Business Valuation and Taxes: Procedure, Law and Perspective / Edition 1

Business Valuation and Taxes: Procedure, Law and Perspective / Edition 1

by David Laro, Shannon P. Pratt

ISBN-10: 0471694371

ISBN-13: 9780471694373

Pub. Date: 04/08/2005

Publisher: Wiley

There are several hundred sections of the Internal Revenue Code and several thousand references in the federal tax regulations that explicitly require fair market value determination. Consequently, taxpayers file an estimated fifteen million tax returns each year reporting an event involving a valuation-related issue. Business Valuation and Taxes is the first


There are several hundred sections of the Internal Revenue Code and several thousand references in the federal tax regulations that explicitly require fair market value determination. Consequently, taxpayers file an estimated fifteen million tax returns each year reporting an event involving a valuation-related issue. Business Valuation and Taxes is the first comprehensive resource providing knowledge and guidance to everyone involved in this high-stakes process, complete with a full overview of the laws, procedures, and approaches related to business valuation.

Business Valuation and Taxes provides insightful discussions on the relationship between federal taxes and valuation, and specifically, valuations relating to business interests. Combining the expert knowledge of coauthors Judge David Laro and Shannon Pratt, this accessible reference shares their decades of experience and advice on everything practitioners need to know about business valuation—from general definitions to valuing complex business interests.

Business Valuation and Taxes combines basic information with important perspectives on current issues. It provides a broad understanding of the basic knowledge needed to appreciate business valuation, and addresses the techniques and procedures of conducting a business valuation. It also features in-depth examinations of numerous topics that are particularly important to practitioners, including:

  • Standards of business valuation
  • Sources of law and choice of courts
  • Subsequent events
  • IRS positions
  • Valuation and choice of entity
  • Burden of proof in valuation controversies
  • The income approach
  • The market approach
  • The asset-based approach
  • Questions to ask business valuation experts
  • Economic and industry analysis
  • Tax-affecting pass-through entities
  • And more!

Valuators, CPAs consulting on valuations, attorneys, corporate development officers, and intermediaries will discover a wellspring of vital information on valuation approaches, techniques, finance-related issues, burden of proof, standards, choice of entity, and much more.

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Table of Contents




1. Standards of Business Valuation.



Sources for Defining Value.

Definitions of Value.

Premise of Value.


2. Subsequent Events.


Key Question.

Valuation Date.

Subsequent Events—Exceptions.


3. Business Valuation Experts.



Proving Business Value.

The Expert Appraiser.

Types of Experts.

Various Roles of Experts.

Business Valuation Litigation Witnesses.

Admissibility of Evidence Underlying Expert Opinions.

Limitations to Admissibility.

Reliability of the Expert.

Minimum Thresholds for the Business Valuation Expert.

Sarbanes-Oxley Act of 2002.

Attorney Assistance to the Expert.

Qualified Appraiser.

Concerns about Expert Testimony.

Court-Appointed Expert.


Appendix: Expert Credentials and Qualifications.

4. Sources of Law and Choice of Courts.


Structure of the American Legal System.

Tax Law.

Tax Litigation.

5. Burden of Proof in Valuation Controversies.


Burden of Proof.

Who Bears the Burden of Proof.

Burden of Proof: Exceptions to the General Rule.

6. Penalties and Sanctions.



What You Need to Know.

Valuation Penalties.

General Penalties.

Discretionary Sanctions.

7. Valuation and Choice of Entity.




Limited Liability Companies.

General Partnerships.

Limited Partnerships.

Sole Proprietorships.

Valuation Considerations.

Choice of Jurisdiction.


8. Valuation of S Corporations and Other Pass-Through Tax Entities: Minority and Controlling Interests.


Case Law Background.

S Corporation Minority Interest Appraisals.

Comparison of Minority Interest Theories—A Summary of the Issues.

S Corporation Controlling Interest Appraisals.


S Corporation Valuation Issues—Partial Bibliography.

9. Valuation of International Transactions.



Transfer Pricing.

Customs Valuation.


10. Adjustments to Financial Statements.


Separating Nonoperating Items from Operating Items.

Addressing Excess Assets and Asset Deficiencies.

Handling Contingent Assets and Liabilities.

Adjusting Cash-Basis Statements to Accrual-Basis Statements.

Normalizing Adjustments.

Controlling Adjustments.


11. Comparative Financial Statement Analysis.


Comparable Ratio Analysis.

Common Size Statements.

Tying the Financial Statement Analysis to the Value Conclusion.


