Mn soc of cpa's 11 15- 2012 - revised (1)

For MN Society of CPAs November 15, 2012
By Michael Gregory
Michael Gregory Consulting LLC
mg@mikegreg.com

 Opened Michael Gregory Consulting LLC
September 2011
 28 years at IRS as engineer valuator, manager,
operations team lead, controller, acting assistant
director, territory manager
 Championed IRS DLOM Job Aid, 6695A Penalty on
Appraisers, Sub S, Reasonable Compensation,
409A, Family Limited Partnerships and Lead
Initiatives on Other Areas Such As R&E Credit,
Transfer Pricing, Cost Segregation and Others
 ASA, AVA, MBA and a Qualified Neutral with the
Minnesota Supreme Court

© 2012 Michael Gregory
Consulting LLC
www.mikegreg.com November 15, 2012 2

The opinions presented here are those of Michael
Gregory. Michael Gregory does not represent the
IRS. Any opinions presented in this seminar are
those of the author and do not represent an
official position of his current or previous
employers. This material is offered for
educational purposes only. The author and his
employer expressly disclaim any
liability, including incidental or consequential
damages, arising from the use of this material or
any errors or omissions that may be contained in
it.
Consulting LLC

 Understanding The IRS and Issue Resolution
 Estate and Gift Tax Classification
 Valuation Issues
◦ Family Limited Partnerships
◦ Discounts for Lack of Marketability
◦ Reasonable Compensation
◦ Common Errors Investigated at the IRS
◦ Review with an Opinion of Value at the IRS
 Take Away Key Points
 In Short Time Together - Key Practical Pointers

Consulting LLC

 Eleven Divisions – Need to Understand Stove
Pipes and Culture Since 2000
 Compliance – Four Divisions
 Your Primary Interest as Accountants
◦ Large Business and International (LB&I)
◦ Small Business and Self Employed (SBSE)
◦ Tax Exempt and Governmental Entities (TEGE)
 Appeals
 Counsel – IRS and DOJ Tax Litigation Division

Consulting LLC

 Good Source of Information for
◦ Businesses
◦ Starting a Business
◦ Operating a Business
◦ Closing a Business
◦ Employer ID Numbers
◦ Small Business Events
◦ Industry Professions
 “Audit Techniques Guides (ATGs)”
◦ Over 50 topics
◦ Aerospace to Wine
Consulting LLC

 Six Industries (Updated 10-1-2012)
 CTM, FS, HMP, NRC, RFTH and GHW
 Case Manager and Team Coordinator Control
 Specialists Are Consultants and Do NOT Control
Case
◦ Engineering IRM 4.4.48 [4.4.48.4 (BV Guidelines)] in NRC
◦ Employment Tax to SBSE
◦ Computer Audit Specialists in RFTH
◦ Financial Products in FS
◦ Economists and International Examiners in “I” of “LB&I”
 Counsel

Consulting LLC

 Internal Consultants to All Divisions
 Four Territory Managers
 34 Managers
 320 Technical Employees (approx. 180
Credentialed Valuators)
 Manager Locally in Bloomington – Christine
Harwood
 Valuators Locally – Real Property and BV

Consulting LLC

 Examination
◦ General Program: Team Manager and Revenue
Agent Control
◦ Estate and Gift (E&G) IRM 4.4.425
 Classification Process Joint E&G and Valuators
 E&G Manager and E&G Attorney Control
 Collection
 Counsel

Consulting LLC

 Team Manager and Revenue Agent Control
 Business Valuator Issues
◦ ESOPs
◦ Related for Profit Entities
◦ Gifts in Kind
◦ Services Provided
 Initiatives

Consulting LLC

 Case Closes Out of Examination Unagreed
and Goes to the Internal IRS Appeals Division
 Goal to Settle Cases Due to Hazards of
Litigation
 Targets
 Independent
 Ex Parte Rules

