I am a valuation expert who specializes in negotiation and mediation. I receive calls weekly from people seeking advice on various valuation issues. Recently, I received a call from an individual who had a credential in personal property valuation. He asked me if I thought he was qualified to prepare an appraisal with a specific application in mind. He informed me that the client required a fair market value determination for federal gift tax purposes. I would like to share useful information with you that may be beneficial, regardless of your area of expertise in valuation. Additionally, I will provide extra information on business valuation.

As a mediation and negotiation specialist that worked for the IRS at all levels for over 28 years, I want to share with you how conflict resolution and mediation works at the IRS . It was my pleasure in 2020 to bring mediation to the large case business program (at the time LMSB – Large and Mid-Size Business and later LB&I Large Business and International). Over time 2,500 field specialists were trained in mediation while I worked at the IRS. What follows is commentary to explain various stages of issue resolution at the IRS and how an expert in this area can help navigate these processes.

As a mediation and negotiation specialist I also address issues with the IRS associated with valuation. Have you ever wondered what the IRS Business Valuation Guidelines are? The are spelled out in Part 4 (Examining Process) of the IRS Internal Revenue Manual (IRM) in Chapter 48 (Engineering Program), Section 4 (Business Valuation Guidelines). The commentary that follows presents key elements from this section of the IRM to help you understand how the IRS looks at business valuations. Issues could arise with estate and gifts or with income-related issues.

As a continual learner, mediator, and negotiation specialist, I am always looking to enhance my skills and experiences. Recently I was involved in a negotiation assisting my client in a dispute with the IRS. A very wealthy client had a dispute with the IRS on a valuation. The IRS estate and gift tax attorney had a difficult time with an extraordinarily complex transaction associated with an estate, gift, and redemption. When I received the contact from the team of attorneys involved,

the proposal from the IRS resulted in an adjustment of $400 million. After nine months and multiple iterations the client agreed to a tax adjustment of $400,000.

The story of how we were able to address this issue can be summed up in one word. That one word is

“attitude.”

The facts have been simplified and changed, but the concepts are on point

The last two weeks I offered ideas on the Top Strategies for Negotiation Part One and Part Two. This article is one of a series of five articles over the past five months. The focus of this article is entirely with the IRS on a technical issue. Having worked for the IRS for 28 years at all levels from specialist to executive, having brought mediation and mediation training to the IRS Large Business and International Division and trained some 2,500 employees in the techniques, having been involved with over 2,500 mediations from boards of directors with fortune 100 companies on billion dollar issues, to the IRS on valuation issues or issues on research credit from thousands of dollars to a billion dollars, I wanted to offer you some insights on how to negotiate with the IRS on examination on these types of issues. Similar techniques can be used at Appeals and with IRS Counsel, but the emphasis there is on hazards of litigation. There is a different emphasis on examination that focuses on factual development. This commentary will introduce you to factual issues and negotiations on examination where issues are discussed and may be resolved factually.

This is the fourth in a series of six monthly technical blogs on issues related to business valuation. Many business valuers believe that all entities whether a C-corp that is taxed or an S-corp that pays no federal income taxes should both be valued as if they pay tax (Grabowski, Mercer, Van Vleet)[i]. These business valuers believe there is no difference in the determination of fair market value. Others believe there is an S-corp adjustment to be made, but it should not be fully taxed (Fannon, Treharne)[ii]. These approaches suggest a premium for an S-corp. In general, the IRS believes that an S-corp should not be tax affected since it does not pay federal income taxes. This article looks at this issue in general. For a more complete analysis of this topic see original commentary dated Valuing Interests in S Corps (2013) or an updated and more comprehensive commentary within Business Valuations and the IRS (2018).

This is the third in a series of five articles regarding the title above. When valuing a minority interest in a privately held company two common adjustments are made after determining the controlling fair market value of the entity. These adjustments are the Minority Interest Discount adjustment and the Discount for Lack of Marketability (DLOM) adjustment. This article explores issues associated with the DLOM associated with a minority interest to help address conflicts or disputes with IRS valuers and agents. These can be very material leading to significant conflicts. The results can lead to discussions with their immediate supervisor and in the instances of an unagreed case to Appeals at the IRS. The purpose of this article is to highlight and introduce ways to minimize these conflicts

In business negotiations there are three common conflicts that you want to make sure you are aware of and address appropriately according to the Harvard Program on Negotiation. These three most common conflict areas are introduced and supplemented with additional information to help you with your own business negotiations going forward. The three areas are to avoid stereotyping the other party, take on the most difficult issues first, and check your own assumptions and determine your role. When you know the characteristics of each you will be able to negotiate from a much better position. Your relationship with the other party is critical. By learning everything you can about the other party up front and taking time to develop a relationship this can go a long way to improve the negotiation process.

This is part 2 of a 6 part series. Conflicts and disputes in the area of business valuation with the IRS may be expected given the subjective nature of this topic. Part 1 set the stage introducing the concepts of mediation, business valuer bias, steps to overcome bias, federal court rules, the likelihood of litigation, how most appraisers never know their appraisal is being audited by the IRS, and potential penalties on appraisers. This Part 2 commentary focuses on the most commonly adjusted areas by IRS valuers and what valuers can do to reduce the probability of an audit technically.

This is the first in a six part series looking at this topic. Today the focus is on expert witnesses in federal court sessions having various rules to follow regarding their expertise and reports. Given these rules how can an expert demonstrate leadership, help with dispute resolution, or conflict resolution working with the client or client’s representative to resolve the case with the other party and the other expert? Business valuers are taught to be advocates for their position and not for their client. They are to be independent. Only a small number of cases actually make it to court. The question is how does an expert witness such as a business valuer serve their client best with an out of court settlement? This last question will be addressed in a future monthly blogs.

The IRS valuers identified reasonable compensation as one of the top issues for audit. Differences of opinion by valuers in the private sector and IRS valuers could lead to conflict and disputes on examination, leading to Appeals, and potentially to litigation. This commentary defines reasonable compensation, introduces the IRS Job Aid and Appendix, provides links to some recent IRS papers related to reasonable compensation, introduces how various levels at the IRS look at the issue, provides links to relevant court cases and key factors for consideration from those court cases, and provides a source for contemporary commentary on this topic.