Term
| RR 59 - 60 Valuing Closely Held Stock |
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Definition
(1) Regarded as the single most important piece of valuation literature.
(2) Involved itself with Estate and Gift Taxes
(3) Mandates that you consider the Market method
(4) No useful purpose is served by taking an average of several factors and basing the valuation on the result. |
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Term
| RR 68 - 609 Formula Method |
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Definition
Excess Earnings Method or Treasury Method introduced a formula method to determine values for intangibles specifically goodwill.
Range of Capitalization Rates:
(1) Tangible Assets 8% to 10%
(2) Intangible Assets 15% to 20% |
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Term
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Definition
| Sets forth a methodology to value certain compensatory stock options. |
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Term
| RR 93 - 12 Allowance of Minority Interest Discount in Family Owned Business |
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Definition
| A minority discount will not be disallowed solely because a transferred interest, when aggregated with interests held by family members, would be a part of a controlling interest. |
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Term
| Factors that increase the need for valuations of closely held companies |
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Definition
History
Economic Instability
Age Demographics
Litigation Engagements
Tax Planning
Financial Reporting |
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Term
| 4 Basic Purposes for valuing a business |
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Definition
(1) tax
(2) litigation
(3) Transaction
(4) Regulatory |
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Term
| 7 Common Reasons for Valuations |
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Definition
(1) Mergers, Acquisitions and Sales
(2) Buy-Sell Agreements
(3) Employee Stock Ownership Plans (ESOPS)
(4)Estate, Gift and Income Taxes
(5) Litigation Support
(6) Regulatory - FAS 141 and 142
(7) Attestation Under FAS 141 and 142 |
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Term
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Definition
| An agreement that establishes the methodology to be followed by the parties regarding the ultimate disposition of a departing or a deceased owner's interest in a closely held business. Could avoid much protracted litigation. |
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Term
| Employee Stock Ownership Plans (ESOPS) |
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Definition
(1) A type of benefit plan
(2) A defined contribution plan intended to invest primarily in the employer's stock
(3) A mechanism by which employees become beneficial owners of stock in their company.
(4) IRC Section 401(a)(28)(C) requires use of an independent appraiser for ESOP valuations. |
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Term
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Definition
(1) The act or process of determining the value of a business, business ownership interest, security, or intangible asset.
(2) is as much an art as a science |
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Term
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Definition
| The process of determining the value of gems, equipment, furnishings and other tangible assets to be used in determining the value of a business. |
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Term
| Value of a Particular Business |
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Definition
| The value of an interest in a closely held business is typically considered to be equal to the future benefits that will be received from the business, discounted to the present, at an appropriate discount rate. |
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Term
| Theoretical Basis of Value |
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Definition
| A Fair Return or equivalent in goods, services, or money for something exchanged; the monetary worth of something; marketable price; relative worth, utility, or importance; something intrinsically valuable or desirable. |
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Term
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Definition
(1) Fair Market Value
(2) Fair Value
(3) Strategic /Investment Value |
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Term
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Definition
(1) Used in all Federal tax matters, whether it is gift taxes, estate taxes, income taxes or inheritance taxes.
(2) The price at which the property would change hands between a willing buyer and a willing seller, when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts. |
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Term
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Definition
(1) The amount that will compensate an owner involuntarily deprived of property; commonly have a willing buyer but not a willing seller and buyer may be more knowledgeable.
(2) The price that would be received for an asset or paid to transfer a liability in a transaction between marketplace participants at the measurement date. |
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Term
| Strategic/Investment Value |
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Definition
| The Value to a particular investor based on individual investment requirements and expectations. |
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Term
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Definition
(1) Book Value
(2) Going Concern Value
(3) Liquidation Value
(4) Replacement Value |
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Term
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Definition
(1) With respect to a business enterprise, the difference between total assets (net of accumulated depreciation, depletion, and amortization) and total liabilities as they appear on the balance sheet (synonomous with Shareholder's Equity).
(2) With respect to a specific asset, the capitalized cost less accumulated amortization or depreciation as it appears on the books of account of the business enterprise |
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Term
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Definition
(1) The value of a business enterprise that is expected to continue to operate into the future.
(2) The American Medical Association (AMA) refers to going concern value as "in-place value". |
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Term
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Definition
| The net amount that would be realized if the business is terminated and the assets are sold piecemeal. Liquidation can be either "orderly" or "forced". |
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Term
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Definition
| Refers to the current cost of a similar new property having the nearest equivalent utility to the property being valued. |
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Term
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Definition
(1) Resulted from the enactment of Prohibition
(2) Introduced 2 key concepts:
(a) Goodwill exists if a business has excess earnings.
(b) Goodwill Value is determined by capitalizing the excess earnings. |
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Term
| RR 59 - 60 Relevant Factors to Consider in valuing Closely Held Stock |
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Definition
(1) Nature of the business
(2) Economic Outlook
(3) Book Value of stock
(4) Earning Capacity of company
(5) Dividend-paying capacity
(6) Enterprise has goodwill?
