Business Valuation and Taxes : Procedure, Law, and Perspective,9780471694373

Business Valuation and Taxes : Procedure, Law, and Perspective

by ;
ISBN13: 9780471694373
ISBN10: 0471694371
Format: Hardcover
Pub. Date: 2005-04-01
Publisher(s): Wiley
List Price: $131.50

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Summary

Disputes over valuation issues fill the court's dockets and for good reason, fair market valuations are required frequently by the law. The authors believe that approximately 243 sections of the Code and several thousand references in the Regulations explicitly require fair market value determination. Consequently, taxpayers file an estimated 15 million tax returns each year reporting an event involving a valuation related issue. It is no mystery, therefore, why valuation cases are ubiquitous. Today, valuation is an important and highly sophisticated process. Valuators need legitimate guidance to perform their work. The objective of this book is to provide knowledge, and guidance to those who do the valuations as well as those who are affected by them. This unprecedented text provides: Clear guidance and perspective on business valuation from two of the nation' s top authorities, Hon. David Laro and Dr Shannon Pratt. Insightful perspective and discussion on critical issues, procedures and law pertaining to business valuation. An overview of business valuation procedures Law and techniques of Fair Market Value Opinion from the Hon. David Laro and Dr. Shannon Pratt who express their unique and critical views. The business valuer with everything from the basics to the sophisticated. From definitions to valuing complex business interests, what you need to know about business valuation. Everything from empirical market evidence to credible expert business

Author Biography

DAVID LARO was appointed by President Bush to the United States Tax Court, confirmed by the Senate, and vested as a federal judge in November 1992. He formerly practiced law in Flint and Ann Arbor, Michigan, specializing in tax law for twenty-four years. Judge Laro was chairman and CEO of a publicly traded international company and cofounded Republic Bancorp, a Michigan bank holding company. He is an adjunct professor of law at Georgetown University Law Center, a visiting professor at the University of San Diego Law School, and a lecturer at Stanford Law School. He is a frequent guest speaker and has written numerous articles on taxation.

Shannon P. Pratt, CFA, FASA, MCBA, CM&AA, is the Chairman and CEO of Shannon Pratt Valuations, Inc. a premier business valuation firm located in Portland Oregon, and is the founder and Editor Emeritus of Business Valuation Resources, LLC. Over a distinguished career of close to four decades, he has performed valuation engagements for M&A, ESOPs, gift and estate taxation, marital dissolution, shareholder oppression and dissent, and numerous other purposes. He has conducted numerous fairness and solvency opinions, has testified in a wide variety of federal and state courts across the country, and frequently participates in arbitration and mediation proceedings. Dr. Pratt is one of the most successful and respected authors in his field. He is the author or coauthor of several industry standards, including Valuing a Business: The Analysis and Appraisal of Closely Held Companies, Valuing Small Businesses and Professional Practices, The Market Approach to Valuing Businesses, Standards of Value, Business Valuation and Taxes, The Lawyer's Business Valuation Handbook, and Cost of Capital

