How to Prepare a Discount for Lack of Marketability for the IRS

Transcription

1 Valuation Cutting-Edge Topics How to Prepare a Discount for Lack of Marketability for the IRS Michael Gregory

2 Please set pagers, cell phones, etc. on vibrate mode or turn them off. Please complete and hand in the Presenter Evaluation forms. Don t forget to complete your CPE Attestation Form. Add your Membership Number (located on your name badge) and sign it. Keep the white copy for your records. Turn in the yellow copy at the Registration Desk. 2

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4 Valuation Cutting-Edge Topics Thursday, June 19, 2014 Michael Gregory, CVA, ASA, Qualified Neutral MN Supreme Court How to Prepare a Discount for Lack of Marketability for the IRS 4

5 Michael Gregory Three years at Michael Gregory Consulting, LLC 28 years at IRS as engineer valuer, manager, operations team lead, controller, acting assistant director, territory manager Territory Manager of Specialists Key Championed IRS DLOM Job Aid Published 8/ ASA, CVA, MBA and Qualified Neutral 5

6 Disclaimer The opinions presented here are those of Michael Gregory. Michael Gregory does not represent the IRS. Any opinions presented in this seminar are those of the author and do not represent an official position of their current or previous employers. This material is offered for educational purposes only. The author and his employer expressly disclaim any liability, including incidental or consequential damages, arising from the use of this material or any errors or omissions that may be contained in it. 6

7 Background and Today s Presentation Discount for Lack of Marketability Job Aid for IRS Valuation Professionals at Prepared 9/2009 for IRS Valuers August 2011 Developments The Job Aid Public and Private Comments on the Job Aid Comments on a Review of the Job Aid (Discount for Lack of Marketability and the IRS October 2013) Working with the IRS Organization Elevate and Specialists 7

8 The IRS Big Picture IRS Founded in 1913 with 16 th Amendment Hired First Engineers in 1914 Today 320 Engineers 180 with Credentials in Valuation Specialists in IRS 1913 to 1999 Organization 2000 to Now Organization Small Business Self Employed Large Business and International Tax Exempt and Governmental Entities Wage and Investment Engineers Embedded in LB&I but Service all Divisions Control of Case by Case Manager, Team Manager, E&G Mgr 8

9 DLOM Historical Perspective I left the IRS July 31, 2011 Call from Eva Lang and Jim Hitchner Call from the IRS Research IRS Officially Publishes Job Aide August 22 nd at 4:01 PM Webinar August 23 rd with Jim Hitchner and Jim Alerding 9

10 Follow Up After Webinar Webinar Published Other Follow Up Webinars Lance Hall September 8, 2011 FMV Opinions Rebuts Job Aide Chris Mercer September 15, 2011 QMDM Over 900 Call in Lines Thank Jim Hitchner for Assistance 10

11 Job Aid on DLOM at Download It Read It Key Points When What Why How It May Be Useful 11

12 IRS Job Aid Key Points Prepared and Reviewed by 5 ASA s, 8 AVA/CVA s and 3 CPA s IRS View on DLOM s as of 2009 Identifies 33 Factors Deemed Important * Includes 17 Initial IDR Items * Includes How IRS Valuers Should Approach Issue As a Reviewer * Suggest Include In Your Report 12

13 IRS Job Aid Key Points Continued Includes How IRS Valuers Should Approach Issue As a Valuer Provides Sample Report Language * Detailed Strengths and Weaknesses of Most Common Approaches * Addresses Concerns with Fair Market Value Opinions Statistical Analysis Provides Detailed Commentary on Other Methods * Suggest Include In Your Report 13

14 Quick Overview of the IRS DLOM Job Aid Four Categories Benchmark Approaches Securities Based Approaches Analytical Approaches Other Approaches Eighteen Methods in Body and Two in Appendices Methods Chosen Based on What IRS Valuers Saw on Audit 14

15 Benchmark Approaches Restricted Stock Studies Pre IPO Studies Restricted Stock Equivalent Analysis Cost of Flotation Mandelbaum Factors, Judge Laro 1995 Updated Comments on Pluris Data and FMV Opinions Data 15

16 Securities Based Approaches Long Term Equity Anticipation Securities (LEAPS) Robert Trout 2003, Ronald Seaman 2005 The Longstaff Study, Journal of Finance, December 1995 The Chaffee Study Bid Ask Spread Method to Determine DLOM Finnerty, Journal of Derivates, Summer

17 Analytical Approaches Karen Hopper Wruck Hertzel and Smith Bajaj, Denis, Ferris and Sarin Ashok B. Abbott 17

18 Other Approaches QMDM (Christopher Mercer) NICE (William Frazier) NERA (David Tabak) Partnership Profiles (Partnership Spectrum) Public versus Private P/E Ratios in Acquisitions (MergerStat) In Appendix (note earlier comments) John Finnerty FMV Opinions 18

19 Job Aid Comments Executive Summary Background Objective Approach Conclusion Introduction Organization Other Authors Observations 19

20 Observations IRS Job Aid on DLOM s Worth Reading Look at Why It Was Written and Audience Nothing Personal Strictly Analytic Multiple Approaches Recommended Use Judgment and Document Rationale Courts More Analytically Oriented See Pro s and Con s of Methods and Choose Accordingly 20

