mn soc of cpa's 11 15- 2012 - revised (1)
DESCRIPTION
Presentation to the Minnesota Society of CPAs as an exampleTRANSCRIPT
From Audit to Courtroom: Business Valuation
Tips and Traps For MN Society of CPAs November 15, 2012
By Michael GregoryMichael Gregory Consulting LLC
© 2012 Michael Gregory Consulting LLC www.mikegreg.com
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Opened Michael Gregory Consulting LLC September 2011
28 years at IRS as engineer valuator, manager, operations team lead, controller, acting assistant director, territory manager
Championed IRS DLOM Job Aid, 6695A Penalty on Appraisers, Sub S, Reasonable Compensation, 409A, Family Limited Partnerships and Lead Initiatives on Other Areas Such As R&E Credit, Transfer Pricing, Cost Segregation and Others
ASA, AVA, MBA and a Qualified Neutral with the Minnesota Supreme Court
November 15, 2012
Michael Gregory
© 2012 Michael Gregory Consulting LLC www.mikegreg.com
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The opinions presented here are those of Michael Gregory. Michael Gregory does not represent the IRS. Any opinions presented in this seminar are those of the author and do not represent an official position of his current or previous employers. This material is offered for educational purposes only. The author and his employer expressly disclaim any liability, including incidental or consequential damages, arising from the use of this material or any errors or omissions that may be contained in it.
November 15, 2012
Disclaimer
© 2012 Michael Gregory Consulting LLC www.mikegreg.com
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Understanding The IRS and Issue Resolution Estate and Gift Tax Classification Valuation Issues
◦ Family Limited Partnerships◦ Discounts for Lack of Marketability◦ Reasonable Compensation◦ Common Errors Investigated at the IRS◦ Review with an Opinion of Value at the IRS
Take Away Key Points In Short Time Together - Key Practical Pointers
November 15, 2012
Valuations and Potential Pitfalls
© 2012 Michael Gregory Consulting LLC www.mikegreg.com
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Eleven Divisions – Need to Understand Stove Pipes and Culture Since 2000
Compliance – Four Divisions Your Primary Interest as Accountants
◦ Large Business and International (LB&I)◦ Small Business and Self Employed (SBSE)◦ Tax Exempt and Governmental Entities (TEGE)
Appeals Counsel – IRS and DOJ Tax Litigation Division
November 15, 2012
Understanding the IRS
© 2012 Michael Gregory Consulting LLC www.mikegreg.com
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Good Source of Information for ◦ Businesses◦ Starting a Business◦ Operating a Business◦ Closing a Business◦ Employer ID Numbers◦ Small Business Events◦ Industry Professions
“Audit Techniques Guides (ATGs)”◦ Over 50 topics◦ Aerospace to Wine
November 15, 2012
Look at www.irs.gov
© 2012 Michael Gregory Consulting LLC www.mikegreg.com
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Six Industries (Updated 10-1-2012) CTM, FS, HMP, NRC, RFTH and GHW Case Manager and Team Coordinator Control Specialists Are Consultants and Do NOT
Control Case◦ Engineering IRM 4.4.48 [4.4.48.4 (BV Guidelines)]
in NRC◦ Employment Tax to SBSE◦ Computer Audit Specialists in RFTH◦ Financial Products in FS◦ Economists and International Examiners in “I” of “LB&I”
Counsel
November 15, 2012
Large Business and International Division
© 2012 Michael Gregory Consulting LLC www.mikegreg.com
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Internal Consultants to All Divisions Four Territory Managers 34 Managers 320 Technical Employees (approx. 180
Credentialed Valuators) Manager Locally in Bloomington – Christine
Harwood Valuators Locally – Real Property and BV
November 15, 2012
Engineering Program – Valuators Reside Here in IRS
© 2012 Michael Gregory Consulting LLC www.mikegreg.com
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Examination◦ General Program: Team Manager and Revenue
Agent Control ◦ Estate and Gift (E&G) IRM 4.4.425
Classification Process Joint E&G and Valuators E&G Manager and E&G Attorney Control
Collection Counsel
November 15, 2012
Small Business and Self EmployedDivision
© 2012 Michael Gregory Consulting LLC www.mikegreg.com
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Team Manager and Revenue Agent Control
Business Valuator Issues◦ ESOPs◦ Related for Profit Entities◦ Gifts in Kind◦ Services Provided◦ Reasonable Compensation
Initiatives
November 15, 2012
Tax Exempt and Governmental Entities Division
© 2012 Michael Gregory Consulting LLC www.mikegreg.com
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Case Closes Out of Examination Unagreed and Goes to the Internal IRS Appeals Division
Goal to Settle Cases Due to Hazards of Litigation
Targets Independent Ex Parte Rules
November 15, 2012
Appeals Division
© 2012 Michael Gregory Consulting LLC www.mikegreg.com
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IRS Office of Chief Counsel◦ Operations◦ Technical
All Non Litigation Work (Legislative, Regulation, Interpretation)
Corporate International Technical Advice
IRS Division Counsel IRS Special Trial Counsel (DOJ Tax Litigation Division for Refund Cases)
November 15, 2012
IRS Counsel
© 2012 Michael Gregory Consulting LLC www.mikegreg.com
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Regarding Examination Divisions, Appeals and Council ◦ Who Owns the Case in Exam?◦ Who Manages the Day to Day Operations on the
Case in Exam?◦ What is the Role of the Valuator?◦ Who can Resolve a Case on Examination?◦ Who can Settle a Case in Appeals?