Table of Contents

Forewords xvii
Preface xxiii
Acknowledgments xxvii
Standards of Business Valuation
1(16)
Summary
1(1)
Introduction
2(1)
Sources for Defining Value
3(4)
Definitions of Value
7(8)
Premise of Value
15(1)
Conclusion
16(1)
Subsequent Events
17(7)
Summary
17(1)
Key Question
17(1)
Valuation Date
17(2)
Subsequent Events---Exceptions
19(4)
Conclusion
23(1)
Business Valuation Experts
24(24)
Summary
24(1)
Introduction
25(1)
Proving Business Value
25(1)
The Expert Appraiser
26(1)
Types of Experts
26(1)
Various Roles of Experts
27(1)
Business Valuation Litigation Witnesses
28(1)
Admissibility of Evidence Underlying Expert Opinions
29(1)
Limitations to Admissibility
30(1)
Reliability of the Expert
31(2)
Minimum Thresholds for the Business Valuation Expert
33(1)
Sarbanes-Oxley Act of 2002
34(1)
Attorney Assistance to the Expert
35(2)
Qualified Appraiser
37(1)
Concerns about Expert Testimony
38(2)
Court-Appointed Expert
40(1)
Conclusion
41(1)
Appendix: Expert Credentials and Qualifications
42(6)
Sources of Law and Choice of Courts
48(7)
Summary
48(1)
Structure of the American Legal System
48(1)
Tax Law
49(2)
Tax Litigation
51(4)
Burden of Proof in Valuation Controversies
55(8)
Summary
55(2)
Burden of Proof
57(1)
Who Bears the Burden of Proof
58(1)
Burden of Proof: Exceptions to the General Rule
59(4)
Penalties and Sanctions
63(7)
Summary
63(1)
Introduction
63(1)
What You Need to Know
64(1)
Valuation Penalties
65(2)
General Penalties
67(1)
Discretionary Sanctions
68(2)
Valuation and Choice of Entity
70(9)
Summary
70(1)
Introduction
71(1)
Corporations
72(1)
Limited Liability Companies
73(1)
General Partnerships
73(1)
Limited Partnerships
74(1)
Sole Proprietorships
75(1)
Valuation Considerations
75(2)
Choice of Jurisdiction
77(1)
Conclusion
77(2)
Valuation of S Corporations and Other Pass-Through Tax Entities: Minority and Controlling Interests
79(58)
Introduction
79(2)
Case Law Background
81(2)
S Corporation Minority Interest Appraisals
83(44)
Comparison of Minority Interest Theories---A Summary of the Issues
127(3)
S Corporation Controlling Interest Appraisals
130(1)
Summary
131(1)
S Corporation Valuation Issues---Partial Bibliography
131(6)
Valuation of International Transactions
137(16)
Summary
137(1)
Introduction
138(1)
Transfer Pricing
139(8)
Customs Valuation
147(5)
Conclusion
152(1)
Adjustments to Financial Statements
153(6)
Summary
153(1)
Separating Nonoperating Items from Operating Items
154(1)
Addressing Excess Assets and Asset Deficiencies
155(1)
Handling Contingent Assets and Liabilities
155(1)
Adjusting Cash-Basis Statements to Accrual-Basis Statements
156(1)
Normalizing Adjustments
156(1)
Controlling Adjustments
157(1)
Conclusion
158(1)
Comparative Financial Statement Analysis
159(9)
Summary
159(2)
Comparable Ratio Analysis
161(5)
Common Size Statements
166(1)
Tying the Financial Statement Analysis to the Value Conclusion
167(1)
Conclusion
167(1)
Economic and Industry Analysis
168(10)
Summary
168(1)
Objective of Economic and Industry Analysis
168(1)
National Economic Analysis
169(1)
Regional and Local Economic Analysis
170(1)
Industry Analysis
170(2)
Conclusion
172(1)
Partial Bibliography of Sources for Economic and Industry Analysis
172(6)
Site Visits and Interviews
178(3)
Summary
178(1)
Site Visits
178(1)
Management Interviews
178(1)
Interviews with Persons Outside the Company
179(1)
Conclusion
180(1)
The Income Approach
181(28)
Summary of Approaches, Methods and Procedures
181(1)
Introduction to the Income Approach
182(1)
Net Cash Flow: The Preferred Measure of Economic Benefit in the Income Approach
182(2)
Discounting versus Capitalizing
184(1)
Relationship between Discount Rate and Capitalization Rate
184(6)
Projected Amounts of Expected Returns
190(1)
Developing Discount and Capitalization Rates for Equity Returns
190(4)
Weighted Average Cost of Capital (WACC)
194(1)
The Midyear Convention
195(1)
The Income Approach in the Courts
196(4)
Conclusion
200(1)
Appendix: An Illustration of the Income Approach to Valuation
201(8)
The Market Approach
209(51)
Summary
209(1)
The Market Approach
210(1)
