2007 and Beyond: What Are the Big Issues in Business Valuation?
Business Valuation Advisor, Summer 2007
The IRS’s enhanced oversight of appraisals and appraisers is certainly a hot topic in 2007, along with the continued evolution of valuing pass-through (tax-affecting) entities. Fair value for financial reporting and related FASB pronouncements will continue to make news, as will efforts by the Business Valuation (BV) profession to create a convergence of practice standards.
Tax issues heating up
Last year was relatively quiet in the federal tax courts. The Fifth Circuit’s holding in McCord v. Commissioner captured BV headlines, primarily for its reversal of the Tax Court’s determination of marketability discounts. But the decision turned on the continued viability of the defined value gift clause, so it leaves open the question of the appropriate methodology and data for determining discounts, which is bound to be a big issue in 2007. Although estate planners may be tempted to use the defined value gift clause, it may still flag the attention of IRS examiners as much as any high-dollar transaction or significant discount.
In another high-impact Tax Court case last year, Dallas v. Commissioner, highlighted the continued uncertainty of valuing subchapter S Corporation earnings. In declining to tax affect in an estate/gift tax scenario, the Dallas court distinguished the recent decision by the Delaware Chancery Court in Delaware Open MRI Radiology v. Kessler, which applied tax affecting in an appraisal action. Rather than ending the debate, the distinction widened it, according to many BV analysts, so watch for tax affecting to remain a key issue in the coming year.
IRS gets tough on appraisers too
The passage of the Pension Protection Act of 2006 (PPA)—including its attendant penalties for appraisers and appraisals—will continue to impact the profession. Many see the new legislation as part of a bigger trend toward the creation, issuance, and/or revisions of standards applicable to the providers and users of BV services. In addition to the PPA, last year also saw:
- Substantial changes to the BV provisions of the Uniform Standards of Professional Appraisal Practice (USPAP)
- Yet another exposure draft on BV Standards from the American Institute of Certified Public Accountants (AICPA)
- Updated BV guidelines from the IRS
- FASB’s release of SFAS 157 on fair value measurements (along with updates on SFAS 123R, 141, and 142) and its continued work with the International Accounting Standards Board (IASB) toward a convergence of fair value standards
- A new task force formed by the International Valuation Standards Committee (IVSC), charged with drafting global valuation standards and fair value guidance
- A similar BV task force formed by the Appraisal Foundation
BV no longer a specialty
The rapid development and dissemination of new standards and new information has brought extraordinary change to the business valuation profession. While BV used to be a niche practice area, it’s now considered by many to be a general practice area with various specialized niches, including fair value measurements but also valuations in health care, ESOPs’, intangible assets, M&A, lost profits/economic damages, and the like.
To practice competently in any one of these niches requires significant commitment to the work and to greater accountability and credibility within the BV profession. In facing the challenge to raise the bar, BV practitioners will be seeking more opportunities to better serve their community of clients in the financial, auditing, and legal professions.
