The discounted cash flow (DCF) approach is certainly among the “most prominent” valuation methods, said Judge David Laro (U.S. Tax Court) during BVR’s recent Tax Summit. “I believe it’s the most reliable because it tries to predict the income benefit (available cash) that will come back from a particular investment.” That’s “real world stuff,” Laro added. The inputs of the DCF approach are important, too—such as the discount rate, the cap rate, etc., and they can all be easily examined by the court. “I think it’s the best technique,” Laro said, preferable to the guideline public company method (GPCM) because “you can always find some differences” between the subject company and the selected comparables—and so can opposing counsel.
At the same time, appraisers should use the GPCM—at least in Tax Court, because Rev. Ruling 59-60 recommends it, and then “the devil is in the details,” observed Judge Julian Jacobs, who’s seen cases in which the expert maintained that one comparable company was a sufficient benchmark. “That doesn’t work,” Judge Jacobs said. “You have to find a reasonable number” and then make sure you can explain any adjustments.
Tax Court moving in direction of DE Chancery? The recent Gallagher decision indicates the specificity with which the Tax Court will examine each variable within any valuation approach, “much as the Delaware courts do,” commented moderator Jay Fishman (Financial Research Associates). “Is that the direction of the Tax Court?” he asked—and all the judges agreed that it was. Indeed, the Delaware Chancery has just issued some important decisions on the recommended number of valuation methods as well as the inputs to the DCF, including determination of the equity risk premium.
To keep up with this important precedent from the “Supreme Court” of corporation law, don’t miss Delaware Chancery Roundtable: Views from the Bench, Council & Witness Stand. In this special two-hour webinar, Neil Beaton (Grant Thornton) and Stephen C. Norman (Potter Anderson & Corroon) will ask Vice Chancellor Donald F. Parsons Jr. what the Delaware Court of Chancery expects from financial experts, their valuation methods, conclusions, and credibility.
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