Revenue Ruling 59-60 Emphasizes Market Approach
210(1)
The Guideline Publicly Traded Company and the Guideline Transaction (Merger and Acquisition) Method
211(2)
How Many Guideline Companies?
213(4)
Selection of Guideline Companies
217(2)
Documenting the Search for Guideline Companies
219(1)
Choosing Multiples Based on Objective Empirical Evidence
219(1)
What Prices to Use in the Numerators of the Market Valuation Multiples
220(1)
Choosing the Level of the Valuation Multiple
220(2)
Selecting Which Valuation Multiples to Use
222(2)
Assigning Weights to Various Market Multiples
224(1)
Sample Market Valuation Approach Tables
224(1)
Other Methods Classified under the Market Approach
224(5)
Conclusion
229(1)
Appendix: An Illustration of the Market Approach to Valuation
230(30)
The Asset-Based Approach
260(6)
Summary
260(1)
The Adjusted Net Asset Value Method
260(1)
Excess Earnings Method (The Formula Approach)
261(4)
Conclusion
265(1)
Entity-Level Discounts
266(16)
Summary
266(1)
Trapped-In Capital Gains Discount
267(4)
Key Person Discount
271(5)
Portfolio (Nonhomogeneous Assets) Discount
276(3)
Discount for Contingent Liabilities
279(2)
Conclusion
281(1)
Discounts for Lack of Marketability
282(29)
Summary: General Introduction to Shareholder-Level Discounts and Premiums
283(1)
Definition of Marketability
283(1)
Benchmark for Marketability Is Cash in Three Days
284(1)
Investors Cherish Liquidity, Abhor Illiquidity
285(1)
Degrees of Marketability or Lack Thereof
285(1)
Empirical Evidence to Quantify Discounts for Lack of Marketability: The Restricted Stock Studies
286(5)
Empirical Evidence to Quantify Discounts for Lack of Marketability: Pre-IPO Studies
291(3)
Criticisms of the Pre-IPO Studies
294(1)
Factors Affecting the Magnitude of Discounts for Lack of Marketability
295(4)
Use of the Databases for Quantifying Discounts for Lack of Marketability
299(3)
Discounts for Lack of Marketability in the Courts
302(7)
Conclusion
309(1)
Partial Bibliography of Sources for Discounts for Lack of Marketability
310(1)
Other Shareholder-Level Discounts
311(13)
Summary
311(1)
Minority Discounts/Control Premiums
311(6)
Voting versus Nonvoting Shares
317(1)
Blockage
318(3)
Discounts for Undivided Fractional Interests in Property
321(2)
Conclusion
323(1)
Weighting of Approaches
324(4)
Summary
324(1)
Theory and Practice
324(1)
Mathematical versus Subjective Weighting
325(1)
Examples of Weighting of Approaches
326(1)
Conclusion
327(1)
Valuation of Options
328(12)
Summary
328(1)
Introduction and Background
329(1)
General Principles of Option Valuation
330(4)
Specific Rules for Valuing Options
334(5)
Conclusion
339(1)
IRS Positions
340(43)
Summary
340(1)
Introduction
341(1)
Rev. Rul. 59-60
342(8)
Rev. Rul. 65-192
350(4)
Rev. Rul. 65-193
354(1)
Rev. Proc. 66-49
354(4)
Rev. Rul. 68-609
358(1)
Rev. Proc. 77-12
359(2)
Rev. Rul. 77-287
361(6)
Rev. Rul. 83-120
367(4)
Rev. Rul. 85-75
371(1)
Rev. Rul. 93-12
372(2)
Tax Advice Memorandum 1994-36-005
374(4)
Rev. Proc. 2003-51
378(4)
Conclusion
382(1)
Business Appraisal Reports
383(17)
Summary
384(1)
Business Valuation Report-Writing Standards
384(8)
Elements of the Business Valuation Report
392(5)
Organization of the Report
397(1)
Qualities of a Good Appraisal Report
397(2)
Conclusion
399(1)
Questions to Ask Business Valuation Experts
400(7)
Summary
400(1)
Qualifications
400(2)
Financial Statement Adjustments and Analysis
402(1)
Economic and Industry Data
402(1)
Site Visits and Interviews
402(1)
General Questions about Methodology
402(1)
Discount and Capitalization Rates in the Income Approach
402(2)
Projections Used in the Income Approach
404(1)
Market Approach
404(1)
Asset-Based Approach
405(1)
Entity-Level Discounts
405(1)
Minority Interest Discounts/Control Premiums
405(1)
Discounts for Lack of Marketability
405(1)
Voting/Nonvoting Stock
406(1)
Questions about Contradictory Prior Testimony
406(1)
Appendix A IRS Business Valuation Guidelines 407(5)
Appendix B International Glossary of Business Valuation Terms 412(7)
Appendix C Bibliography 419(7)
Appendix D Table of Cases 426(5)
Index 431

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