Consulting LLC

 IRS Office of Chief Counsel
◦ Operations
◦ Technical
 All Non Litigation Work (Legislative, Regulation,
Interpretation)
 Corporate
 International
 Technical Advice
 IRS Division Counsel
 IRS Special Trial Counsel
 (DOJ Tax Litigation Division for Refund Cases)
Consulting LLC

 Regarding Examination Divisions, Appeals
and Council
◦ Who Owns the Case in Exam?
◦ Who Manages the Day to Day Operations on the
Case in Exam?
◦ What is the Role of the Valuator?
◦ Who can Resolve a Case on Examination?
◦ Who can Settle a Case in Appeals?
 If you have a Frustration on a Case on a
Valuation Issue Who Do You Contact?
 Let’s Discuss Some Key Issue Areas

Consulting LLC

◦ Family Limited Partnerships in E&G
◦ Discounts for Lack of Marketability
◦ Common Errors Investigated at the IRS
◦ Review with an Opinion of Value at the IRS

Consulting LLC

 Understand the Process
◦ Know What It Is You Are Valuing
◦ Obtain the Necessary Documents
◦ Review and Analyze Agreements
◦ Review and Analyze the Financial Data
◦ Determine the Appropriate Approach(s)
◦ Apply the Appropriate Approach(s)
◦ Determine the Appropriate Discounts and Premiums
of What You Are Valuing

Consulting LLC

 Business Purpose
 Contributions
 Management Prerogatives Distance Limited
Partners from Assets of FLP
 Distributions
 Term of Partnership

Consulting LLC

 Approval Rights of Limited Partners Required
for Major Decisions or Limited Partners
Excluded from all Decisions
 Right of First Refusal
 Transferability of Rights Approved by All
 Limitations on Withdrawal
 Dissolution Provisions

Consulting LLC

 Asset Based Approach
 Income Approach
◦ Discount Rate
◦ Cash Flows
 Market Approach – Generally Similar to Asset
Based Approach in This Instance
 Valuation Adjustments
◦ Marketable Securities
 Closed End Funds from Barron’s, Wall Street Journal,
Morningstar, Closedendfunds.com
 Choose Appropriate Funds (Bonds, Domestic, etc.)
◦ Real Estate
 NAV REITS and Closed End Funds
 Match Funds with Land, Commercial Type, etc.

Consulting LLC

 Generally Not Adjusted
 Could Be Based on Fact Pattern
◦ Example Restriction on Sale to Charity
◦ Example Income Only
 For Example Reports Go To Partnership
Profiles: Real Estate, Marketable Securities,
Mixed Assets, Non-income Producing Real
Estate
 Will Discuss DLOM Separately

Consulting LLC

 DLOM Job Aid for IRS Professionals
◦ http://www.irs.gov/pub/irs-utl/dlom.pdf
◦ Read It
◦ Use Best Practices [33 Factors, IDR, Review, Report
Critiques, Report Language]
◦ 18 Approaches Critiqued with
Background, Summary, Strengths, Weaknesses, Importan
t Parameters, Prevalence in the Profession, Court
Comments
◦ Make Sure to Note Caveats – Don’t Skip
 In Addition
◦ Espen Robak – Pluris DLOM
◦ John Finnerty – Asian Options Method
Consulting LLC

 Over Compensation Privately Held Companies
◦ Compensation Compared with Firm Performance
(RMA, Bizminer, Integra, Fintel, Dun and Bradstreet)
◦ Types of Compensation - & Areas
◦ Data Sources (Watson
Wyatt, ERI, RMA, BVR, RIA, Troy, Dunn and
Bradstreet, Trade Associations and Others)
◦ Independent Analysis
◦ Exempt Organizations (GuideStar and ERI)
 Subchapter S Under Compensation
◦ Avoid Employment and Other Taxes
◦ Growing Initiative at IRS

