IRS Business Valuation Guidelines
TABLE OF CONTENTS
1.0 Introduction
2.0 Development Guidelines
2.1 Planning
2.2 Identifying
2.3 Analyzing
2.4 Workpapers
2.5 Reviewing
3.0 Resolution Guidelines
3.1 Objective
3.2 Arriving at Conclusions
4.0 Reporting Guidelines
4.1 Overview
4.2 Report Contents
4.3 Statement
1. INTRODUCTION
The purpose of this document is to provide guidelines applicable to all IRS personnel engaged in valuation practice (herein referred to as "Valuators") relating to the development, resolution and reporting of issues involving business valuations and similar valuation issues. Valuators must be able to reasonably justify any departure from these guidelines.
This document incorporates by reference, the ethical and conduct provisions, contained in the Office of Government Ethics (OGE) Standards of Ethical Conduct, applicable to all IRS employees.
2. DEVELOPMENT GUIDELINES
2.1. Planning.
2.1.1. Valuators will adequately plan and their managers will supervise the staff involved in the valuation process.
2.1.2. Quality planning is a continual process throughout the valuation assignment.
2.2. Identifying.
2.2.1. In developing a valuation conclusion, Valuators should define the assignment and determine the scope of work necessary by identifying the following:
2.2.1.1. Subject to be valued;
2.2.1.2. Interest to be valued;
2.2.1.3. Effective date of valuation;
2.2.1.4. Purpose of valuation;
2.2.1.5. Use of valuation;
2.2.1.6. Statement of value;
2.2.1.7. Standard and definition of value;
2.2.1.8. Assumptions;
2.2.1.9 Limiting conditions;
2.2.1.10 Scope limitations;
2.2.1.11 Restrictions, agreements and other factors that may influence value;
2.2.1.12 Sources of information.
2.3. Analyzing.
2.3.1. In developing a valuation conclusion, Valuators should obtain and analyze the relevant information necessary to accomplish the assignment, including:
2.3.1.1. The nature of the business and the history of the enterprise from its inception.
2.3.1.2. The economic outlook in general and the condition and outlook of the specific industry in particular.
2.3.1.3. The book value of the stock or interest and the financial condition of the business.
2.3.1.4. The earning capacity of the company.
2.3.1.5. The dividend-paying capacity.
2.3.1.6. Whether or not the enterprise has goodwill or other intangible value.
2.3.1.7. Sales of the stock or interest and the size of the block of stock to be valued.
2.3.1.8. The market price of stocks or interests of corporations or entities engaged in the same or a similar line of business having their stocks or interests actively traded in a free and open market, either on an exchange or over-the-counter.
2.3.1.9. Other information deemed to be relevant.
2.3.2. The three generally accepted valuation approaches are the asset-based approach, the market approach and the income approach. Consideration should be given to all three approaches. Professional judgment should be used to select the approach(es) ultimately used and the method(s) within such approach(es) that best indicate the value of the business interest.
2.3.3. Historical financial statements should be analyzed and, if necessary, adjusted to reflect the appropriate asset value, income, cash flows and/or benefit stream, as applicable, to be consistent with the valuation methodologies selected by the Valuator.
2.3.4. The Valuator should select the appropriate benefit stream, such as pre-tax or after-tax income and/or cash flows, and select appropriate discount rates, capitalization rates or multiples consistent with the benefit stream selected within the relevant valuation methodology.
2.3.5. The Valuator will determine an appropriate discount and/or capitalization rate after taking into consideration all relevant factors, such as:
2.3.5.1. The nature of the business.
2.3.5.2. The risk involved.
2.3.5.3. The stability or irregularity of earnings.
2.3.5.4. Other relevant factors.
2.3.6. As appropriate for the assignment, and if not considered in the process of determining and weighing the indications of value provided by other procedures, the Valuator should separately consider the following factors in reaching a final conclusion of value:
2.3.6.1. Marketability, or lack thereof, considering the nature of the business, business ownership interest or security, the effect of relevant contractual and legal restrictions, and the condition of the markets;
2.3.6.2. Ability of the appraised interest to control the operation, sale, or liquidation of the relevant business;
2.3.6.3. Other levels of value considerations (consistent with the standard of value in Section 2.2.1.6) such as the impact of strategic or synergistic contributions to value; and
2.3.6.4. Such other factors which, in the opinion of the Valuator, are appropriate for consideration.
2.4. Workpapers.
2.4.1. Workpapers should document the steps taken, techniques used, and provide the evidence to support the facts and conclusions in the final report.
