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Valuing Pass-Through Entities

Book Description

The clarity and guidance valuation analysts have been thirsting for

The business appraisal community regularly names the valuation of pass-through entities as a major issue of concern. Courts, appraisers, and the IRS have long been at odds on the topic, and the contention within the appraisal community itself over methods and inputs further complicates the issue. Valuing Pass-Through Entities provides clarity for the analyst tasked with valuation, offering clear explanations of the different perspectives and approaches to the process.

Valuing Pass-Through Entities cuts through the chatter to:

  • Explain the advantages and limitations of different types of pass-through entities

  • Analyze the different viewpoints currently dividing the appraisal community

  • Gain a fresh perspective on landmark cases

  • Explain how to properly utilize a court-tested model

  • Examine detailed sensitivity analyses of different inputs under the income and market approaches

  • The book includes illustrative examples, templates, and a useful technical supplement, plus case studies that demonstrate the real-world effects of various pass-through entity valuation methods and inputs. Detailed analyses and an easy-to-apply model simplify the process while positively affecting outcomes. The companion website provides the text of landmark court decisions, a blog featuring industry trends and tidbits, additional articles, and the insight of the author and other industry leaders.

    Valuation requires the successful juggling of multiple variables, many of which can have a major impact on value. Analysts need to know how to balance each factor and apply the appropriate rates and discounts, but a lack of standard practice often leaves the issue too subjective. Valuing Pass-Through Entities clears the air, providing real-world guidelines and tools.

    Table of Contents

    1. Cover
    2. Series Page
    3. Title Page
    4. Copyright
    5. Dedication
    6. Foreword
    7. Preface
    8. Acknowledgments
    9. About the Author
    10. Chapter 1: Introduction
      1. Definition of Value
      2. Beauty and Value
      3. Premise of Value
      4. Approaches to Value
      5. The PTE Conundrum
    11. Chapter 2: The History of Federal Statutory Tax Rates in Maximum Income Brackets and the Evolution of Different Forms of Business Entities
      1. Origins of the United States Internal Revenue Code
      2. Years 1913 Through 1938
      3. Years 1939 Through 1953
      4. Years 1954 Through 1985
      5. S Corporations
      6. Tax on Unreasonable Compensation
      7. General Utilities Doctrine
      8. Years 1986 Through 2013
      9. Limited Liability Companies
      10. Summary
    12. Chapter 3: Effective Federal Individual and Corporation Income Tax Rates
      1. Effective Federal Income Taxes on $10,000 of 2012 CPI Adjusted Taxable Income, 1913–2013
      2. Effective Federal Income Taxes on $100,000 of 2012 CPI Adjusted Taxable Income, 1913–2013
      3. Effective Federal Income Taxes on $1 Million of 2012 CPI Adjusted Taxable Income, 1913–2013
      4. Summary
    13. Chapter 4: Comparison of Different Entity Forms
      1. Business Life Cycle
      2. Benefits and Limitations of PTEs
      3. Financial Statements of C Corporations and PTEs
      4. PTE Status and Bank Financing
      5. Prevalence of PTEs
      6. Change in Form of Entity
    14. Chapter 5: Income Approach and Value to the Holder
      1. Value to the Holder versus Value to the Buyer
      2. Jurisdictional Issues
      3. Delaware Open MRI Radiology Associates, P.A. v. Howard B. Kessler4
      4. Bernier v. Bernier
      5. Limitations OF Delaware Open MRI and Bernier
      6. The Modified Delaware MRI Model
      7. Flexibility of the MDMM
    15. Chapter 6: Inputs to Modified Delaware MRI Model
      1. Normalized Pretax Income
      2. Entity-Level Income Taxes on Pass-Through Earnings
      3. Income Retained in the Business
      4. Effective Federal and State Income Tax Rates on Pass-Through Income
      5. Dividend Tax Rates
      6. Summary
    16. Chapter 7: Income Approach and Investment Value
      1. Measuring Investment Value
      2. Deal Structure
    17. Chapter 8: Income Approach and Fair Market Value
      1. Characteristics of FMV
      2. Determining FMV
      3. Example of Failing to Consider Floor and Ceiling Values
    18. Chapter 9: Fair Market Value Court Decisions
      1. Number of Federal Estate and Gift Tax Returns
      2. Gross V. Commissioner9
      3. Estate of Heck V. Commissioner
      4. Wall V. Commissioner
      5. Estate of Adams V. Commissioner
      6. Robert Dallas V. Commissioner
      7. Gallagher V. Commissioner
      8. Analysis of Cases
    19. Chapter 10: The Market Approach
      1. Revenue Ruling 59–60
      2. Appraisal Standards Board Standards
      3. Aicpa Statement on Standards for Valuation Services
      4. Guideline Public Company Method
      5. Guideline Public Company Method and PTE Value to the Holder
      6. Guideline Public Company Method and PTE Investment Value
      7. Guideline Public Company Method and PTE Fair Market Value
      8. Guideline Transactions Method
    20. Chapter 11: Individual State Income Taxes
      1. Statutory Individual State Income Tax Rates
      2. Effective Individual State Income Tax Rates
    21. Chapter 12: Discounts, Premiums, Bylaws, and State Laws
      1. PTE Agreements
      2. State Law
      3. Nevada Senate Bill 350
    22. Chapter 13: Valuing Complex PTE Ownership Interests
      1. Reasons for Complex Capital Structures
      2. Option-Pricing Method1
      3. Example 1: Preferred-Member Units
      4. Example 2: Joint Venture
      5. Example 3: S Corporation with Unreasonable Officer/Stockholder Compensation
    23. Appendix A: Checklist
    24. Appendix B: Case Study: Bob's Cruises
      1. Part I: Introduction
      2. Part II: Sam's Cruises
      3. Part III: Valuing Sam's Cruises
      4. Part IV: Valuing Betty's Cruises
      5. Part V: Closing the Deal
      6. Part VI: Looking Back
    25. About the Website
    26. Index
    27. End User License Agreement