If you have a Frustration on a Case on a Valuation Issue Who Do You Contact?
Let’s Discuss Some Key Issue Areas
November 15, 2012
Quick Review
© 2012 Michael Gregory Consulting LLC www.mikegreg.com
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◦ Family Limited Partnerships in E&G◦ Discounts for Lack of Marketability◦ Reasonable Compensation◦ Common Errors Investigated at the IRS◦ Review with an Opinion of Value at the IRS
November 15, 2012
Some Key Technical Issue Areas
© 2012 Michael Gregory Consulting LLC www.mikegreg.com
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Understand the Process◦ Know What It Is You Are Valuing◦ Obtain the Necessary Documents◦ Review and Analyze Agreements◦ Review and Analyze the Financial Data◦ Determine the Appropriate Approach(s)◦ Apply the Appropriate Approach(s)◦ Determine the Appropriate Discounts and
Premiums of What You Are Valuing
November 15, 2012
Family Limited Partnerships
© 2012 Michael Gregory Consulting LLC www.mikegreg.com
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Business Purpose Contributions Management Prerogatives Distance Limited
Partners from Assets of FLP Distributions Term of Partnership
November 15, 2012
Some of the Key Points in the Agreement – Up To Attorney
© 2012 Michael Gregory Consulting LLC www.mikegreg.com
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Approval Rights of Limited Partners Required for Major Decisions or Limited Partners Excluded from all Decisions
Right of First Refusal Transferability of Rights Approved by All Limitations on Withdrawal Dissolution Provisions
November 15, 2012
Key Points of Agreement Continued
© 2012 Michael Gregory Consulting LLC www.mikegreg.com
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Asset Based Approach Income Approach
◦ Discount Rate◦ Cash Flows
Market Approach – Generally Similar to Asset Based Approach in This Instance
Valuation Adjustments◦ Marketable Securities
Closed End Funds from Barron’s, Wall Street Journal, Morningstar, Closedendfunds.com
Choose Appropriate Funds (Bonds, Domestic, etc.)◦ Real Estate
NAV REITS and Closed End Funds Match Funds with Land, Commercial Type, etc.
November 15, 2012
FLP Approaches
© 2012 Michael Gregory Consulting LLC www.mikegreg.com
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Generally Not Adjusted Could Be Based on Fact Pattern
◦ Example Restriction on Sale to Charity◦ Example Income Only
For Example Reports Go To Partnership Profiles: Real Estate, Marketable Securities, Mixed Assets, Non-income Producing Real Estate
Will Discuss DLOM Separately
November 15, 2012
FLP Adjustments
© 2012 Michael Gregory Consulting LLC www.mikegreg.com
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DLOM Job Aid for IRS Professionals◦ http://www.irs.gov/pub/irs-utl/dlom.pdf◦ Read It◦ Use Best Practices [33 Factors, IDR, Review, Report
Critiques, Report Language]◦ 18 Approaches Critiqued with Background, Summary,
Strengths, Weaknesses, Important Parameters, Prevalence in the Profession, Court Comments
◦ Make Sure to Note Caveats – Don’t Skip In Addition
◦ Espen Robak – Pluris DLOM◦ John Finnerty – Asian Options Method
November 15, 2012
Discount for Lack of Marketability (Chapter 10)
© 2012 Michael Gregory Consulting LLC www.mikegreg.com
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Over Compensation Privately Held Companies◦ Compensation Compared with Firm Performance
(RMA, Bizminer, Integra, Fintel, Dun and Bradstreet)◦ Types of Compensation - & Areas◦ Data Sources (Watson Wyatt, ERI, RMA, BVR, RIA,
Troy, Dunn and Bradstreet, Trade Associations and Others)
◦ Independent Analysis◦ Exempt Organizations (GuideStar and ERI)
Subchapter S Under Compensation◦ Avoid Employment and Other Taxes◦ Growing Initiative at IRS
November 15, 2012
Reasonable Compensation (Chapter 8)
© 2012 Michael Gregory Consulting LLC www.mikegreg.com
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Math Logic Standards SSVS – Know and Follow Documentation – Explain Why Written to Audience
◦ Client◦ Lay Person◦ IRS Exam ◦ New Report For Litigation Tailored to Audience◦ US Tax Court – IRS Attorneys (90% of Fed Tax Cases)◦ Refund Cases – US District Court and US Court of Claims
– Note Judge, Jury, Depositions and DOJ Attorneys
November 15, 2012
Common Errors (Chapter 11)
© 2012 Michael Gregory Consulting LLC www.mikegreg.com
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Start with the Report and Valuer Certified Valuator Credential and Meet
