Post-McCord: Is it back to ‘bias as usual’ in the Tax Court? The most talked-about issue in the 2003 McCord v. Commissioner decision, from a business valuation perspective, was the Tax Court’s rejection of the pre-IPO approach in the determination of marketability discounts. Ironically—this was the least-discussed issue in the recent appellate reversal of McCord. As the IRS declined to raise the question on appeal, the 5th Circuit did not need to consider it. And yet, as the Court observes, “Our failure to address it should not...be viewed as either agreeing or disagreeing with the Majority’s determination on this point.” So where does that leave the issue for business valuators? “I don’t think the McCord reversal has any impact on how the Tax Court will perceive expert testimony on determination of [marketability] discounts,” says William Chandler, JD, CPA/ABV, ASA, CFA (Spectrum Consulting Partners LLC, New York City). “I don’t think this decision advances us at all.” A fellow New Yorker, Lance Hall, ASA (FMV Opinions, Inc.) is even more blunt. “The Tax Court will retain its bias against the Pre-IPO approach,” he predicts. To assess the full impact of the McCord reversal —and the future of marketability discounts, many experts are reviewing the original case as well as its criticism. For your copy of the critique by former BVU editor-in-chief Shannon Pratt, click here. An answer you rarely hear from the IRSDuring BVR’s recent Telephone Conference, “Ask the IRS,” Michael Gregory, ASA, AVA, an IRS Engineering Territory Manager, was pleased to announce the release of the Service’s new Business Valuation Guidelines—which also include its Valuation Guidelines for Intangible Property and Tangible Personal Property. (And BVR was pleased to put the comprehensive Guidelines at the top of its free downloads.) But what about all the “countless sheets of exhibits” released with the prior (1999) version of the Guidelines? “Does this 2006 streamlined version replace our existing information,” asks BVR subscriber Gabrielle Lauhon (Daulton & Company, CPA, Inc.), “or would it be prudent to retain the exhibits?” “The new guidelines replace the 1999 guidelines,” Mike Gregory responds, adding the words you don’t hear often from the IRS, “it’s that easy.” Where else can you hear Sherron Watkins and great live music? Try Austin, Texas for this year’s AICPA National Business Valuation Conference, December 3-5, which will feature former Enron VP Sherron Watkins as the keynote speaker. Other highlights: A complete, conference-long track on fair value measurement, including case studies on FAS 141/142 and 123R. And back by popular demand are speakers Roger Grabowski (equity risk premiums) and Roger Dodd (an expert on being an expert BV witness), all set to converge in what’s been called the “Live Music Capital of the World.” To receive a price discount, register early at the AICPA. Economic forecast: CFOs see recession clouds on the horizon Last week, the Dow Jones Industrial Average rallied to within 170 points of its all-time high—refuting September’s reputation as the stock market’s worst month. At the same time, CFO economic optimism is at an all-time low, according to the most recent “CFO Outlook” survey by Duke University and CFO Magazine. The survey, which reached nearly 1,000 international CFOs (approximately half from the U.S., the remainder from Europe and Asia), points to weak consumer demand, rising labor costs and high fuel costs as the main culprits behind the dour financial forecast. As a result, CFOs are cutting their capital spending plans and earnings projections; their confidence in the Federal Reserve is also falling, as nearly half (45.8%) of respondents are skeptical that tightening will reduce the rate of inflation. “CFOs are feeling so negatively about the U.S. Economy that one-third predicts we will be in a recession in one year,” says John Graham, a finance professor at Duke’s Fuqua School of Business and director of the survey. Detailed results, including tabular summaries, are available at www.cfosurvey.org. Do appraisers value a company’s historic workers comp claims? “I just had an interesting meeting with a consultant from the Washington State Workers Compensation Department,” says former BVR controller Ken Becker, CMA. “He emphasized how accidents today impact our insurance rates for years to come, and also reflect the culture we have regarding safety. It made me wonder if, in doing a business valuation, the experience rate of workers compensation insurance is ever valued into the process, both as a reflection of future insurance cost to that business, and as a reflection of the safety culture, which would be hard for a new owner to change quickly.” Do you have any insight or experience on valuing workers compensation claims? Let us know; email the editor and we’ll feature your response(s) in future issues of the BVWire. Final FASB statements on business combinations due by 2Q 2007 FASB is meeting with IASB this month to discuss their joint project on Business Combinations: Applying the Acquisition Method. In particular, the Boards will be focusing on accounting for intangible assets; and per their most recent statement, they expect to issue the final Statements on business combinations and non-controlling interests by the second quarter, 2007. For comment letter summaries, copies of all exposure drafts, and related articles on the joint project, click here. When the value of control is worth nothing In many valuations of private businesses, appraisers begin with a discounted cash flow (DCF) and add a control premium, using 20% as a “rule of thumb.” But if the DCF inputs already reflect a well-managed firm, then any control premium may be double counting, cautions Aswath Damodaran, NYU finance professor, in BVR’s recent Telephone Conference on Control Premia. Some clues to look for: “If you use target debt ratios, industry average margins and optimistic earnings growth numbers, then you are doing an optimal valuation,” he says. “The value of control can be zero if a firm is already optimally run.” For a transcript and/or CD of the complete telephone conference (also featuring an overview of the Mergerstat Control Premium Study), click here.
To ensure this email is delivered to your inbox, Copyright © 2006 by Business Valuation Resources, LLC Business
Valuation Resources, LLC | 7412 SW Beaverton Hillsdale Hwy., Ste. 106 |
Portland, OR 97225 | (503) 291-7963 |