How to Bargain with the IRS on Business Valuation Issues

When engaged with a board of directors to assist in a negotiation, I have learned that if I what I am offering is a way to engage the other party that will result in Peaceful Resolutions, there is little or no interest. However, when I rephrase this and indicate that I am offering to assist in a process to expand our understanding of the issue, explore the other side’s perspective and interests, and to use techniques based on neuroscience to develop a better solution to the existing conflict, there is an interest. That is why board of directors, attorneys with business valuation issues before the IRS, and other clients engage me to assist them with various negotiations. 

On estate and gift tax issues at the IRS constituencies may be an estate and gift tax attorney, the estate and gift tax attorney’s manager, an IRS business valuer, the IRS business valuer’s manager, a revenue agent, a revenue agent’s manager, an appeals officer, an IRS chief counsel attorney and others.

In many negotiations it is not just the parties engaged in the negotiations, but also the selling of the agreement to local constituencies back on the home front. 

Think of this in terms of the President and the Secretary of State negotiating the Iranian nuclear deal and then trying to sell the U.S Congress on this in the U.S. and the Iranian team trying to sell this to the hard liners in Iraq.  What is the best course of action?  Help the other side with how to sell this to those on the home front.

In an article entitled “Negotiating Skills: How to Bargain Behind the Table” from the Program on Negotiation at the Harvard Law School, the authors recommend that you:

Understand the barriers;

Cultivate back channel relationships;

Take the high road; and

Help them write an “acceptable speech”.

The article presents an example from the reunification of Germany and having Germany join NATO with the collapse of the Soviet Union.

From my own experience in working through negotiations behind the scenes with my clients (attorneys representing the ultimate client or taxpayer for this example with the IRS) involved with a negotiation with a third party and using business valuation experts, I wanted to offer several ideas that I have found helpful.  These ideas work well when a business valuer is engaged as the technical expert and there is an issue with the business valuer’s approach.

·         After reviewing and critiquing both sides expert reports initially introduce a series of alternatives with my client (attorney’s representing the taxpayer) in anticipation of the negotiation and ask my client to share these with the ultimate client (the taxpayer) to gain insight into the ultimate client’s initial perspective.

·         Have my client go over the series of alternatives with the ultimate client indicating the pros and cons of alternatives and discuss the ability to move off these alternatives during the negotiation.

·         Have a Best Alternative to a Negotiated Agreement (BATNA) to know what will happen if an agreement is not determined at this level.  This BATNA is a minimum level of acceptability that must be obtained if there is to be an agreement at this level.

·         Explore all of the options to be able to consider the Worst Alternative to a Negotiated Agreement (WATNA) if there is no agreement at this level.  This could truly be a worst case scenario such as the firm needing to file for bankruptcy.

·         Ensure that the ultimate client understands and accepts what my client is proposing.

·         Ensure that my client understands the expert reports and can articulate the major points and alternatives off of those major points.  This includes my client’s expert witnesses and the other side’s expert witnesses reports.

·         Ensure that any trier of fact’s potential insights have been explored.  For example if a judge could be rendering a verdict based on the facts, make sure and explore all decisions that are related to similar decisions and see how the facts in this case compare to those other decisions.  This can assist with BATNA and best case scenarios depending on the facts and law on the case.

Explore the elements of neuroscience and negotiations presented in some of my more recent blog posts (February 15th, January 28th, January 4th, December 2, 2015).  The field of neuroscience is growing at an exponential pace.  A quick search on the topic of neuroscience and negotiations provides a tremendous amount of information at the academic level.   Realize that our brains are 98% emotional and 2% rationale, so really take the time to address all our senses when involved with any dialogue with a negotiation.

I also suggest you look at an article in the February 2016 issue of the ABA Journal entitled “Get Smart: Texas Tech adopts brain training for its 1Ls.”  The article explains that all first year law students are now taking a course on what we can learn from neuroscience and decision making.  I believe this is the first of a whole new way for attorneys to explore how to use techniques from mediation and neuroscience to help clients work to resolve issues.   This is what I do with my business as well.  It is not manipulative, it is educational and relationship building to ensure reception to ideas.

In my work as a business valuation reviewer and negotiator I try to tie into neuroscience by setting up my client for success with a setting that addresses all of the senses.   I work to ensure a truly neutral location, appropriate foods (antioxidants) and drink, a warm environment, a round table with a mixing of the parties, no interruptions, with the right parties present at each meeting.  We also explore information regarding the other party(s) on social media to engage the other party in areas of their interests and develop a better relationship.   I also take time away as a variable by scheduling the meeting for twice as long we think may be needed to allow for unexpected events.  If we are done early there is a gift of time.  The session is divided up into four quarters with the first being relationship building, the second on listening, the third on education and helping the other side to say “yes” several times so that they too affirm that they understand where we are coming from, and the fourth quarter is a fruitful discussion of interests.  I also try to limit expectations of any particular meeting and suggest what might be built upon over a series of meetings with ever higher levels of management involved.  As decision making moves up within management there is less representation of technical expert witnesses.  Often the technical expert witnesses such as a business valuer representing the ultimate client or a business valuer representing the IRS can actually become so position based they have a hard time working with the other party to effectively work towards issue resolution.  Don’t underestimate the application of neuroscience in a negotiation and the need to elevate the decision making to the ultimate decision maker on the case such as an estate and gift tax manager or a large case manager.

This process has worked very well on a host of issues and is continually evolving consistent with our understanding of neuroscience.  As the process evolves it may be necessary for members of later negotiating sessions to be educated on how to present final determinations to those originally involved as technical experts so that they too can save face within their organization.  Being there to help explain this to various stakeholders in the other organization may indeed be necessary to culminate the final agreement.

In summary, understand that an expert witness and an expert witness report can and generally is very helpful as a starting position, but for issue resolution, positions can be a hindrance to understanding the true interests of the parties and working towards issue resolution.  Understand elements related to neuroscience that can help with negotiations.   Consider what might be needed to sell an agreement to those not at the table, in the other organization.  In 2014 less than 50 valuation cases went to U.S. Tax Court while over 33,000 estate and over 370,000 gifts were filed with the IRS.  Along the way a lot of disputes were settled through negotiations.   Keep these ideas in mind when issues arise relative to an expert witness’ technical valuation.   Consider the points made here that could help you resolve the issue with the IRS.

About the author

Mike Gregory is a professional speaker, an author, and a mediator. You may contact Mike directly at mg@mikegreg.com and at (651) 633-5311. Mike has written 12 books (and co-authored two others) including his latest book, The Collaboration Effect: Overcoming Your Conflicts, and The Servant Manager, Business Valuations and the IRS, and Peaceful Resolutions that you may find helpful. [Michael Gregory, ASA, CVA, NSA, MBA, Qualified Mediator with the Minnesota Supreme Court]