2.4.2. Valuators will maintain a detailed case activity record (Form 9984) which:
2.4.2.1. Identifies actions taken and indicates time charged;
2.4.2.2. Identifies contacts including name, phone number, subject, commitments, etc.; and
2.4.2.3. Documents delays in the examination.
2.4.3. The case activity record, along with the supporting workpapers, should justify time spent is commensurate with work performed.
2.5. Reviewing.
2.5.1. In reviewing a business valuation and reporting the results of that review, a Valuator should form an opinion as to the adequacy and appropriateness of the report being reviewed and should clearly disclose the scope of work of the review process undertaken.
2.5.2. In reviewing a business valuation, a Valuator should:
2.5.2.1. Identify the taxpayer and intended use of the Valuator's opinions and conclusions, and the purpose of the review assignment;
2.5.2.2. Identify the report under review, the property interest being valued, the effective date of the valuation, and the date of the review;
2.5.2.3. Identify the scope of work of the review process conducted;
2.5.2.4. Form an opinion as to the completeness of the report under review within the scope of work applicable in the review assignment;
2.5.2.5. Form an opinion as to the apparent adequacy and relevance of the data and the propriety of any adjustments to the data;
2.5.2.6. Form an opinion as to the appropriateness of the valuation methods and techniques used and develop the reasons for any disagreement; and
2.5.2.7. Form an opinion as to whether the analyses, opinions and conclusions in the report under review are appropriate and reasonable, and develop the reasons for any disagreement.
2.5.2.8. In the event of a disagreement with the report's factual representations, underlying assumptions, methodology or conclusions, conduct additional fact-finding, research and/or analyses necessary to make corrections or revisions to arrive at an appropriate value for the property.
3. RESOLUTION GUIDELINES
3.1. Objective.
3.1.1. The objective is to resolve the issue as early in the examination as possible. Credible and compelling work by the Valuator will facilitate resolution of issues without litigation.
3.1.2. The Valuator will work in concert with the internal customer and taxpayer to resolve all outstanding issues.
3.2. Arriving at Conclusions.
3.2.1. Once the Valuator has all the information to be considered in resolving the issue, the Valuator will use his/her professional judgment in considering this information to arrive at a conclusion.
3.2.2. Valuators may not have all of the information they would like to have to definitively resolve an issue. Valuators, therefore, should decide when they have substantially enough information to make a proper determination.
3.2.3. Valuators will employ independent and objective judgment in reaching conclusions and will decide all matters on their merits, free from bias, advocacy and conflicts of interest.
4. REPORTING GUIDELINES
4.1. Overview.
4.1.1. The primary objective of a valuation report is to provide convincing and compelling support for the conclusions reached.
4.1.2. Valuation reports should contain all the information necessary to allow a clear understanding of the valuation analyses and demonstrate how the conclusions were reached.
4.2. Report Contents.
4.2.1. The extent and content of the report prepared depends on the needs of each case.
4.2.2. Valuation reports should clearly communicate the results and identify the information relied upon in the valuation process. The valuation report should effectively communicate the methodology and reasoning, as well as identify the supporting documentation.
4.2.3. Subject to the type of report being written, valuation reports should generally contain sufficient information relating to the items in Sections 2.2 and 2.3, above, to ensure consistency and quality of valuation reports issued by IRS Valuators.
4.2.4. Reports written with respect to Section 2.5.2.8, above, shall contain, at a minimum, information relating to those items in Sections 2.2 and 2.3 necessary to support the revised assumptions, analyses, and/or conclusions of the Valuator.
4.3. Statement.
4.3.1. Each written valuation report should contain a signed statement that is similar in content to the following:
To the best of my knowledge and belief:
-
My compensation is not contingent on an action or event resulting from the analyses, opinions or conclusions in, or the use of, this report.
|
Affidavit Form
Personal Finance Software