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Business Valuation and Federal Taxes: Procedure, Law and Perspective, 2nd Edition

Book Description

Praise for Business Valuation and Federal Taxes Procedure, Law, and Perspective Second Edition

"The Honorable David Laro and Dr. Shannon Pratt present a comprehensive primer on federal tax valuation controversies that will benefit both tax practitioners (attorneys and CPAs) and valuation practitioners. . . . It serves as a valued reference source and an introductory text for legal and valuation training."

—Roger J. Grabowski, Duff & Phelps Corp. from the Foreword

"[I]t is refreshing to see these two close observers of valuation issues collaborate on this intriguing volume. What the reader gets is something like a mural—depicting the life of a business appraisal from conception to preparation to the occasional ultimate use by a trier of fact."

—Ronald D. Aucutt, Esq.McGuireWoods LLP, from the Foreword

"This offering from Judge David Laro and Dr. Shannon Pratt fills in some persistent gaps in the business valuation literature, as well as a surprisingly fresh treatment of perennial themes."

—John A. Bogdanski, Professor of LawLewis & Clark Law School, from the Foreword

Straightforward guidance and perspective on business valuation from two of the nation's top authorities

Written by Senior Judge David Laro and Shannon Pratt, both leading experts on the subject, Business Valuation and Federal Taxes, Second Edition provides a comprehensive overview of business valuation procedures.

The new edition offers:

  • Insightful perspectives of personal versus enterprise goodwill

  • New materials on transfer pricing and customs valuations and how recent markets have affected both the income and market approaches

  • Timely coverage of FAS 157 and its many changes to penalties and sanctions affecting both taxpayers and appraisers

  • Exploration of new court cases

Presenting knowledge and guidance to those who perform valuations as well as those who are affected by them, Business Valuation and Federal Taxes, Second Edition is the essential guide to federal taxes and valuation, and specifically valuations relating to business interests.