Standards of Society Engagement Letter and Limiting Conditions Overview of Report Clear and Concise with Logical,
Mathematically Correct Tables and Appendices
Discounts, Discount Rates, Adjustments to Income Statement and Balance Sheet
November 15, 2012
Review with an Opinion of Value at the IRS
© 2012 Michael Gregory Consulting LLC www.mikegreg.com
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Broad Error Categories◦ Definition of Value - Standards◦ Communication – Written for Audience Clear and Concise◦ General – Val Date, Logical, Control or Minority Valuation,
Comprehensive, Reasonableness of Variables, and Reconciliation
◦ Income Approach – Adjustments, Discount Rate, Cash Flow
◦ Market Approach – Guideline Co’s vs. Transactional Data Bases, Adjustments to the Subject Company
◦ Asset Based Approach – Expertise◦ Reconciliation of Approaches and Method◦ Discounts and Premiums
November 15, 2012
Review with an Opinion of Value at the IRS Continued
© 2012 Michael Gregory Consulting LLC www.mikegreg.com
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Write a Report for the Court and Judge Read Court Cases by Judge on Topic What Did Judge Halpern Have to Say?
◦ Report is Testimony Have to Work with What I Have◦ Should NOT Have Used WACC in This Instance
Not Going Public and Do Not Meet Assumptions for WACC
Use Equity Approach◦ Do Not Use CAPM or Modified CAPM for the Discount
Rate Same Concerns As Above Use Build Up Method
November 15, 2012
Key Points from the Estate of Gallagher Case TCM 2011-148
© 2012 Michael Gregory Consulting LLC www.mikegreg.com
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◦ Gross Still Governs – “We Will NOT Impose an Unjustified Fictitious Corporate Tax Rate” – IRS is 6 for 6 in Court
◦ Don’t Assume Judge Understands Valuation Concepts
◦ Understand Discovery Rules and Process and Work with Attorney
◦ Have a Third Party Review Your Report◦ Provide Court with Evidence: If It Is Not In
Evidence It Does Not Exist - Valuation Text Book for Example
November 15, 2012
What Did Judge Halpern Have To Say Continued
© 2012 Michael Gregory Consulting LLC www.mikegreg.com
27November 15, 2012
Life In New Venture
© 2012 Michael Gregory Consulting LLC www.mikegreg.com
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Know Who to Work With at the IRS Raise Issues in Management as Appropriate Issue Resolution – Mediation – Litigation IRS Job Aide on DLOM’s Worth Reading Reasonable Compensation 409A Courts More Analytically Oriented
◦ Avoid Common Errors ◦ Use Facts of Case and Data to Drive Decisions
Appraiser Penalties 6695A – Standards Think Strategically About What You Want to Do
November 15, 2012
Observations
© 2012 Michael Gregory Consulting LLC www.mikegreg.com
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Know Who Your Working with at the IRS Understand the Role of Participants Seek to Understand Interests –Listen and
Answer What Was Asked Do Not Be Afraid to Ask Questions Consider Options
◦ Ask for a Specialist◦ Ask to Elevate in Management as a Neutral Party
Given Ownership of the Issue by the RA or ETA
November 15, 2012
Issue Resolution Key Points
© 2012 Michael Gregory Consulting LLC www.mikegreg.com
30November 15, 2012
http://tinyurl.com/cs4ppyf
© 2012 Michael Gregory Consulting LLC www.mikegreg.com
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IRS Official and Unofficial Rules of Engagement IRS Organization My History and Best Practices Issue Resolution and Mediation at the IRS Classification in General and Estate and Gift in
Particular Potential Penalties on Appraisers Reasonable Compensation in Corporations Discounts for Lack of Marketability Most Common Errors in Valuations Strategic Growth Areas of Business Valuation Appraisers Other Engineering Issues and Valuation Related Issues Strategic Thinking Overall Commentary and “Do’s and Don’ts”
November 15, 2012
Summary of Chapters (Selected Practical Pointers Here Today of 150 in Book)
© 2012 Michael Gregory Consulting LLC www.mikegreg.com
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Michael Gregory Consulting, LLC [email protected] www.mikegreg.com 651-633-5311 1945 Sharondale Ave. Roseville, MN 55113
Contact me with any questions or concerns
I Will Stick Around Outside for Questions and to Autograph Book if You Are Interested
November 15, 2012
Contact Information
© 2012 Michael Gregory Consulting LLC www.mikegreg.com
33November 15, 2012
Thank You Very Much