May 2004 - Information submitted by Jamshed Gandi, of Bertorelli, Gandi, Won & Behti, a MSI accounting member firm based in San Francisco, California, USA.

Recently two cases related to Business Valuations were decided which may be of interest.

A. Closely held stock - gift tax - subsequent events

An issue that frequently comes up in valuing entities is the effect of subsequent events, and what part these events play as of the actual valuation date.

In the Jeffrey L. Okerland vs. U.S. case, the failure to take into account the corporation's decrease in earnings for the two subsequent years was not held to be critical. This decrease in earnings was attributed to an illness of the founder of the company. However, the valuation had taken into account the risk of the reliance on the key executive. The drop in earnings was not considered to have an effect as the events were unforeseen as of the date of valuation.

I suppose following the principals laid down in Rev-Rul 59-60, fair market value for gift tax purposes, is attributable to the date of the actual gifting and therefore, this case would seem to be consistent with that holding. I also think this case lends to the importance of consideration of all pertinent risk factors as of the data of valuation.

B. Intangibles

In another case the U.S. Tax Court ruled in favour of the Charles Schwab Corporation regarding the valuation and amortization of intangible assets. The court opined on whether the purchase of customer accounts could be amortized and if so, as to the value and life, for purposes of the amortization.

Schwab was able to argue that the customer listing had a value separate from goodwill based on the life attributed to the customer accounts. Regarding the question of value, here again, Schwab prevailed where a higher value was attributed to the assets based on its rationale that, the definition of fair market value would have to consider usage applicable to a particular business, and the realities of the market place, as opposed to the distinct use attributed to a particular entity.

Concerning the life attributable to the customer accounts, the Court agreed with Schwab’s determination based on its own experience, and the fact that only a reasonable amount of similarity was necessary to equate the useful life to its own experience, thereby justifying a life based on its own experience, for purposes of the amortization.