Consulting LLC

 Math
 Logic
 Standards SSVS – Know and Follow
 Documentation – Explain Why
 Written to Audience
◦ Client
◦ Lay Person
◦ IRS Exam
◦ New Report For Litigation Tailored to Audience
◦ US Tax Court – IRS Attorneys (90% of Fed Tax Cases)
◦ Refund Cases – US District Court and US Court of Claims
– Note Judge, Jury, Depositions and DOJ Attorneys

Consulting LLC

 Start with the Report and Valuer
 Certified Valuator Credential and Meet
Standards of Society
 Engagement Letter and Limiting Conditions
 Overview of Report
 Clear and Concise with Logical,
Mathematically Correct Tables and
Appendices
 Discounts, Discount Rates, Adjustments to
Income Statement and Balance Sheet
Consulting LLC

 Broad Error Categories
◦ Definition of Value - Standards
◦ Communication – Written for Audience Clear and
Concise
◦ General – Val Date, Logical, Control or Minority
Valuation, Comprehensive, Reasonableness of Variables,
and Reconciliation
◦ Income Approach – Adjustments, Discount Rate, Cash
Flow
◦ Market Approach – Guideline Co’s vs. Transactional Data
Bases, Adjustments to the Subject Company
◦ Asset Based Approach – Expertise
◦ Reconciliation of Approaches and Method
◦ Discounts and Premiums

Consulting LLC

 Write a Report for the Court and Judge
 Read Court Cases by Judge on Topic
 What Did Judge Halpern Have to Say?
◦ Report is Testimony Have to Work with What I Have
◦ Should NOT Have Used WACC in This Instance
 Not Going Public and Do Not Meet Assumptions for
WACC
 Use Equity Approach
◦ Do Not Use CAPM or Modified CAPM for the
Discount Rate
 Same Concerns As Above
 Use Build Up Method

Consulting LLC

◦ Gross Still Governs – “We Will NOT Impose an
Unjustified Fictitious Corporate Tax Rate” – IRS is 6
for 6 in Court
◦ Don’t Assume Judge Understands Valuation
Concepts
◦ Understand Discovery Rules and Process and Work
with Attorney
◦ Have a Third Party Review Your Report
◦ Provide Court with Evidence: If It Is Not In Evidence
It Does Not Exist - Valuation Text Book for Example

Consulting LLC

Consulting LLC

 Know Who to Work With at the IRS
 Raise Issues in Management as Appropriate
 Issue Resolution – Mediation – Litigation
 IRS Job Aide on DLOM’s Worth Reading
 Reasonable Compensation
 409A
 Courts More Analytically Oriented
◦ Avoid Common Errors
◦ Use Facts of Case and Data to Drive Decisions
 Appraiser Penalties 6695A – Standards
 Think Strategically About What You Want to Do

Consulting LLC

 Know Who Your Working with at the IRS
 Understand the Role of Participants
 Seek to Understand Interests –Listen and
Answer What Was Asked
 Do Not Be Afraid to Ask Questions
 Consider Options
◦ Ask for a Specialist
◦ Ask to Elevate in Management as a Neutral Party
Given Ownership of the Issue by the RA or ETA

Consulting LLC

Consulting LLC

 IRS Official and Unofficial Rules of Engagement
 IRS Organization
 My History and Best Practices
 Issue Resolution and Mediation at the IRS
 Classification in General and Estate and Gift in Particular
 Potential Penalties on Appraisers
 Reasonable Compensation in Corporations
 Discounts for Lack of Marketability
 Most Common Errors in Valuations
 Strategic Growth Areas of Business Valuation Appraisers
 Other Engineering Issues and Valuation Related Issues
 Strategic Thinking
 Overall Commentary and “Do’s and Don’ts”

Consulting LLC

 Michael Gregory Consulting, LLC
 mg@mikegreg.com
 www.mikegreg.com
 651-633-5311
 1945 Sharondale Ave.
 Roseville, MN 55113

 Contact me with any questions or concerns

 I Will Stick Around Outside for Questions and to
Autograph Book if You Are Interested

Consulting LLC

Consulting LLC

Mn soc of cpa's 11 15- 2012 - revised (1)

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