12. Economic and Industry Analysis.


Objective of Economic and Industry Analysis.

National Economic Analysis.

Regional and Local Economic Analysis.

Industry Analysis.


Partial Bibliography of Sources for Economic and Industry Analysis.

13. Site Visits and Interviews.


Site Visits.

Management Interviews.

Interviews with Persons Outside the Company.


14. The Income Approach.

Summary of Approaches, Methods and Procedures.

Introduction to the Income Approach.

Net Cash Flow: The Preferred Measure of Economic Benefit in the Income Approach.

Discounting versus Capitalizing.

Relationship between Discount Rate and Capitalization Rate.

Projected Amounts of Expected Returns.

Developing Discount and Capitalization Rates for Equity Returns.

Weighted Average Cost of Capital (WACC).

The Midyear Convention.

The Income Approach in the Courts.


Appendix: An Illustration of the Income Approach to Valuation.

15. The Market Approach.


The Market Approach.

Revenue Ruling 59-60 Emphasizes Market Approach.

The Guideline Publicly Traded Company and the Guideline Transaction (Merger and Acquisition) Method.

How Many Guideline Companies?

Selection of Guideline Companies.

Documenting the Search for Guideline Companies.

Choosing Multiples Based on Objective Empirical Evidence.

What Prices to Use in the Numerators of the Market Valuation Multiples.

Choosing the Level of the Valuation Multiple.

Selecting Which Valuation Multiples to Use.

Assigning Weights to Various Market Multiples.

Sample Market Valuation Approach Tables.

Other Methods Classified under the Market Approach.


Appendix: An Illustration of the Market Approach to Valuation.

16. The Asset-Based Approach.


The Adjusted Net Asset Value Method.

Excess Earnings Method (The Formula Approach).


17. Entity-Level Discounts.


Trapped-In Capital Gains Discount.

Key Person Discount.

Portfolio (Nonhomogeneous Assets) Discount.

Discount for Contingent Liabilities.


18. Discounts for Lack of Marketability.

Summary: General Introduction to Shareholder-Level Discounts and Premiums.

Definition of Marketability.

Benchmark for Marketability Is Cash in Three Days.

Investors Cherish Liquidity, Abhor Illiquidity.

Degrees of Marketability or Lack Thereof.

Empirical Evidence to Quantify Discounts for Lack of Marketability: The Restricted Stock Studies.

Empirical Evidence to Quantify Discounts for Lack of Marketability: Pre-IPO Studies.

Criticisms of the Pre-IPO Studies.

Factors Affecting the Magnitude of Discounts for Lack of Marketability.

Use of the Databases for Quantifying Discounts for Lack of Marketability.

Discounts for Lack of Marketability in the Courts.


Partial Bibliography of Sources for Discounts for Lack of Marketability.

19. Other Shareholder-Level Discounts.


Minority Discounts/Control Premiums.

Voting versus Nonvoting Shares.


Discounts for Undivided Fractional Interests in Property.


20. Weighting of Approaches.


Theory and Practice.

Mathematical versus Subjective Weighting.

Examples of Weighting of Approaches.


21. Valuation of Options.


Introduction and Background.

General Principles of Option Valuation.

Specific Rules for Valuing Options.


22. IRS Positions.



Rev. Rul. 59-60.

Rev. Rul. 65-192.

Rev. Rul. 65-193.

Rev. Proc. 66-49.

Rev. Rul. 68-609.

Rev. Proc. 77-12.

Rev. Rul. 77-287.

Rev. Rul. 83-120.

Rev. Rul. 85-75.

Rev. Rul. 93-12.

Tax Advice Memorandum 1994-36-005.

Rev. Proc. 2003-51.


23. Business Appraisal Reports.


Business Valuation Report-Writing Standards.

Elements of the Business Valuation Report.

Organization of the Report.

Qualities of a Good Appraisal Report.


24. Questions to Ask Business Valuation Experts.



Financial Statement Adjustments and Analysis.

Economic and Industry Data.

Site Visits and Interviews.

General Questions about Methodology.

Discount and Capitalization Rates in the Income Approach.

Projections Used in the Income Approach.

Market Approach.

Asset-Based Approach.

Entity-Level Discounts.

Minority Interest Discounts/Control Premiums.

Discounts for Lack of Marketability.

Voting/Nonvoting Stock.

Questions about Contradictory Prior Testimony.

Appendix A: IRS Business Valuation Guidelines.

Appendix B: International Glossary of Business Valuation Terms.

Appendix C: Bibliography.

Appendix D: Table of Cases.


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