share in a private entity. When asked how many would continue to do so after his presentation with Gil Matthews (Sutter Securities)—only a couple of stalwarts kept their hands in the air. “We’re all working toward a convergence of thought and shared conceptualization on fair value appraisals,” said Matthews. “Part of our job is to overcome a failure in terms,” Hamermesh agreed. He attributed the courts’ continued application of the IMD to “a gap in communication between folks who make the legal standards regarding fair value and folks like you who actually do it.” His solution? In his current article, he and co-author Michael Wachter argue that:
To access “Rationalizing Appraisal Standards in Compulsory Buy-outs,” click here.
Although nearly one-half (41%) of respondents to last week’s online survey said that they are focus on business development during the downturn, just about the same number (42.9%) admitted that they are working “from the seat of their pants.” The vast majority (71.4%) are encouraging their professionals to publish, present, and participate in BV professional activities and also to review current referral lists for reconnection potential (64.3%). Nearly half (42%) are taking clients out and updating their print/web materials. Only a few (14%) are launching (or re-launching) a client newsletter or similar electronic or mail campaign. Borrowman says. “When times get good again (and they will!), finding time for public presentations may become a lower priority, while on-going marketing efforts like a newsletter or e-alert will continue to reach a larger audience on a regular basis.” And, some of these marketing tasks can be delegated even when your practice becomes too busy. Good questions to ask when using restricted stock studies Of all the “small bombs” dropped at DLOM Summit II (the 2nd Annual Business Valuation and Tax Conference, held at the University of San Diego Law School on October 9th), one that drew the most comments related to the observation that marketability discounts don’t always correlate to size (revenues), earnings, or other performance measures (see last week’s BVWire™).
“With all these uncertainties being baked into the pricing recipe, it’s not surprising that there may be little correlation to revenue or earnings,” Mercer says. Not to mention that the benchmarking studies and others are aged. “One has to question what relevance guideline company pricing [in 1997, e.g.], regardless of how comparable, would have to transactions occurring in 2009?” Are you prepared to provide distressed business values in today’s economy? New study shows business litigation about to swell The latest results from Fulbright & Jaworski LLP's sixth annual Litigation Trends Survey have arrived—and 42% of corporate counsel polled say they expect litigation to swell in the coming year. This represents a significant leap over last year’s survey, when only a third (34%) of in-house attorneys predicted an increase. Moreover, the majority of U.S. respondents (83%) reported that they’ve already fielded new litigation during the past year, up from 79% last year. The main dispute-driver is the economic downturn, of course, which has spawned big increases in bankruptcy, contract, and labor disputes. Only the healthcare industry appears relatively unscathed, with only 6% of healthcare respondents reporting a rise in bankruptcy and reorganization litigation. Corporate budgets will track the areas of concern: 18% of respondents plan to increase funds for labor/employment litigation; 15% will spend more on bankruptcy; and 14% will lay out more for contract disputes. Meanwhile, 11% will spend more for regulatory and investigations work, and 16% will spend on e-discovery. For the complete survey, click here.
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