The clarity and guidance valuation analysts have been thirsting for
The business appraisal community regularly names the valuation of pass-through entities as a major issue of concern. Courts, appraisers, and the IRS have long been at odds on the topic, and the contention within the appraisal community itself over methods and inputs further complicates the issue.Valuing Pass-Through Entities provides clarity for the analyst tasked with valuation, offering clear explanations of the different perspectives and approaches to the process.
Valuing Pass-Through Entities cuts through the chatter to:
Explain the advantages and limitations of different types of pass-through entitiesAnalyze the different viewpoints currently dividing the appraisal communityGain a fresh perspective on landmark casesExplain how to properly utilize a court-tested modelExamine detailed sensitivity analyses of different inputs under the income and market approaches
The book includes illustrative examples, templates, and a useful technical supplement, plus case studies that demonstrate the real-world effects of various pass-through entity valuation methods and inputs. Detailed analyses and an easy-to-apply model simplify the process while positively affecting outcomes. The companion website provides the text of landmark court decisions, a blog featuring industry trends and tidbits, additional articles, and the insight of the author and other industry leaders.
Valuation requires the successful juggling of multiple variables, many of which can have a major impact on value. Analysts need to know how to balance each factor and apply the appropriate rates and discounts, but a lack of standard practice often leaves the issue too subjective.Valuing Pass-Through Entities clears the air, providing real-world guidelines and tools.
Foreword xi
Preface xiii
Acknowledgments xv
About the Author xvii
CHAPTER 1Introduction 1
Definition of Value 2
Beauty and Value 2
Premise of Value 4
Approaches to Value 5
The PTE Conundrum 7
CHAPTER 2The History of Federal Statutory Tax Rates in Maximum Income Brackets and the Evolution of Different Forms of Business Entities 11
Origins of the United States Internal Revenue Code 13
Years 1913 Through 1938 14
Years 1939 Through 1953 19
Years 1954 Through 1985 22
S Corporations 23
Tax on Unreasonable Compensation 27
General Utilities Doctrine 28
Years 1986 Through 2013 29
Limited Liability Companies 30
Summary 32
CHAPTER 3Effective Federal Individual and Corporation Income Tax Rates 41
Effective Federal Income Taxes on $10,000 of 2012 CPI Adjusted Taxable Income, 19132013 42
Effective Federal Income Taxes on $100,000 of 2012 CPI Adjusted Taxable Income, 19132013 51
Effective Federal Income Taxes on $1 Million of 2012 CPI Adjusted Taxable Income, 19132013 57
Summary 67
CHAPTER 4Comparison of Different Entity Forms 71
Business Life Cycle 71
Benefits and Limitations of PTEs 75
Financial Statements of C Corporations and PTEs 76
PTE Status and Bank Financing 78
Prevalence of PTEs 79
Change in Form of Entity 81
CHAPTER 5Income Approach and Value to the Holder 85
Value to the Holder versus Value to the Buyer 86
Jurisdictional Issues 87
Delaware Open MRI Radiology Associates, P.A. v. Howard B. Kessler 87
Bernier v. Bernier 92
Limitations of Delaware Open MRI and Bernier 93
The Modified Delaware MRI Model 94
Flexibility of the MDMM 98
CHAPTER 6Inputs to Modified Delaware MRI Model 101
Normalized Pretax Income 101
Entity-Level Income Taxes on Pass-Through Earnings 103
Income Retained in the Business 104
Effective Federal and State Income Tax Rates on Pass-Through Income 107
Dividend Tax Rates 111
Summary 121
CHAPTER 7Income Approach and Investment Value 123
Measuring Investment Value 124
Deal Structure 126
CHAPTER 8Income Approach and Fair Market Value 131
Characteristics of FMV 131
Determining FMV 134
Example of Failing to Consider Floor and Ceiling Values 135
CHAPTER 9Fair Market Value Court Decisions 139
Number of Federal Estate and Gift Tax Returns 140
Gross v. Commissioner 141
Estate of Heck v. Commissioner 145
Wall v. Commissioner 146
Estate of Adams v. Commissioner 149
Robert Dallas v. Commissioner 151
Gallagher v. Commissioner 153
Analysis of Cases 154
CHAPTER 10The Market Approach 157
Revenue Ruling 5960 157
Appraisal Standards Board Standards 159
AICPA Statement on Standards for Valuation Services 160
Guideline Public Company Method 161
Guideline Public Company Method and PTE Value to the Holder 163
Guideline Public Company Method and PTE Investment Value 168
Guideline Public Company Method and PTE Fair Market Value 169
Guideline TransactionsMethod 171
CHAPTER 11Individual State Income Taxes 175
Statutory Individual State Income Tax Rates 175
Effective Individual State Income Tax Rates 176
CHAPTER 12Discounts, Premiums, Bylaws, and State Laws 181
PTE Agreements 181
State Law 183
Nevada Senate Bill 350 183
CHAPTER 13Valuing Complex PTE Ownership Interests 187
Reasons for Complex Capital Structures 187
Option-Pricing Method 188
Example 1: Preferred-Member Units 190
Example 2: Joint Venture 193
Example 3: S Corporation with Unreasonable Officer/Stockholder Compensation 196
Appendix A: Checklist 199
Appendix B: Case Study: Bob's Cruises 215