(7) Sale of stock and size of block
(8) Market price of stock sin same business |
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Term
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Definition
| Concerned with valuing tangible and intangible property separately |
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Term
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Definition
| Provided info and guidelines relative to appraisals of contributed property for federal income tax purposes. |
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Term
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Definition
| Amplified RR 59 - 60 relative to discounts for lack of marketability |
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Term
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Definition
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Term
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Definition
| Contained guidelines for valuing preferred stock |
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Term
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Definition
states for estate, gift and other tax purposes, the value of any property is determined without regard to any right or restriction relating to the property
Key issues:
(1) an exception exists for any which is bona fide offer, not a device to trfr for < FMV, is comparable to siliar arm's length arrangements, and these safe harbors must be independently satisfied.
(2) The mere showing that it's a bona fide business arrangement is not sufficient to establish the absence of a device.
(3) Each must be tested separately.
(4) Considered to meet 3 safe harbor requirements if more than 50% owned by non-family members.
(5) Property owned by non-family members must be subject to same rights or restrictions. |
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Term
| Department of Labor (DOL) |
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Definition
| Governing organization for ESOPs |
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Term
| IRC Section 338 - 7 classes of assets |
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Definition
Pertains to a corp which acquires a controlling int in another corp and elects to treat the stock purchase as an asset purchase.
(1) Cash and cash equivalents
(2)Certificates of deposits and marketable securities
(3) Accounts receivable
(4) Inventory
(5) All assets not in any other class
(6) All amortizable Section 197 intangibles
(7) Goodwill and going concern value |
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Term
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Definition
| Pertains to the transfer of assets which constitute a trade or business whether it is a corporation or otherwise. The assets purchased are allocated based on IRC Section 338. |
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Term
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Definition
(1) Performs appraisals on a regular basis
(2)qualified
(3) not a related party |
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Term
| FMV defined in RR 59 - 60 |
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Definition
| The price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts |
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Term
| Estate, Gift and Income Taxes |
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Definition
(1) an independent valuation is imperative
(2) Universal standard of value is FMV |
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Term
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Definition
(1) Independent valuations need to be made for purchase price allocations
(2) FAS 142 requires annual impairment reviews.
(3) Under SOX, an independent auditor is explicitly forbidden to provide appraisal or valuation services, fairness opinions or contribution-in-kind reports for any audit clients. |
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Term
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Definition
(1) Estate
(2) Gift
(3) ESOPs
(4) Allocation of lump sum purchase price
(5) Charitable contributions
(6) Calculation of Built-in Gain for S Corp elections |
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Term
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Definition
(1) Purchase
(2) Sale
(3) Merger
(4) Buy-Sell agreements
(5) Regulatory Valuations: asset allocation/valuation under FAS 141 and 142
(6) Litigation support |
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Term
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Definition
(1) A Valuator relies more heavily on quantifiable objective data
(2) An Advocate introduces subjective factors and attempts to rely more heavily on qualitative factors |
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Term
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Definition
defines several accuracy-related taxation penalties
(1) negligence penalty
(2) substantial understatement of income tax penalty
(3) substantial valuation overstatement penalty
(4) substantial estate or gift tax valuation understatement penalty
(5) substantial overstatement of pension liabilities penalty |
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Term
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Definition
(1) applies in the context of buying or selling a business
(2) Boththe buyer and seller have alternatives (choices) and do not neccessarily need to enter or proceed with a proposed purchase/sale transaction |
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Term
| The Principle of Substitution |
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Definition
| The value of an asset tends to be determined by the ost of acquiring an equally desirable substitute |
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Term
| The Investment Value Principle |
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Definition
(1) Valuation of a closeley held business is difficult due to lack of an active free trading market for securities in closely held businesses
(2) Value = Benefit Stream / Required Rate of Return |
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Term
| Rtae of Return / Level of Risk Principle |
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Definition
(1) A fundamental relationship exists between rate of return from an investment and the amount of risk associated in the investment
(2) There is a direct relationship between risk and return - the greater the risk, the greater the return. |
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Term
| 3 key financial variables that are important in determining the value of a closely held business |
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Definition
(1) identification and definition of appropriate benefit stream
(2) Measurement of appropriate benefit stream
(3) Determination of an appropriate capitalization/discount rate |
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Term
| 1st 4 steps to a valuation |
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Definition
(1) Purpose
(2) Standard of Value
(3) Premise of Value
(4) Valuation Date |
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Term
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Definition
| Court ruling related to admitting expert scientific testimony |
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Term
| Estate of Walter Gross v Commissioner |
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Definition
| court ruling related to tax effect of S Corp |
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Term
| Estate of Davis v Commissioner |
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Definition
| court ruling related to discounts for trapped in gains |
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Term
| Estate of Roark v Commissioner |
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Definition
| case related to failure to properly substantiate a donation results in denial of charitable tax deductions |
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