Table of Contents

  1. Cover
  2. Title Page
  3. Copyright
  4. Dedication
  5. Foreword to Second Edition
  6. Foreword: Legal Practitioner's Perspective
  7. Foreword: Law Professor's Perspective
  8. Foreword: Business Appraiser's Perspective
  9. Preface to the New Edition
    1. Origin of the Book
    2. Authors Provide Own Perspectives
    3. Topics Covered
  10. Acknowledgments
  11. About the Authors
  12. Chapter 1: Standards of Business Valuation
    1. Summary
    2. Introduction
    3. Sources for Defining Value
    4. Definitions of Value
    5. Premise of Value
    6. Conclusion
  13. Chapter 2: Subsequent Events
    1. Summary
    2. Key Question
    3. Valuation Date
    4. Subsequent Events—Exceptions
    5. Conclusion
  14. Chapter 3: Business Valuation Experts
    1. Summary
    2. Introduction
    3. Proving Business Value
    4. The Expert Appraiser
    5. Types of Experts
    6. Various Roles of Experts
    7. Business Valuation Litigation Witnesses
    8. Admissibility of Evidence Underlying Expert Opinions
    9. Limitations to Admissibility
    10. Reliability of the Expert
    11. Minimum Thresholds for the Business Valuation Expert
    12. Sarbanes-Oxley Act of 2002
    13. Attorney Assistance to the Expert
    14. Qualified Appraiser
    15. Concerns about Expert Testimony
    16. Court-Appointed Expert
    17. Conclusion
    18. Appendix: Expert Credentials and Qualifications
  15. Chapter 4: Sources of Law and Choice of Courts
    1. Summary
    2. Structure of the American Legal System
    3. Tax Law
    4. Tax Litigation
    5. Conclusion
  16. Chapter 5: Burden of Proof in Valuation Controversies
    1. Summary
    2. Burden of Proof
    3. Who Bears the Burden of Proof?
    4. Burden of Proof: Exceptions to the General Rule
  17. Chapter 6: Penalties and Sanctions
    1. Summary
    2. Introduction
    3. Valuation Penalties
    4. Preparer and Appraiser Penalties
    5. General Penalties
    6. Discretionary Sanctions
  18. Chapter 7: How the Form of Entity Affects Valuation
    1. Summary
    2. Introduction
    3. Corporations
    4. General Partnerships
    5. Limited Partnerships
    6. Limited Liability Companies
    7. Sole Proprietorships
    8. Tax Classifications
    9. Valuation Considerations
    10. Entity-Level Discounts
    11. Choice of Jurisdiction
    12. Conclusion
  19. Chapter 8: Valuation of S Corporations and Other Pass-Through Tax Entities: Minority and Controlling Interests
    1. Introduction
    2. Case Law Background
    3. S Corporation Minority Interest Appraisals
    4. Comparison of Minority Interest Theories—A Summary of the Issues
    5. S Corporation Controlling Interest Appraisals
    6. General S Corporation Appraisal Considerations
    7. Conclusion
  20. Chapter 9: Transfer Pricing
    1. Summary
    2. Introduction
    3. Conclusion
  21. Chapter 10: Customs Valuation
    1. Summary
    2. Introduction
    3. Customs Valuation Methods and Concepts
    4. Related-Party Transactions
    5. Conclusion
  22. Chapter 11: Adjustments to Financial Statements
    1. Summary
    2. Separating Nonoperating Items from Operating Items
    3. Addressing Excess Assets and Asset Deficiencies
    4. Handling Contingent Assets and Liabilities
    5. Adjusting Cash-Basis Statements to Accrual-Basis Statements
    6. Normalizing Adjustments
    7. Controlling Adjustments
    8. Conclusion
  23. Chapter 12: Comparative Financial Statement Analysis
    1. Summary
    2. Comparable Ratio Analysis
    3. Common Size Statements
    4. Tying the Financial Statement Analysis to the Value Conclusion
    5. Conclusion
  24. Chapter 13: Economic and Industry Analysis
    1. Summary
    2. Objective of Economic and Industry Analysis
    3. International Economic Analysis
    4. National Economic Analysis
    5. Regional and Local Economic Analysis
    6. Industry Analysis
    7. Conclusion
    8. Partial Bibliography of Sources for Economic and Industry Analysis
  25. Chapter 14: Site Visits and Interviews
    1. Summary
    2. Site Visits
    3. Management Interviews
    4. Interviews with Persons Outside the Company
    5. Conclusion
  26. Chapter 15: The Income Approach
    1. Summary of Approaches, Methods, and Procedures
    2. Introduction to the Income Approach
    3. Net Cash Flow: The Preferred Measure of Economic Benefit in the Income Approach
    4. Discounting versus Capitalizing
    5. Relationship between Discount Rate and Capitalization Rate
    6. Projected Amounts of Expected Returns
    7. Developing Discount and Capitalization Rates for Equity Returns
    8. Weighted Average Cost of Capital (WACC)
    9. The Midyear Convention
    10. The Income Approach in the Courts
    11. Conclusion
    12. Appendix: An Illustration of the Income Approach to Valuation
