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Unresolved tax issues influence BV firm business cycles, notes Shostag

Everyone knows about Congress’ failure to reinstate the estate tax, and now it looks like nothing’s going to happen until after the November elections. The later in the year it gets, the less likely there will be a retroactive estate tax. And the more talk there is of deficits, the less likely that the estate and gift tax will be repealed or even reset to 2009 levels.

Another potential tax change affecting FLPs is the proposal directed against hedge funds, which are typically structured as limited partnerships.  The upshot is that certain income taxed as capital gains benefiting both hedge funds and FLPs would be converted to ordinary income tax rates as high as 40%. The current version of the proposed legislation doesn’t distinguish FLPs from hedge funds – and would not only apply to investment gains but from the sale of the FLP itself.

Randall Schostag (Minnesota Business Valuation Group) shared the impact of all this uncertainty on his practice with BVWire:

“Our business was slow at the beginning of the year because there was some hope that the tax rates for gifting and estate purposes were going to be at least as favorable, or even more favorable than they were in 2009. The realization has now occurred that in fact we’re not likely to see things any more favorable and the chances are much greater that things will be worse come 2011. Therefore, there is some pick-up in BV assignments for gift tax purposes right now. The government has a huge deficit and they have to get cash from somewhere. Our read is that there will be an unwillingness on the part of our legislators in Washington to fight for low tax rates because they may believe that they have more important things to fight right now.”

How are the tax issues affecting your practice? Send your comments to editor@bvwire.com.

Andersen and Seigneur on growing your practice to include exit planning

Join James Andersen (Burr Pilger Mayer) and Ron Seigneur (Seigneur Gustafson) for “Succession Planning & Exit Strategies: Challenges and Opportunities Today”, a BVR webinar at 10:00 am PT/1:00 pm ET on Thursday, September 9.  As these two experts will show, the retirements of the baby boomer generation have created a wave of valuation business in succession and exit planning.  To take advantage, appraisers need to know how to recognize both the opportunities and the challenges these valuation assignments present.

For more information or to register, click here. Two CPE credits are available.

NERA seminar addresses impact of recent changes in business valuation practices for transfer pricing studies

NERA, in cooperation with the Tax Executives Institute (TEI), is hosting a tax and transfer pricing seminar on October 19 in NYC.  Experts from NERA’s Global Transfer Pricing Practice will provide updates on US international tax legislation and country specific updates on transfer pricing issues in Canada, the UK, Germany, France, Japan, and China.

For more information click here.

ESOP repurchase obligation – part of the appraiser’s due diligence

During last week’s webinar, “ESOP Valuation: Repurchase Obligations”, attorney Jared Kaplan (McDermott Will & Emery) and appraiser Robert Gross (Prairie Capital Advisors) agreed that the way a repurchase obligation (RO) is handled by the Company should be a part of the valuation process.

An ESOP RO is a bigger issue now than it was 30 years ago because there are more majority and 100% ESOPs. In addition, demographics in many companies are weighted by baby boomers, resulting in large ROs as this group approaches retirement age. Consequently, some trustees and their appraisers are reexamining traditional thinking of RO treatment in the ESOP valuation, challenging companies to focus on RO planning, requiring companies to forecast RO, and explicitly reflecting RO in the valuation.  Kaplan listed several factors that can change an ESOP RO:

• Timing of benefit payments
• Form of payment
• Timing of valuations
• “Run on the Bank”
• Recycling
• Early diversification
• Reshuffling/Rebalancing
• Dividends or distributions of S-Corp earnings
• Annual leveraged repurchases

To hear all of Kaplan and Gross’ discussion of these ESOP valuation topics, click here.

New four-part webinar series on damages and lost profits valuations

WMA insights on intellectual property valuation and economic analysis

We’ve just posted numerous new articles from Insights, the esteemed valuation quarterly published by Willamette Management Associates and provided exclusively to subscribers of BVResearch. The new content includes special-focus articles on intellectual property valuation and economic analysis. The new articles include:

