Spring 2022

Willamette Management Advisors Spring 2022 Insights

Thought Leadership in Economic Damages Measurements and Forensic Accounting

Editor for This Issue: Kevin M. Zanni

Damages Measurements and Forensic Analysis Thought Leadership

Damages Awards—Income Tax Considerations

Robert F. Reilly, CPA

A damages analyst may be retained by legal counsel to any party in a damages claim dispute. Such a dispute typically results from a breach of contract, a tortious action, or some other cause. The damages analyst is typically not a causation expert or a liability expert. Rather, the damages analyst measures the amount of damages suffered by the damaged party related to the allegations made against the damaging party. There are numerous income tax considerations related to damages awards (or negotiated settlements). These income tax considerations include (1) is the receipt of the award/settlement payment taxable income to the damaged party recipient and, if so, is it ordinary income or capital gain and (2) is the payment of the damages award/settlement amount tax deductible to the damaging party payer? The damages analyst—and legal counsel and the disputing parties—should be aware of these tax considerations both (1) in the measurement of the amount of damages suffered by the damaged party and (2) in the analyst’s recommendation of the total damages award in the judicial order.

Read the full article.

Washington v. Kellwood: Applying an Unsupported Lost Profits Damages Analysis, the Plaintiff Is Awarded $1

Ben R. Duffy

This discussion summarizes both the Washington v. Kellwood Company trial court decision and the associated appeals court decision. Specifically, this discussion focuses on how a not supported and not credible damages measurement analysis developed by the plaintiff’s testifying expert resulted in a multimillion dollar damages award being reduced to $1.

Read the full article.

Trends in Securities and Derivative Litigation: Fewer Merger and Acquisition Filings at the Forefront of Litigation Activity

Tim C. Ladd

Historically, the volume of shareholder litigation increases in periods of market turbulence and significant merger or acquisition activity. During the past two years, there has been a decrease in the number of shareholder complaints filed due to the decrease in merger objection filings. The number of complaints filed may have decreased even more if not for the litigation activity surrounding both special purpose acquisition companies (“SPACs”) and COVID-19. This discussion analyzes this decrease in shareholder claims. This discussion also provides an overview of the types of litigation claims being filed, the impact of SPACs and COVID-19 on shareholder litigation, and the recent trends in shareholder litigation judicial decisions.

Read the full article.

ERISA Litigation Insights: Walsh v. Bowers

Nate Hesch

In Walsh v. Bower, the U.S. Department of Labor (the “DOL”) sued Brian Bowers and Dexter Kubota, the former owners of Bowers + Kubota Consulting, Inc. (“B+K”). The DOL alleged that Bowers and Kubota had violated the Employee Retirement Income Security Act of 1974 (“ERISA”) by manipulating data to induce the B+K newly formed employee stock ownership plan (“ESOP”) to pay more than the company’s fair market value. This judicial decision is noteworthy because it provides discussion of certain ERISA issues that other courts have avoided. This judicial decision provides practitioners with professional guidance as the DOL has not lost a major ESOP case on a valuation issue for over a decade.

Read the full article.

Damages Analysis and the Cost of Equity Capital Size Premium

Kevin M. Zanni

Damages analysts routinely develop damages measurements that include income projections and apply a present value discount rate. Such damages measurements often include lost profits method analyses. Such damages measurements also include cost to cure method analyses and reasonable royalty rate method analyses. One of the typical components of the discount rate measurement in the damages analysis is the estimation of cost of equity capital. The measurements of many of the cost of equity capital components are typically not controversial in the damages measurement discount rate calculation. The measurement of the size risk premium component of the cost of equity capital can sometimes result in a disagreement among practitioners with regard to the discount rate calculation. This discussion summarizes many of the damages analyst considerations with regard to the measurement of the equity size risk premium. This equity size risk premium is one component of the present value discount rate calculation that is developed as part of the damages measurement analysis.

Read the full article.

Commentary on Lost Profits Damages: Principles, Methods, and Applications, Second Edition

Robert F. Reilly, CPA

The discussions in Insights often describe and illustrate the current thought leadership related to the generally accepted damages measurement methodology. One important consideration with regard to damages analysis thought leadership is the professional literature related to this technical discipline. This Insights discussion describes—and recommends—a new addition to the professional literature with regard to the development of—and the reporting of—damages measurement analyses in commercial litigation.

Read the full article.

Forensic Analysis Thought Leadership

Financial Adviser Due Diligence in a Transactional Fairness Opinion

Justin M. Nielsen

The use of a management-prepared financial projection in the income approach discounted cash flow analysis presents certain issues for the valuation analyst acting as a financial adviser. This statement is certainly true with respect to the independent financial adviser’s duties to perform due diligence in a transactional fairness opinion context. While a fairness opinion may be utilized in several contexts, fairness opinions for transactional purposes (i.e., for a merger and acquisition transaction), are typically relied upon by the participating company board of directors. This discussion summarizes fairness opinions in a transactional context and provides insights into the financial adviser’s role in utilizing management-prepared financial projections in the income approach discounted cash flow business valuation method.

Read the full article.

Due Diligence Interviews in a Forensic Analysis

John Sanders and Dakota Ask

This discussion summarizes forensic analysis best practices related to the conduct of a management due diligence interview. Conducting a successful due diligence interview is not a science. However, it does require a combination of preparation and years of practical experience. In order for the due diligence interview to be successful, the interview should involve (1) sufficient forensic analyst preparation time and (2) ensuring that the forensic analyst interviews the right individuals.

Read the full article.

Income Tax Thought Leadership

Best Practices Related to Equity Incentive Compensation Programs

Robert F. Reilly, CPA

Private companies (and particularly early-stage private companies) may use equity incentives to attract and/or retain talented employees. This employee compensation practice has become more common during periods of labor shortages and low unemployment rates. However, equity incentive compensation plans have income tax consequences—both to the employee recipient and to the employer company. This discussion summarizes the taxation issues and the security valuation issues related to the implementation of private company equity incentive compensation programs.

Read the full article.

Valuation Reporting Requirements for Charitable Contribution Tax Deductions

Weston C. Kirk and Christopher T. Chafin

This discussion summarizes what the valuation analyst, tax counsel, and taxpayer need to know with respect to the valuation reporting requirements for charitable contribution income tax deductions. This discussion specifically focuses on the charitable contribution income tax valuation reporting requirements related to the noncash contribution of private company stock.

Read the full article.

Look into the Sun (Powered Industry)

Forrest E. Lind III, Esq.

From lighting fires through Greek burning glass1 to powering NASA satellites during the space race,2 solar energy has made possible some of mankind’s greatest achievements. It should therefore come as no surprise that the United States is increasingly turning to solar energy to meet its electricity needs. This discussion explores the expansion of the commercial solar industry and summarizes recent trends in the world of solar industry financing.

Read the full article.