  27. Chapter 16: The Market Approach
    1. Summary
    2. The Market Approach
    3. Revenue Ruling 59-60 Emphasizes Market Approach
    4. The Guideline Public Company and the Guideline Transaction (Merger and Acquisition) Method
    5. How Many Guideline Companies?
    6. Selection of Guideline Companies
    7. Documenting the Search for Guideline Companies
    8. Choosing Multiples Based on Objective Empirical Evidence
    9. What Prices to Use in the Numerators of the Market Valuation Multiples
    10. Choosing the Level of the Valuation Multiple
    11. Selecting Which Valuation Multiples to Use
    12. Assigning Weights to Various Market Multiples
    13. Sample Market Valuation Approach Tables
    14. Other Methods Classified under the Market Approach
    15. Conclusion
    16. Appendix: An Illustration of the Market Approach to Valuation
  28. Chapter 17: The Asset-Based Approach
    1. Summary
    2. Adjusted Net Asset Value Method
    3. Excess Earnings Method (The Formula Approach)
    4. Conclusion
  29. Chapter 18: Entity-Level Discounts
    1. Summary
    2. Trapped-In Capital Gains Discount
    3. Key Person Discount
    4. Portfolio (Nonhomogeneous Assets) Discount
    5. Discount for Contingent Liabilities
    6. Conclusion
  30. Chapter 19: Minority Discounts/Control Premiums
    1. Summary
    2. Minority Discounts/Control Premiums
    3. Conclusion
  31. Chapter 20: Discounts for Lack of Marketability
    1. Summary: General Introduction to Shareholder-Level Discounts and Premiums
    2. Definition of Marketability
    3. Benchmark for Marketability Is Cash in Three Days
    4. Investors Cherish Liquidity, Abhor Illiquidity
    5. Degrees of Marketability or Lack Thereof
    6. Empirical Evidence to Quantify Discounts for Lack of Marketability: Restricted Stock Studies
    7. Empirical Evidence to Quantify Discounts for Lack of Marketability: Pre-IPO Studies
    8. Criticisms of the Pre-IPO Studies
    9. Factors Affecting the Magnitude of Discounts for Lack of Marketability
    10. Use of the Databases for Quantifying Discounts for Lack of Marketability
    11. Discounts for Lack of Marketability for Controlling Interests
    12. Option Pricing as Indicator of DLOM
    13. Discounts for Lack of Marketability in the Courts
    14. Conclusion
    15. Partial Bibliography of Sources for Discounts for Lack of Marketability
  32. Chapter 21: Other Shareholder-Level Discounts
    1. Summary
    2. Voting versus Nonvoting Shares
    3. Blockage
    4. Discounts for Undivided Fractional Interests in Property
    5. Conclusion
  33. Chapter 22: Personal versus Enterprise Goodwill
    1. Summary
    2. Definitions of Goodwill
    3. Tax Implications
    4. Indications of Personal versus Enterprise Goodwill
    5. Landmark Cases
    6. Excerpt from Personal Goodwill Appraisal Report
    7. Conclusion
  34. Chapter 23: Weighting of Approaches
    1. Summary
    2. Theory and Practice
    3. Mathematical versus Subjective Weighting
    4. Examples of Weighting of Approaches
    5. Conclusion
  35. Chapter 24: IRS Positions
    1. Summary
    2. Introduction
    3. Rev. Rul. 59-60
    4. Rev. Rul. 65-192
    5. Rev. Rul. 65-193
    6. Rev. Proc. 66-49
    7. Rev. Rul. 68-609
    8. Rev. Proc. 77-12
    9. Rev. Rul. 77-287
    10. Rev. Rul. 83-120
    11. Rev. Rul. 85-75
    12. Rev. Rul. 93-12
    13. Tax Advice Memorandum 9436005
    14. Rev. Proc. 2003-51
    15. Rev. Proc. 2007-41
    16. Rev. Rul. 2008-35
  36. Chapter 25: Business Appraisal Reports
    1. Summary
    2. Business Valuation Report-Writing Standards
    3. Elements of the Business Valuation Report
    4. Organization of the Report
    5. Qualities of a Good Appraisal Report
    6. Conclusion
  37. Chapter 26: Valuation of Options
    1. Summary
    2. Introduction and Background
    3. General Principles of Option Valuation
    4. Specific Rules for Valuing Options
    5. Conclusion
  38. Chapter 27: Questions to Ask Business Valuation Experts
    1. Summary
    2. Qualifications
    3. Financial Statement Adjustments and Analysis
    4. Economic and Industry Data
    5. Site Visits and Interviews
    6. General Questions about Methodology
    7. Discount and Capitalization Rates in the Income Approach
    8. Projections Used in the Income Approach
    9. Asset-Based Approach
    10. Entity-Level Discounts
    11. Minority Interest Discounts/Control Premiums
    12. Discounts for Lack of Marketability
    13. Voting/Nonvoting Stock
    14. Questions about Contradictory Prior Testimony
  39. Appendix A: International Glossary of Business Valuation Terms
  40. Appendix B: Bibliography
    1. Books
    2. Articles and Papers
    3. Periodicals
    4. Mergers and Acquisitions Databases
    5. Discount for Lack of Marketability Databases
  41. Table of Cases
  42. Index