Thoughts and Insights by Michael Gregory

Business Valuation and the IRS in 2023

The IRS has many challenges and some real opportunities in FY 2023 (October 1, 2022 to September 30, 2023) with the Inflation Reduction Act signed into law August 18, 2022. That law includes as part of the Act $80 billion and potentially 87,000 additional employees to the IRS over the next 10 years. A question arises as to what that means for the Engineering Program where IRS business valuers are located.  This article takes a look at this question and provides some insights and recommendations for those working in this area. This includes business valuers, accountants, attorneys, and others that may have issues related to fair market value with the Internal Revenue Code

IRS and conflict resolution – Part 6 Thoughts on Rev. Rul. 59-60

One of the fundamentals of business valuation training is Revenue Ruling 59-60. Although published in 1959 with the express purpose to “outline and review in general the approach, methods and factors to be considered in valuing shares of the capital stock of closely held corporations for estate tax and gift tax purposes” it has been accepted by the federal courts in applications of fair market value across the board. This commentary introduces the main points of the revenue ruling, provides some insights from a historical perspective and comments on a recent publication regarding Revenue Ruling 59-60 and its application to Subchapter S corporations, limited liability corporations, and partnerships.

Business valuers, the IRS, and conflict resolution – Part 5 Negotiating with the IRS

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.

Business valuers, the IRS, and conflict resolution – Part 4 S-Corp issues

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).   [i] https://www.amazon.com/Business-Valuations-IRS-Michael-Gregory/dp/1945148020 (423-433 and 436-441)   [ii] https://www.amazon.com/Business-Valuations-IRS-Michael-Gregory/dp/1945148020 (419-423 and 433-435)  

Business valuers, the IRS, and conflict resolution - Part 3 DLOM issues

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

How do you address the three most common conflicts in business negotiations?

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.

Business valuers, the IRS, and conflict resolution – Part 2 - Top issues of disagreement

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.

Business valuers, the IRS, and conflict resolution – Part 1 Setting the stage

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.

Is the IRS Job Aid on Reasonable Compensation still relevant?

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.

Business valuation experts are biased and so are you – so what do you do?

Four experts in behavioral finance conducted extensive research and wrote an article entitled, “Are Business Valuators Biased? A Psychological Perspective on the Causes of Valuation Disputes.”  This article explores the insights gained from their research. In short, yes, business valuers are biased on at least three levels. When given a number from a client as to what the client thinks, that is an “anchor” bias or when knowing the client is a buyer or seller that is called engagement bias to have a lower or higher number. Cognitive bias impacts the number supplied by the business valuer. When considering whether the business valuer is biased or not 58.7% believed the other side was biased and 25.1% believed that they were biased. Your bias can hurt or harm you during a negotiation on your conclusion of value too. Using your bias can be an advantage in a negotiation sometimes too.