A highlight at the 2015 AICPA conference in Las Vegas was the session in which David Laro, senior judge of the United States Tax Court, shared some of his thoughts on hot valuation topics.
Tax affecting: Practitioners must know the IRS’s October 2014 job aid explaining the agency’s thinking on valuing S corporations. The IRS’s position of no tax affecting leans on Gross v. Commissioner and progeny but contradicts sound valuation practices, says Judge Laro. Keep in mind that Tax Court memos are not precedent, he reminds us. Therefore, “the final chapter on tax affecting has not yet been written.”
DLOM: Simply pulling the discount for lack of marketability rate from restricted stock studies and pre-IPO studies spells trouble, the judge cautions. Today’s Tax Court judges know valuation in a way the prior generation did not. And they expect experts to tailor their DLOM to the facts of a particular case. Judge Laro recommends using his Mandelbaum decision, in which he provides a multifactor analysis, as guidance for your DLOM determination.
USPAP: Mere compliance with the profession’s standards does not make you a reliable expert for Tax Court purposes, Judge Laro says. Conversely, failure to comply with the standards does not exclude your testimony from consideration.
Hot tubbing: This technique, also known as concurrent witness testimony, is Judge Laro’s preferred technique for receiving expert testimony. It replaces the blood sport of cross-examination with a collegial discussion involving the judge and the experts on both sides but excluding the attorneys. According to Judge Laro, when experts need not fear attacks on their credibility, they are able to express their thoughts more freely and provide the judge with a more meaningful valuation than the adversarial system allows. Not everyone is on board, but it’s a technique that is catching on. In fact, the AICPA is providing training in this technique.
Find out more about hot tubbing in Business Valuation Update’s June 2014 article “U.S. Tax Court Judge Laro Discusses Valuation and Expert Testimony Issues.” Also, a digest of Mandelbaum v. Commissioner, T.C. Memo 1995-255, along with Judge Laro’s opinion, is available at BVLaw.
More of Judge Laro’s remarks will be covered in the January 2016 issue of Business Valuation Update.
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