I am a valuation expert who specializes in negotiation and mediation. I receive calls weekly from people seeking advice on various valuation issues. Recently, I received a call from an individual who had a credential in personal property valuation. He asked me if I thought he was qualified to prepare an appraisal with a specific application in mind. He informed me that the client required a fair market value determination for federal gift tax purposes. I would like to share useful information with you that may be beneficial, regardless of your area of expertise in valuation. Additionally, I will provide extra information on business valuation.
As a mediation and negotiation specialist that worked for the IRS at all levels for over 28 years, I want to share with you how conflict resolution and mediation works at the IRS . It was my pleasure in 2020 to bring mediation to the large case business program (at the time LMSB – Large and Mid-Size Business and later LB&I Large Business and International). Over time 2,500 field specialists were trained in mediation while I worked at the IRS. What follows is commentary to explain various stages of issue resolution at the IRS and how an expert in this area can help navigate these processes.
As a mediation and negotiation specialist I also address issues with the IRS associated with valuation. Have you ever wondered what the IRS Business Valuation Guidelines are? The are spelled out in Part 4 (Examining Process) of the IRS Internal Revenue Manual (IRM) in Chapter 48 (Engineering Program), Section 4 (Business Valuation Guidelines). The commentary that follows presents key elements from this section of the IRM to help you understand how the IRS looks at business valuations. Issues could arise with estate and gifts or with income-related issues.
As a business valuation mediator and negotiator addressing conflicts associated with complex valuations it is inevitable that positions can become entrenched. The process of business valuation often gives rise to challenging disputes that seem insurmountable and intractable with family owned businesses and with federal income tax issues. These conflicts can leave all parties involved feeling stuck, frustrated, and disillusioned. However, addressing these disputes with intellect, creativity, insight, and perception can pave the way to a resolution that not only benefits the parties but also strengthens the foundation of their business relationships.
A business valuation mediator plays a crucial role in facilitating communication and negotiation between parties involved in a dispute, such as a business valuation dispute, where expert business valuers are engaged. The business valuation mediator is impartial and assists the parties in helping them reach a mutually acceptable resolution to their dispute. When working with expert business valuers in a business mediation, the business valuation mediator typically follows a structured process. This is an example of such a process but the facts, attorneys, decision makers, and business valuation experts may result in a different process than what is presented here. A qualified and experienced business valuation mediator with a background in business valuation working with business valuers will structure the process appropriate for the parties. This is an example process:
In negotiations, mediations, and conflict resolutions emotions can be difficult to manage. Emotional intelligence has to do with your ability to be aware of, control, and express your emotions appropriately. The commentary that follows explores how emotions and displays of anger can work both for you and against you in a negotiation and as a participant in a negotiation or other forms of conflict resolution.
When preparing for a negotiation, mediation, or conflict resolution session usually significant effort may be applied to determine the facts, the issues, the prioritization of the issues, and your interests. Similarly, you may have attempted to explore what the other party’s perceptions compared to these same items.
However, typically little attention is paid regarding your and their emotions that may play out during the interaction.
As a continual learner, mediator, and negotiation specialist, I am always looking to enhance my skills and experiences. Recently I was involved in a negotiation assisting my client in a dispute with the IRS. A very wealthy client had a dispute with the IRS on a valuation. The IRS estate and gift tax attorney had a difficult time with an extraordinarily complex transaction associated with an estate, gift, and redemption. When I received the contact from the team of attorneys involved,
the proposal from the IRS resulted in an adjustment of $400 million. After nine months and multiple iterations the client agreed to a tax adjustment of $400,000.
The story of how we were able to address this issue can be summed up in one word. That one word is
“attitude.”
The facts have been simplified and changed, but the concepts are on point
The IRS has many challenges and some real opportunities in FY 2023 (October 1, 2022 to September 30, 2023) with the Inflation Reduction Act signed into law August 18, 2022. That law includes as part of the Act $80 billion and potentially 87,000 additional employees to the IRS over the next 10 years. A question arises as to what that means for the Engineering Program where IRS business valuers are located. This article takes a look at this question and provides some insights and recommendations for those working in this area. This includes business valuers, accountants, attorneys, and others that may have issues related to fair market value with the Internal Revenue Code
One of the fundamentals of business valuation training is Revenue Ruling 59-60. Although published in 1959 with the express purpose to “outline and review in general the approach, methods and factors to be considered in valuing shares of the capital stock of closely held corporations for estate tax and gift tax purposes” it has been accepted by the federal courts in applications of fair market value across the board. This commentary introduces the main points of the revenue ruling, provides some insights from a historical perspective and comments on a recent publication regarding Revenue Ruling 59-60 and its application to Subchapter S corporations, limited liability corporations, and partnerships.
The last two weeks I offered ideas on the Top Strategies for Negotiation Part One and Part Two. This article is one of a series of five articles over the past five months. The focus of this article is entirely with the IRS on a technical issue. Having worked for the IRS for 28 years at all levels from specialist to executive, having brought mediation and mediation training to the IRS Large Business and International Division and trained some 2,500 employees in the techniques, having been involved with over 2,500 mediations from boards of directors with fortune 100 companies on billion dollar issues, to the IRS on valuation issues or issues on research credit from thousands of dollars to a billion dollars, I wanted to offer you some insights on how to negotiate with the IRS on examination on these types of issues. Similar techniques can be used at Appeals and with IRS Counsel, but the emphasis there is on hazards of litigation. There is a different emphasis on examination that focuses on factual development. This commentary will introduce you to factual issues and negotiations on examination where issues are discussed and may be resolved factually.
This is the fourth in a series of six monthly technical blogs on issues related to business valuation. Many business valuers believe that all entities whether a C-corp that is taxed or an S-corp that pays no federal income taxes should both be valued as if they pay tax (Grabowski, Mercer, Van Vleet)[i]. These business valuers believe there is no difference in the determination of fair market value. Others believe there is an S-corp adjustment to be made, but it should not be fully taxed (Fannon, Treharne)[ii]. These approaches suggest a premium for an S-corp. In general, the IRS believes that an S-corp should not be tax affected since it does not pay federal income taxes. This article looks at this issue in general. For a more complete analysis of this topic see original commentary dated Valuing Interests in S Corps (2013) or an updated and more comprehensive commentary within Business Valuations and the IRS (2018).
[i] https://www.amazon.com/Business-Valuations-IRS-Michael-Gregory/dp/1945148020 (423-433 and 436-441)
[ii] https://www.amazon.com/Business-Valuations-IRS-Michael-Gregory/dp/1945148020 (419-423 and 433-435)
This is the third in a series of five articles regarding the title above. When valuing a minority interest in a privately held company two common adjustments are made after determining the controlling fair market value of the entity. These adjustments are the Minority Interest Discount adjustment and the Discount for Lack of Marketability (DLOM) adjustment. This article explores issues associated with the DLOM associated with a minority interest to help address conflicts or disputes with IRS valuers and agents. These can be very material leading to significant conflicts. The results can lead to discussions with their immediate supervisor and in the instances of an unagreed case to Appeals at the IRS. The purpose of this article is to highlight and introduce ways to minimize these conflicts
