Focus on Forensic Analysis and Litigation ServicesEditor for This Issue: Thomas J. Millon Jr. Forensic Analysis Insights
Bankruptcy Litigation Valuation Guidelines
Thomas J. Millon Jr.
Valuation opinions are often required as part of the bankruptcy process. Therefore, bankruptcy counsel often seek the professional services of a valuation analyst to provide assistance in developing an acceptable plan of reorganization. This discussion identifies ten guidelines that contribute to a successful bankruptcy engagement.
How to Estimate the Long-Term Growth Rate in the Discounted Cash Flow
Aaron M. Rotkowski and Evan Clough
In forensic analysis engagements where the value of a company or security is disputed, one topic that the litigants often disagree about is the selection of the expected long-term growth rate used in the discounted cash flow method. The expected long-term growth rate may be contested because (1) small changes in the selected growth rate can lead to large changes in the concluded business or security value and (2) the long-term growth rate is a judgment-based valuation input. Because of these two factors, judges, mediators, and arbitrators may view the analyst’s selected long-term growth rate skeptically. This discussion provides qualitative and quantitative factors that analysts may consider to support the selection of an expected long-term growth rate.
Intangible Asset Economic Damages Due Diligence Procedures
Robert F. Reilly, CPA
Forensic analysts are often asked to measure economic damages to intangible asset owner/ operators related to either breach of contract claims or tort claims. There are generally accepted methods and procedures related to quantifying economic damages within a litigation environment. However, before the forensic analyst begins the quantitative analyses, the analyst will collect relevant data and documents and perform reasonable due diligence procedures. This discussion summarizes those economic damages-related due diligence procedures.
General Valuation Factors ERISA Counsel May Consider in an ESOP Litigation Case
Chip Brown, CPA, and Steve Whittington
As part of an ERISA litigation matter involving an ESOP’s investment in the stock of a closely held sponsor company, the counsel often seeks the services of a valuation analyst. This discussion focuses on the process of retaining a valuation analyst. Understanding the capabilities and services that a valuation analyst provides may help counsel retain, rely on, examine, or defend the valuation analyst.
Ten Reasons Why Taxpayer Computer Software Fair Market Value Is Not
Financial Accounting Net Book Value
Robert F. Reilly, CPA, and Thomas J. Millon Jr.
Computer software valuations may be performed for a variety of reasons. These reasons include financial accounting, sale or license transactions, financing transactions, gift and estate tax, income tax, ad valorem property tax, bankruptcy, and many other purposes. In the context of property taxation, computer software is considered to be an exempt intangible asset (i.e., exempt from tax assessment) in many taxing jurisdictions. Accordingly, for corporate taxpayers subject to the unit valuation principle of property tax assessment (e.g., centrally assessed transportation, communications, and energy companies), the value of the exempt computer software may be adjusted from the value of the taxable unit. The historical cost less depreciation (HCLD) method is sometimes considered appropriate in the valuation of certain tangible assets for property tax purposes (e.g., for a rate-based, regulated public utility). However, for many reasons, the HCLD method—or the so-called net book value—is not appropriate for the valuation of computer software for property tax (or any other) purpose.
Valuing S Corporations in Family Law Engagements
Tax treatment of S corporations is a heavily debated topic within the valuation profession. The courts have ruled both that (1) under certain circumstances, it is appropriate to tax affect S corporations and (2) under other circumstances, it is not appropriate to tax affect S corporations—each under a different premise of value. Family law engagements do not always involve a consistently defined standard of value. This factor can cause confusion among valuation analysts. In the case of Bernier v. Bernier, the tax treatment of an S corporation and the standard of value were important issues. The case was originally tried in 2003, where it was ruled that the S corporation subject to the dispute should be tax-affected at a hypothetical C corporation rate. The case was appealed and remanded. On remand, the instructions given by the Massachusetts Supreme Court were interpreted differently by all involved. In 2012, the case was again appealed and remanded.
Considerations of the Built-In Gain (BIG) Tax Liability Discount During
the S Corporation Conversion
Fady F. Bebawy
In performing a valuation analysis of an S corporation during the 10-year time period after its conversion from a C corporation, it is appropriate to apply a valuation adjustment (or discount) in so far as any built-in capital gain remains that will be subject to a C corporation tax liability upon disposition. There are a number of factors the valuation analyst may consider in determining an appropriate valuation discount.
Recent Valuation Guidance from the Delaware Court of Chancery
Adriana A. DeLaMora
The Delaware Court of Chancery often provides useful valuation guidance to boards and other fiduciaries, corporate managements, investors, legal counsel, and valuation analysts. With regard to valuation analysts, the Chancery Court often provides professional guidance with respect to due diligence procedures. This discussion summarizes two Chancery Court decisions that relate to the valuation analyst’s due diligence with respect to management’s financial projections.
Daubert Challenges: Background, Applications, and Considerations
David S. Turney
Given the prevalence of Daubert challenges in the current litigation environment, it is important for forensic analysts to understand the rules set forth in the Daubert Trilogy cases and the current application by the courts. This discussion summarizes the Daubert rules articulated in the Daubert Trilogy cases, reviews the treatment of Daubert challenges in two recent court decisions, and summarizes best practices to withstand a Daubert challenge. These issues are important given the increase in Daubert challenges to financial expert witnesses following the 1999 decision in Kumho Tire Co. v. Carmichael.
Considerations in the Health Care Company Tax Status Conversion from C
Robert F. Reilly, CPA
For a variety of economic and taxation reasons, now may be a good time for a health care entity C corporation to convert to pass-through entity tax status. As summarized in this discussion, there are both tax costs and tax benefits associated with such a health care entity tax status conversion. However, both the costs and benefits are affected by the conversion date valuation of the health care entity assets. Therefore, a contemporaneous valuation of the health care entity assets is an important component of the tax status conversion decision.
Reasons to Conduct the Health Care Intangible Asset
Robert F. Reilly, CPA
Health care institutions (particularly not-for-profit entities) are often involved in regulatory, taxation, and transaction-related disputes In such disputes, the value of the health care entity’s assets (both tangible and intangible) is often an issue in the controversy. This discussion summarizes the valuation of health care entity intangible assets—for regulatory, taxation, litigation, and other purposes.