21 Where Are We Today 21

22 Quick Update BV Wire and BV Update with NACVA Around the Business Valuation World in 90 Minutes Networking with Valuers and Their Clients Know Who You Are Working with at the IRS and Who the Decision Maker is on the Case Always be Professional Elevate in Management as Needed Ask for Specialist in Business Valuation as Needed 22

23 Consider These Recommendations Use Restricted Stock Studies and 33 Factors If Using a Study Obtain it, Read it, Use it Follow Approach of Mandelbaum Judge Laro Use 33 Factors from DLOM Study Pluris Data or FMV Opinions Step 1 RSED Step 2 Pluris or Step 2 and 3 FMV Opinions IRS May Have Concerns In Place of Step 2 or Step 2 or 3 Use 33 Factors Use Third Approach From DLOM Study Choose What Makes Since Size of Company, Facts Reconcile Approaches 23

24 How to Work with the IRS Know Who You Are Working With at the IRS Issue Resolution is Division Dependent Small Business Self Employed Estate and Gift Tax General Program Large Business and International Tax Exempt and Governmental Entities Wage and Investment 24

25 Elevate in Management Personality Conflict Competency Concerns Customer Satisfaction Issues Timeliness Being Kept Informed on Developments Quality of Work 25

26 Ask for a Specialist Specialists are: Business Valuation, Real Property Appraisers, Engineers, Geologists, Foresters, Financial Products, Computer Audit Specialists, Economists, Employment Tax, International Examiners, Excise Tax Business Valuation in Engineering Program Valuation Specialists (CPAs) Financial Analysts (Credentialed Before Starting IRS) Engineers (Credentialed in Business Valuation) 26

27 Overview DLOM Obtain the DLOM Guide as a Reference Use At Least Three Approaches and Reconcile Them Standardize Restricted Stock Studies and 33 Factors Use a Data Source Private Placements such as Pluris or FMV Opinions Raw Data and 33 Factors Use a Third Approach that Makes Sense Work with the IRS on Business Valuation Issues Estate Tax Attorney or Field Agent Specialist in Business Valuation Elevate in Management Always Be Professional 27

28 Real World Examples SBSE E&G Attorney with No IRS Valuer S Corp Valuation in N.C. SBSE E&G Attorney with No IRS Valuer DLOM in IA SBSE E&G Attorney with IRS Valuer Two Tiered FLP DLOM in TX LB&I Team Coordinator with IRS Valuer DLOM Stock Redemption in MN 28

29 Sources of Information BV Resources Guide to Discount for Lack of Marketability by John Stockdale (2013) Restricted Stock Studies That Back Up the DLOM, Business Valuation Update, Vol. 19, No. 11, November 2013 Discount for Lack of Marketability and the IRS by Michael Gregory (October 2013) 29

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31 How to Work with the IRS, Second Edition How the Content of This Book and My Experiences Can Help You Understand the IRS Official and Unofficial Rules of Engagement Use the IRS Official Organization to Your Advantage Understand Classification in General and Estate and Gift in Particular Working with Technical Specialists at the IRS Discover Issue Resolution and Mediation Processes at the IRS Using the IRS Evaluation Process to Your Advantage How to Work with Expert Witnesses Applying Strategic Thinking to Your Firm Follow These Golden Rules When Working with the IRS 31

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33 Business Appraisals and the IRS 1How the Content of this Book and My Experience Can Help You 2 Understand the IRS Official and Unofficial Rules of Engagement 3Use the IRS Official Organization to Your Advantage 4 Understand Classification in General and Estate & Gift Tax in Particular 5 Working with Technical Specialists at the IRS 6Discover the Issue Resolution and Mediation Processes at the IRS 7Using the IRS Evaluation Process to Your Advantage 8How to Work with Expert Witnesses 9 Applying Strategic Thinking to Your Firm 10 Follow These Golden Rules When Working with the IRS 33

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35 Valuing Interests in S Corps From Chapter 5 in Business Appraisals and the IRS Pulled This Chapter from the Book Given Customer Feedback Covers the Material in This Presentation with 2 Example Comparisons Sixty Three Pages in Length 35

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37 Discount for Lack of Marketability and the IRS Uses the Discount for Lack of Marketability Job Aid for IRS Valuation Professionals Published August 2011 Supplemented With Commentary from Modelers Critiqued in the Original Job Aid Michael Gregory s Commentary Based on IRS and Private Sector Reviews of Scores of Reports for Expert Witnesses Specific Recommendations 37

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41 33 Factors Subject Company Factors ** Value of subject corporation or guideline public corporation s stock ** Dividend paying ability and history Dividend Yield Attractiveness of subject business Attractiveness of subject industry Prospects for a sale or public offering (** Marked to ID 10 Factors from Mandelbaum Case Note More that 10 here due to labeling) 41

42 33 Factors Subject Company Factors Number of identifiable buyers Attributes of controlling shareholder **Availability of access to information or reliability of that information **Management Earnings levels Revenue levels 42

43 33 Factors Subject Company Factors Book to market value ratios Information requirements Ownership concentration effects ** Financial condition **Percent of shares owned by insiders **Percent of shares owned by institutions Percent of independent directors 43

44 33 Factors Subject Company Factors Listing on a major exchange ** Active versus passive investors * *Registration costs Availability of hedging opportunities Market capitalization rank Business risk 44

45 33 Factors Subject Interest Factors **Restrictive transfer provisions **Length of the restriction period **Length of expected holding period Offering size as percentage of total shares outstanding Registered versus unregistered **General economic conditions Prevailing stock market conditions Volatility of stock 45