DOL abandons appraiser-as-fiduciary rule

Published on 04 March 2015 by in News

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In late January, the Department of Labor (DOL) announced that it will abandon the “appraiser-as-fiduciary” rule from its planned reproposal of a broader fiduciary rule. As reported in the January 2015 issue of ASA’s Capital Action publication, the ASA has learned that when the DOL reproposes a broad set of rules affecting fiduciaries and prohibited transactions, the proposal will not include a proposal to classify appraisers as fiduciaries in connection with valuations of employee stock ownership plans (ESOPs).

This is great news for business appraisers.  If appraisers had been subjected to the duties of fiduciaries when performing an ESOP valuation, they would have been placed in a position of owing a special duty of care to a party to the ESOP transaction, which runs counter to the objective, unbiased role appraisers are supposed to play in any valuation assignment.  In addition, the additional risks and cost of fiduciary insurance coverage that would have been imposed on appraisers would likely have made ESOP valuations cost prohibitive for all but the largest valuation firms.

 

John G. Mack, ASA, MCBA, ABAR – Nationwide Valuations – (303) 496.0643 (direct) (303) 586.4554 (fax)
john@nationwidevaluations.comwww.nationwidevaluations.com

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Estate of Franklin Z. Adell v. Commissioner, T.C. Memo 2014-155, Filed August 4, 2014.

The Facts:

Mr. Franklin Z. Adell (“the decedent”) died on August 13, 2006. At the time of his death, among other assets, the decedent owned a 100% interest in STN.com (“STN”), a cable uplinking company created to provide services to one customer, a non-profit religious network called The Word Network (“The Word”). Mr. Kevin R. Adell, son of the decedent (“Mr. Adell”), and the decedent, created The Word in 1999 as a 24-hour station to broadcast urban religious ministries and gospel music. Mr. Adell called upon his personal relationships with religious leaders and churches to gain support and programming for The Word. The decedent was the president and a director of The Word, and Mr. Adell was the treasurer, secretary and a director. In addition, Mr. Adell served as the president of STN, however, he did not have an employment agreement or non-compete agreement with STN.

The Word entered into a services & facilities agreement with STN in 2000 which stated The Word would pay STN a monthly programming fee of “the lesser of actual cost or ninety-five percent of net programming revenue received by The Word in a one month period”. STN received at least 95% of revenue from The Word each month up to and after the decedent’s death, which was STNs primary source of income as The Word was their sole customer. STN’s expenses included rent payment to the decedent’s wholly-owned property holding company, compensation to its officers and employees and personal benefits to both the decedent and Mr. Adell, including paying for luxury cars, real estate and furnishings purchases, and personal litigation expenses, among other things. [...]

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Estate of Helen P. Richmond, Petitioner vs. Commissioner of IRS, T.C. Memo 2014-26, Filed February 11, 2014.

The Facts:

Ms. Helen Richmond passed away in December of 2005. At the time of her death, Ms. Richmond owned a 23.44% interest in a family-owned personal holding Company, Pearson Holding Company (“PHC”). As of December 2005, PHC has 2,338 shares of common stock outstanding held by 25 shareholders whose interests ranged from 0.17% to 23.61%. Ms. Richmond owned 548 of those shares (making Ms. Richmond the second largest shareholder with a 23.44% interest).

PHC’s primary assets were shares of publicly traded stocks, primarily consisting of stocks in 10 major industries, with approximately 42.8% of their holdings concentrated in four companies; Exxon Mobil, Merck & Co. Inc., General Electric CO., and Pfizer, Inc. PHC operated as a C-Corporation with its ultimate objective to provide a steady stream of income for the descendants of Frederick Pearson, while minimizing taxes. Between 1970 and 2005, PHC made regular annual dividend payments [...]

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What Can Trigger an Automatic IRS Audit?

Published on 02 January 2014 by in News

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Here’s an interesting tidbit that was uncovered at last November’s 2013 AICPA Forensic & Valuation Services Conference. IRS audits can be triggered when the same firm does a client’s tax work and valuation work. It was indicated that IRS agents in some areas will pull an estate and gift tax return that is prepared by the same firm that prepares the attached valuation report. A poll of attendees at the conference indicated that approximately 60% of CPA firms that have qualified business appraisers on staff regularly provided both valuation work and tax work to the same client. Thus, to help mitigate client risk, advisors may want to make sure that the client hires a qualified business appraiser that does not work for the CPA firm that is preparing the gift tax or estate tax return.