• “The Sport of Kings: Promise and Perils of 21st Century Patent Litigation” by Scott D. Eads, Esq. (Perkins Coie LLP) and Julia E. Markley, Esq. (Perkins Coie LLP)
• “Valuation Considerations and Methods for a Patent Valuation Analysis” by Katherine A. Gilbert
• “What to Do When Considering an Intellectual Property Purchase” by Scott Slavick, Esq. (Brinks Hofer Gilson & Lione)
• “Forensic Patent Evaluations” by Mila Shvartsman and Vlad Shvartsman, Esq. (Shvartsman Laporte Shvartsman)
• “The Value of a Trade Secret” by Robert P. Schweihs (Willamette Management)
• “Valuing Trademark Intellectual Property Using the Relief from Royalty Method” by Robert P. Schweihs
• “Internal Revenue Service Announces That Intangible Assets Qualify as Section 1031 Like-Kind Exchange” by Robert F. Reilly (Willamette Management)
• “Intellectual Property Valuation, Economic Damages, and Transfer Price Analyses” by Robert F. Reilly
• “The Role of the Valuation Analyst in Providing Intellectual Property Litigation Services and the AICPA Professional Standards” by James G. Rabe (Willamette Management)
• “The Importance of Valuing Intellectual Property from an Attorney’s Perspective” by Gail Podolsky, Esq. (Carlton Fields, PA)
• “Combating Counterfeiting in an Electronic Era” by Camille M. Miller, Esq. (Cozen O’Connor) and Jennie A. Taylor, Esq. (Cozen O’Connor)
• “The Valuation of Copyright-related Intangible Assets” by C. Ryan Stewart (Willamette Management)

Sept. BVU now posted: fractional interests, convertible preferred stock transactions, and much more from industry-leading publication

The most recent BVUpdate (Sept. 2010), now available on BVLibrary, contains 8 timely articles of interest to business appraisers:

• Using Convertible Preferred Stock Transactions to Calculate DLOM: Brian Pearson (Valuation Advisors LLC)
• To Calculate or Not to Calculate: Revisiting the AICPA’s SSVS-1: Nathan DiNatale (SC&H Group LLC)
• Valuing Fractional Interests in a Vacation Home: A Conversation With Eric Nath
• Should Withheld Indemnifications Affect Licensing Valuations? David Wanetick (IncreMental Advantage LLC)
• Book Review: Buy-Sell Agreements for Closely Held and Family Business Owners—How to Know Your Agreement Will Work Without Triggering It: Dan Golish (Skoda Minotti)
• ETFs, DLOMs, and FLPs: Minimum Marketability Discounts: Ronald Seaman (Southland Business Group)
• ESOP Valuation— Smoothing versus Volatility: Robert Buchanan (PCE Companies, Inc.
• Special Legal Report: Daubert Challenges Ten Years After Kumho Tire: Sherrye Henry, Esq, (BVU Legal Editor)

An early-stage IP valuation puzzle…

U.S. Supreme Court takes next step to exempt draft appraisal reports from discovery

Nearly six months ago, the BVWire reported that a financial expert’s draft report would no longer be discoverable under proposed changes to Rule 26 of the Federal Rules of Civil Procedure (F.R.C.P.).  We assumed the U.S. Supreme Court would approve the changes and send them to Congress.

Most recent update: On July 15, 2010, the U.S. Supreme Court ratified the proposed changes, including the key provisions that apply the work-product protections of F.R.C.P. Rule 26(3)(A) and (B) to drafts expert reports and expert-attorney communications. Congress is fully expected to approve the rules, to take effect on Dec. 1, 2010. (But note: The new Rules will not apply retroactively, which may lead to delayed depositions in current lawsuits.)

Also noteworthy: “The proposed amendments to Rule 26 recognize that discovery into the bases of an expert’s opinion is critical,” says the Report by the Committee on Rules of Practice and Procedure (posted by attorneys Faegre & Benson). “The amendments make clear that while discovery into draft reports and many communications between an expert and retaining lawyer is subject to work-product protection, discovery is not limited for the areas important to learning the strengths and weaknesses of an expert’s opinion.” The following three types of communications between counsel and an expert will remain open to discovery:

1. Compensation for the expert’s study or testimony;
2. Facts or data provided by the lawyer that the expert considered in forming opinions; and
3. Assumptions provided to the expert by the lawyer that the expert relied upon in forming an opinion.

At the same time, the Report recognizes that expert have become critical to the litigation process and the new rules will eliminate the often “tortuous” avoidance steps that experts previously had to take—such as refraining from taking any notes, making any record of preliminary analyses or opinions, and producing any drafts. For a copy of all amended Rules, click here.

Note for appraisers using Done Deals

Heidi Walker, speaking on BVR’s webcast this morning focusing on transaction databases, reminds users that “equity price” on Done Deals doesn’t quite mean what most appraisers think it does.  If no debt is assumed, invested capital price equals equity price…so we have to remove debt from our subject company.

Because all of Done Deals transactions come from SEC filings, Heidi recommends that you always go back to the purchase price allocation information to see what assets transferred.

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