Would any of the current DLOM models pass Daubert?

BVWireIssue #72-3
September 24, 2008

“We have a broken system,” the Honorable David Laro (U.S. Tax Court) told over one hundred attendees at the first-ever Summit on Discount for Lack of Marketability (DLOM) in San Diego last week.  “The law is more complicated than ever."  Over 240 sections of the Internal Revenue Code pertain to fair market valuations in the estate and gift tax arena as well as conservation easements and the trillion dollar market for derivatives.  Multiple credentialing organizations provide continuous education and improvements to the business valuation profession, while on the other side, the government now recognizes that its agents and appraisers must meet certain minimum practice standards.  But when the IRS issues a notice of deficiency, the taxpayer disputes the adjustment—and each side ends up in court with an expert espousing widely divergent opinions on value—that’s when “things aren’t working,” Laro said.

“Courts say we don’t want you to be hired guns or advocates,” he added, “but we have missed the opportunity to challenge the admissibility of your opinions at the gate-keeping juncture.”  Although the latest studies by the federal judiciary and PricewaterhouseCoopers show that over 50% of all Daubert challenges are directed at financial experts (see BVWire™ #64-2)—very few appear in Tax Court on valuation methodologies—specifically those concerning one of the most controversial calculations: the DLOM. 

Challenge to appraisers.  “Why aren’t [attorneys] questioning valuation methods at the Daubert level more often?” Judge Laro said, a rhetorical question that nevertheless got the attention of appraisers at the DLOM Summit.   “We are admitting valuation testimony that is not helpful or reliable.”  More frequent challenges would motivate experts to move to higher methodologies and might even force a unified, consistent, generally accepted model for determining DLOM.  In the meantime, courts will continue to pick from dueling appraisals or appoint “neutral” experts to provide independent opinions—a trail that Laro blazed in Bank One v. Commissioner (2003) (abstract and court opinion available at BVLibrary.com).  And while the Summit brought together the top leaders in the field today—including presentations by Chris Mercer, Ashok Abbott, Lance Hall, and hardball questions from Jim Hitchner—the conflicts among DLOM theories are far from reconciled.  “This is a situation in need of improvement,” Laro said, in his closing remarks. 

If you were unable to attend the Summit, be sure to catch BVResources’ next teleconference, “Discounts for Lack of Marketability” hosted by Brian Pearson (Valuation Advisors) on Thursday, October 2, 2008.  Pearson will recap the Summit, the pros and cons of the various approaches, and provide an open Q&A period on how to calculate the DLOM, including views from the experts as well as Judge Laro.  Click here to register for the teleconference.  For more information on the subject of DLOM, readers may be interested in the recently updated BVR’s Guide to the Discounts for Lack of Marketability, which includes new articles and hundreds of the most important and recent court cases on DLOM.  For more information, click here

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