 

John G. Mack, ASA, MCBA, ABAR – Nationwide Valuations – (303) 496.0643 (direct) (303) 586.4554 (fax)
john@nationwidevaluations.comwww.nationwidevaluations.com

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Estate of John F. Koons III, Petitioner vs. Commissioner of IRS, T.C. Memo 2013-94, Filed April 8, 2013.

The Facts:

The decedent, John F. Koons, III, died on March 3, 2005. Mr. Koons served as the president and CEO of Central Investment Corp. (“CIC”). CIC was a bottler and distributor of Pepsi soft drinks and was in the business of selling food and drinks from vending machines. Mr. Koons was CIC’s largest shareholder, owning a 46.9% voting percentage interest and a 51.59% non-voting percentage interest. Mr. Koons’ children also owned, directly and indirectly through trusts, substantial portions of the remaining CIC interests.

CIC and PepsiCo, Inc. filed lawsuits against each other in 1998 regarding the manufacture and sale of PepsiCo products in CIC’s established territories. By December of 2004, [...]

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The outlook for business growth in 2013 depends mainly on one’s point of view, but at least this appears certain:  The success of a business, or lack thereof, can often be traced back to the business plan. What’s more, the absence of a business plan, or one that is skimpy or thrown together in a rush, can be damaging.

Look at an annual business plan as a detailed blueprint for the upcoming year.  Here are several ways such a plan can benefit a business operation: [...]

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Business owners need to recognize that operating a business on a day-to-day basis is not the same thing as preparing it for sale.  There are many steps necessary in the planning process and it all starts with the AWARENESS of that fact.  It is in the best interests of a business owner to get professional advice early – from a business broker, mergers & acquisitions advisor, exit planning consultant, or business coach – to understand what may need to be done for their business.  And the business owner must then begin to take those steps in order make the business sellable at the maximum value.

What a better place to start building this awareness than with a Business Valuation?!  (and/or Machinery & Equipment Appraisal, if the business is capital-intensive)

To find out more about the types of Business Valuations and M&E Appraisals we offer, contact us at 888-750-5259 or by e-mail at info@NationwideValuations.com

Curious to see how sellable your business is today?   Get your free Sellability Score — click HERE, or follow the link at the bottom of our home page.

Marsha Golgart AIBA, CMEA, CEPA, ISBA – Nationwide Valuations – (303) 484-3033     (303) 374-6771 (fax)
marsha@nationwidevaluations.comwww.nationwidevaluations.com

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The value of a business interest is impacted by a number of factors, many of which may change from year to year.  Factors that impact the value of a business include the following:

  • Financial performance—If a business has poor earnings capacity or is on the verge of bankruptcy, the value of the business is going to be negatively impacted.  If the business has strong historical earnings but is currently experiencing a downturn due to external factors such as temporarily higher steel or energy prices, the value of the business may or may not be negatively impacted, if the business appraiser can reasonably conclude that the favorable earnings trend will resume in the future once these temporary factors pass.
  • Growth prospects—There are two ways a business can achieve profitability — [...]

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The most commonly cited benefits of an annual business valuation policy include the following:

Provides Accountability and Performance—An annual business valuation of a closely held firm enables the shareholders to see the value that is being consistently created or destroyed by the management of the firm in its execution of the corporate strategic plan.

Fulfills Reporting or Compliance Needs—As with a 401k rollover, the value of the shares in the privately-held company must be established for annual reporting purposes.  An annual business valuation provides the data necessary for the reporting required by ERISA and the Internal Revenue Code. [...]

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The Hierarchy of Recurring Revenue

One of the biggest factors in determining the value of your company is the extent to which an acquirer can see where your sales will come from in the future. If you’re in a business that starts from scratch each month, the value of your company will be lower than if you can demonstrate the source or sources of your future revenue.  A recurring revenue stream acts like a powerful pair of binoculars for you – and your potential acquirer – to see months or years into the future; creating an annuity stream is the best way to increase the desirability and value of your company.

The surer your future revenue is, the higher the value the market will place on your business. Here is the hierarchy of recurring revenue presented from least to most valuable in the eyes of an acquirer. [...]

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