The two most widely approaches used by valuators to determine a discount for lack of marketability (DLOM) are restricted stock studies and IPO studies. The restricted stock studies compare transaction prices in restricted shares with contemporaneous trading prices for unrestricted shares. The pre-IPO studies, on the other hand, according to the author, lead to conclusions that are unsound in theory and in practice. In this article, the author discusses six major flaws in the data that, in the author’s opinion, make the pre-IPO studies’ conclusions totally unreliable for determining discounts for lack of marketability. The two most widely approaches used…
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Connecticut Appellate Court Affirms Trial Court’s Decision Not to Tax-Affect Earnings In a dispute over the buyout of the minority shares in a family business, the Connecticut appellate court addressed several important valuation issues. Notably, the appellate court upheld the trial court’s decision not to tax-affect the company’s earnings in determining the fair value of the shares, even though both the plaintiffs’ and defendants’ experts had done so. The appellate court also upheld the trial court’s findings that (1) the company engaged in shareholder oppression and, therefore, the value of the minority shareholder’s interest would not be subject to a…
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Best Practices: Thought Leadership in Valuation, Damages, and Transfer Price Analysis This fall, Robert F. Reilly and Robert P. Schweihs published Best Practices: Thought Leadership in Valuation, Damages, and Transfer Price Analysis. The book celebrates the 50th anniversary of Willamette Management Associates and is intended to present thought leadership. The topics selected for inclusion are topics that the authors felt did not already enjoy thought leadership discussion in the current literature. As the authors note: “we were not satisfied with the breadth or depth of the available literature in [many of the topics covered]. We usually concluded: Someone should write…
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A Discount for Controlling Interests This article examines studies and judicial decisions addressing the use of DLOMs where there are controlling, 100% ownership interests, followed by review of a recent client assignment that illustrates the importance of being well versed with the valuation theory in this area.
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Book Review by Michael D. Pakter, CPA, CFF, CGMA, CFE, CVA, MAFF, CA, CIRA, CDBV In this article, Michael D. Pakter, writes a brief review of Michael Gregory’s latest book, Business Valuations and the IRS: Five Books in One.
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Historical perspective and current recommendations The Internal Revenue Service published Discount for Lack of Marketability: Job Aid for IRS Professionals (Job Aid) in August of 2013. Now, two new books provide advice on how to prepare a DLOM and which methods valuators should consider and why. These will help any business valuation practice, whether working on a DLOM for the IRS or any other purpose.
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Beyond an all-or-nothing approach This overview examines the circumstances under which S corporations may or may not be tax affected. Particular emphasis is placed on family law engagements, which do not always involve a consistently defined standard of value, which creates much confusion for valuation analysts.
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Appraisers Should Focus on Objectivity and Competence and Be Ready and Flexible to Deal with Unanticipated Challenges—From Vague Case Law to New Evidence to Erupting Personalities. Rand Curtiss expounds on his philosophy that business appraisal is about boundaries: limits on what we can do. Every work challenge is filled with a large number of people, each of whom have different boundaries. Business sellers want emotionally high prices. Plaintiffs want to destroy defendants. Taxpayers want to minimize taxes. Scenarios are complicated by the fact that a central problem in business appraisal is balancing the purely scientific with a bit of the…
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In Berquist v. Commissioner, Judge Swift Finds a Company’s Pending Liquidation is Relevant and Foreseeable. The Tax Court valued closely-held stock in an anesthesiology practice donated to a hospital for charitable contribution purposes at its liquidation value since the anesthesiology practice would no longer exist after the physician-stockholders were consolidated into a newly-formed umbrella physician management company. The donors valued the practice at $401.79 per share under the going concern premise of value. The respondent determined a fair market value of $37.00 per share under the liquidation premise of value. The Judge cited one key factor that determined his ruling. …
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Estate of Natale B. Giustina v. Commissioner What happens when a case lands in the United States Tax Court where Form 706 found the fair market value of a business share at $12.6 million and the IRS estimates it’s worth $36 million? Find out, in Estate of Natale B. Giustina v. Commissioner! At issue was a 41 percent share in a closely held timber company. Meanwhile, in the Delaware Chancery Court, In re Answers Corp. Shareholders Litigation finds plaintiff shareholders arguing to enjoin the sale of the company because they believed it was of higher worth. The Court finds the…
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Stumped on How to Figure Discounts? The IRS Can Help. The Engineering/Valuation Program DLOM Team at the IRS has posted a job aid on the IRS site. The 112-page guide reviews definitions of marketability and discusses factors that influence it. The aid illuminates the distinctions between minority and controlling interests. It offers sample initial information document requests (IDRs). A large section of the document reviews various methods of factoring DLOM. These include benchmark approaches (restricted stock studies, pre-IPO studies, cost of flotation, and Mandelbaum factors), securities-based approaches (LEAPs, the Longstaff Study, the Chaffee Study, Bid-Ask Spread Method), analytical approaches (Wruck;…