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| We routinely attend conferences to keep up with current developments. A frequent topic is determining value for tax reporting purposes. These conferences tend to be dominated by attorneys and accountants offering their opinions on why the IRS won or lost a case. The most frequent issue disputed by the IRS seems to be valuation. In our experience, having worked for the IRS and taxpayers, the IRS focus on valuation is appropriate. Great care is taken by attorneys to carefully craft documents to address IRS legal attacks and tax preparers make sure that returns are correct. IRS valuation reviews follow a similar formula:
1. Does the documentation filed with the return adequately support the value claimed? If not, you may have an audit. Usually the valuation support offered is insufficient - in fact, the tax payer may have been advised of this before filing, but gambled they would not be audited and lost. 2. Are the facts presented fairly? We frequently find appraisals that advocate for a particular value - in fact, that is what appraisers are supposed to do, assuming the value they advocate for is correct. Many appraisers fail to consider alternative points of view and fail to disclose unfavorable facts to what may be a correct position. The absence of facts counter to the conclusion is suspicious and undermines appraiser credibility. 3. Are the facts presented clearly? We find most valuation situations to be a pretty simple story supported by complex, confusing, overlapping and contradictory information. The simple story needs to be the main point. All the complexities need to be addressed, but only in a way that supports the simple story. 4. Is the appraisal professional? A qualified appraisal must conform to industry and IRS standards. We find many appraisers claim to know these standards and insist their work product complies when in fact there are material deficiencies - for example, we are aware of a tax payer whose deduction was disallowed because the appraiser failed to attach their bio to the appraisal. While the tax payer should ultimately prevail, the additional costs and uncertainty related to this appraiser failure were avoidable. 5. Is the appraiser the person you would trust to represent your interest in front of the IRS? We find clients who have been disappointed to learn that the appraiser they selected based on price is unwilling or unable to support their opinion with the IRS. Other appraisers may be willing but unable to successfully interact with the IRS. Many appraisers are unfamiliar with working with the IRS and struggle with the process. For example, a thoughtful IRS request that can be simply answered directly may be construed as a personal attack. A defensive response only serves to encourage the IRS to press on. Weak valuations are a frequent cause of taxpayer losses and can subject tax payers to unanticipated and significant taxes and penalties. We see many cases of thoughtful family planning well documented legally and filed accurately fail to achieve their objective because of appraisal shortcomings. It is much easier to invest time and money in the initial appraiser selection than to recover from a poor first choice.
Click here for a checklist of factors to consider when hiring an appraiser.
Adams Capital has years of experience working with tax payers and the IRS providing credible tax return support through appraisals, negotiation and, if required, testimony. We have had significant success in resolving valuation disputes prior to court. Our valuation process is thoughtful and customized to each client's unique circumstances.
Merger and Acquisition Market Data
Composite merger and acquisition transaction data did not change significantly as of January 31, 2010 compared to the analysis as of December 31, 2009. The overall median enterprise value to EBITDA multiple for the latest three month period remained unchanged at 8.1x. The Financial sector, which has previously been volatile, showed stabilization at a 13.4x EBITDA multiple. Both Consumer Staples and Healthcare displayed increases in their median EBITDA multiples during the most recent three months. These multiples are higher than historic norms. However, earnings are lower today than historic norms. Investors paying a higher multiple are betting that today's earnings will improve.
Overall Transactions During Latest Twelve Months 
The Overall Transactions chart indicates the mean transaction value leveled out during the latest three months. However, the total number of mergers and acquisitions closed during the latest three months continued to increase. In conjunction, these factors suggest the total value of mergers and acquisitions that closed from November 2009 to January 2010 increased further over the low figures posted earlier in 2009.
The transactions include both public and private companies and are grouped into three month periods. For more information regarding the transaction screen, click here.
We recently valued a key person's intellectual property generated for a business to determine fair compensation. Utilizing market royalty rates for similar assets, we determined the intellectual property value over the next five years. The intellectual property valuation combined with an independent compensation study provided the business with substantial evidence to minimize audit risk. The independent third party valuation and compensation study as a basis for compensation creates a strong case difficult for the IRS to argue.
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For more information about Adams Capital please visit www.adamscapital.com
Adams Capital, Inc. is a national business valuation practice with clients in 50 states and more than 20 countries. We are recognized for our thoughtful approach to complex business valuation matters.
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Atlanta, Georgia 30339
Phone: 770-432-0308
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