Valuation

February 5th, 2024
An IRS article, other spreadsheet papers, a mouse, and a cup

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.

January 29th, 2024

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.

December 11th, 2023

As a business valuation mediator and negotiator addressing conflicts associated with complex valuations it is inevitable that positions can become entrenched. The process of business valuation often gives rise to challenging disputes that seem insurmountable and intractable with family owned businesses and with federal income tax issues. These conflicts can leave all parties involved feeling stuck, frustrated, and disillusioned. However, addressing these disputes with intellect, creativity, insight, and perception can pave the way to a resolution that not only benefits the parties but also strengthens the foundation of their business relationships.

July 3rd, 2023
IRS symbol in white with a blue background

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

December 5th, 2022
Two groups facing each other while sitting with the word negotiation in the background

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.

November 7th, 2022
Cover for the book Valuing Interests in S-Corps

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).

October 3rd, 2022
Book cover for DLOMs and the IRS: the underside of a pier out into the ociean

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

September 12th, 2022
People working together on a task

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.

September 6th, 2022
three hands pointing fingers at three other hands

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.

August 1st, 2022
five male and female professional dress in silhouette

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.

June 27th, 2022
A C-clamp squeezing a wallet with dollar bills in it

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.

May 23rd, 2022
Two opposite pictorial views of positive and negative appear to be banging into each other while words like bias, antagonism and others are in the background

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.

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