“Valuation models in place today effectively treat pass-through entity owners as if they were the only investors ‘smart enough’ to benefit from tax savings,” Fannon says. “However, an abundance of academic research (not to mention common sense and the practical advice that CPAs routinely offer their clients) demonstrates that all investors engage in strategies to reduce or avoid taxes. Our current pass-through entity models fail to consider that the benchmark from which analysts adjust value already has a healthy measure of tax-avoidance baked into it,” she says (emphasis added).
Moreover, “investor taxes do not correlate directly with value,” Fannon adds. “Far from it.” As in the case of determining liquidity discounts, “it seems that only the BV community—and those to whom we have perpetuated this view, including the courts and the IRS—ascribes to this notion.” Similar to the liquidity debate, “advances in academic research seem to make little difference to the models that gain favor, persist in our industry, and seem to be perpetuated on every conference agenda,” observes Fannon, who has been speaking and writing on the topic of taxes and value for the past few years. She is currently completing an article with Keith Sellers (Univ. of Denver), with whom she’ll be conducting an AICPA webinar in early 2012; for more information, visit Fannon’s website. For an immediate overview, consider, “Pass-Through Entity Valuation Update: The Significant Impact of Academic Research on the Debate,” a recent BVR webinar featuring Fannon and Sellers (May 2011).