Prince estate and IRS settle valuation dispute
The IRS and Comerica Bank and Trust, the administrator of the estate of rock star Prince, have agreed to settle their dispute and agree on an estate value of $156.4 million, according to settlement documents submitted in the case. The agreed upon valuation is almost double the estate’s valuation ($82.3 million) and close to the amount the IRS had determined ($163.2 million). Also, the IRS dropped a $6.4 million accuracy-related penalty it had levied on the estate. The matter had been set for trial but that has been cancelled.
Assets in dispute: The estate consists of real estate, music rights, Prince's name and likeness, and other assets. The IRS and Comerica settled on the real estate values last year, so the trial was to focus on the valuations of the other assets. Notable assets with disputed valuations included two entities: NPG Records, Inc. (Estate: $19.5 million; IRS: $46.5 million) and NPG Music Publishing LLC (Estate: $21 million; IRS: $36.9 million). The value of Prince’s name and likeness was also in dispute, with the estate putting the value at $3.1 million versus the IRS expert’s valuation of double that amount ($6.2 million). The settlement documents do not indicate the agreed upon valuations by asset type.
After receiving a notice of deficiency from the IRS (for $32.4 million plus penalties and interest) in 2020, the estate administrator filed a petition in Tax Court and the case was scheduled for this March. According to the settlement documents, the heirs to the estate indicated that minimizing the amount of estate taxes was “not their primary interest” and they expressed a “strong desire” to settle the matter and close the estate.
The case is: Estate of Prince R. Nelson, Deceased, Comerica Bank & Trust, N.A., Executor v. Commissioner of Internal Revenue, Tax Court, Docket 11442-20.
New case points up valuation perils in buy-sell agreements
From a valuation standpoint, the lack of a buy-sell agreement—or one with a valuation provision that’s poorly drafted—can result in costly litigation and a painful falling out between business partners and/or family members. A recent case highlights what happens when a buy-sell goes bad.
New case: A company’s shareholder agreement included a buyout provision with a price based on a fixed per-share value. When the relationship of the owners deteriorated, the company exercised its buyout option at the fixed price, which had not been updated. Lawsuits were filed, and the court ruled that the shareholder agreement is enforceable and the fixed price is what should be paid—leaving someone claiming that person got the short end of the stick [Estate of Connie Collins v. Tabs Motors of Valley Stream Corp., 2021 NY Slip Op 32438(U)], which is available on the BVLaw platform).
This case is not uncommon—many buy-sell agreements do not adequately address the issue of valuation when an owner exits the firm. This represents an opportunity for valuation experts to review clients’ buy-sell agreements to identify potential problems, which could mean recurring business for the practice.
Our thanks to the attorneys at Farrell Fritz, who tipped us off to this case, which was featured on its blog, “New York Business Divorce.” Two of the firm’s attorneys, Peter J. Sluka and Peter Mahler, represented the prevailing parties in the case.
Extra: The February 2022 issue of Business Valuation Update shows how to turn this opportunity into recurring business—including the best way to design a valuation provision in a buy-sell agreement.
Damodaran posts his data update for 2022
Each year, Professor Aswath Damodaran (New York University Stern School of Business) generously posts a great amount of data on his website that include risk-free rates, equity risk premiums (ERPs), corporate default spreads, corporate tax rates, country risk premiums, and other data—all of which are free. He does a series of posts on his blog based on these new data, and the first post explains some of these data and gives the background of his annual analysis.
Implied ERP at 4.9%: A favorite topic of Damodaran is the ERP, and he uses a forward-looking method he calls the “implied” ERP as opposed to the “historical” ERP. He backs this number out from the current market prices and expected future cash flows, which gives an internal rate of return for equities that is analogous to the yield to maturity on a bond. He estimates the implied ERP to be 4.9% as of Jan. 1, 2022, and he reports the year-end estimates going back to 1960.
Damodaran does not update the data during the year, so his next update will be at the beginning of 2023. Therefore, you need to be careful about using the data later in the year, particularly if there is a major shift or disruption in the market or the industry of your subject company.
Poll: Some BVers say ‘no way’ to testifying in court
About one in five (18%) of business valuation experts who do divorce cases have no interest in testifying in court, according to a recent poll. During a BVR webinar on valuations for divorce, the audience was asked: Have you testified in a divorce matter? There were 139 responses, and half of them said, “Yes”; a third said, “No, but I am interested in doing so”; and 18% said, “No, and I am not interested.” Josh Shilts and his colleague, Jeff Robison, both with the Florida-based firm Shilts CPA, gave some very practical advice about testifying in court in a divorce matter, raising the confidence level of those who have testified in court. For those who have not testified—and especially those who are interested in doing so—Shilts says it is not a “life or death” situation. If your valuation does not prevail, it’s not the end of the world. Yes, it can be nerve-wracking and you need a thick skin, but he and Robison shared ways to prepare and present your valuation that will increase your confidence and improve your chances in court.
Kroll reviews 2021 capital markets
“Capital Markets Insights—2021 Year in Review” offers a look at the past year in terms of notable S&P 500 performers, DJIA performers, M&A deals, PE deals, IPOs, SPACs, bankruptcies, cost of capital, and private markets. Here are a few highlights:
Perfect pair: VAB6 and UBV6
Two important books are in the wings for an early 2022 release: Valuing a Business, 6th edition (VAB6), from the American Society of Appraisers and Understanding Business Valuation, 6th edition (UBV6), from Business Valuation Resources. These books complement each other in that the former, by the late Shannon Pratt, gives you a heavy dose of valuation theory, while the latter, by Gary Trugman (Trugman Valuation), shows you how to apply the theory with practical examples from actual engagements and sample valuation reports, written in an easy-to-understand style. Both books are scheduled for release this March and are now available for preorder—just click the links above.
Dates set for AAML/BVR National Divorce Conference
If you do any valuation work for divorce, you do not want to miss the National Divorce Conference, brought to you by the American Academy of Matrimonial Lawyers (AAML) and Business Valuation Resources (BVR). It will be held Sept. 18-20, 2022, and you have your choice of either attending on-site at the Venetian in Las Vegas or you can attend the full event online. What makes this conference unique is that teams of valuation experts and matrimonial attorneys present the sessions, so you get two key perspectives on the most pressing issues. Up to 17.5 CPE/CLE credits are available. The full agenda will be available soon. For more information and to register, click here.
Global BV News
IASB’s Barckow on divergence with FASB regarding goodwill impairment
At the recent AICPA and CIMA Conference on current SEC and PCAOB developments, Andreas Barckow, chair of the International Accounting Standards Board (IASB), discussed the board’s key projects, one of which is goodwill impairments. In the U.S., the Financial Accounting Standards Board (FASB) has tentatively decided to reintroduce an amortization model for goodwill with a 10-year default amortization period. The IASB is leaning toward a different conclusion, that is, retaining the impairment approach with some modifications. “Given that our pronouncements on business combinations are largely converged, an important consideration is to investigate how we can stay aligned,” said Barckow. A copy of his full speech from the conference is available if you click here.
Preview of the February 2022 issue of Business Valuation Update
Here’s what you’ll see: