Business Valuation and Taxes Procedure, Law, and Perspective
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Business Valuation and Taxes Procedure, Law, and Perspective David Laro Judge, U.S. Tax Court Shannon P. Pratt CFA, FASA, MCBA, CM&A, MCBC John Wiley & Sons, Inc. Business Valuation and Taxes Business Valuation and Taxes Procedure, Law, and Perspective David Laro Judge, U.S. Tax Court Shannon P. Pratt CFA, FASA, MCBA, CM&A, MCBC John Wiley & Sons, Inc. This book is printed on acid-free paper. ∞ Copyright © 2005 by John Wiley & Sons, Inc., Hoboken, New Jersey. All rights reserved. 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For general information on our other products and services, or technical support, please contact our Customer Care Department within the United States at 800-762-2974, outside the United States at 317-572-3993 or fax 317- 572-4002. Wiley also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic books. For more information about Wiley products, visit our Web site at www.wiley.com. Library of Congress Cataloging-in-Publication Data: Laro, David, 1942– Business valuation and taxes : procedure, law & perspective / David Laro, Shannon P. Pratt. p. cm. Includes bibliographical references and index. ISBN-13 978-0-4716-9437-3 (cloth) ISBN-10 0-471-69437-1 (cloth) 1. Business enterprises—Valuation—United States. 2. Business enterprises—Taxation—Law and legislation—United States. I. Pratt, Shannon P. II. Title. HF5681.V3L37 2005 346.73'065—dc22 2004013842 Printed in the United States of America 10987654321 Dedication by David Laro To my wife, Nancy, and our family— Rachel, David, and their children, Sophie and Asher Marlene, Andrew, and their sons, Alexander and Benjamin Dedication by Shannon Pratt To my wife, Millie, and our family— Mike, Barb, and their sons, Randall and Kenny Georgia, Tom, and their children, Elisa, Katie, and Graham Susie, Tim, and their children, John, Calvin, and Meg Steve, Jenny, and their children, Addy and Zeph About the Authors The Honorable David Laro was appointed by President George H. W. Bush to the United States Tax Court, confirmed by the Senate, and invested as a federal judge in November 1992. He formerly practiced law in Michigan for 24 years, specializing in tax law. Judge Laro is a graduate of the New York University School of Law (LLM in Taxation, 1970), the University of Illinois Law School (JD, 1967), and the University of Michigan (BA, 1964). Before joining the U.S. Tax Court, Judge Laro was chairman and CEO of a publicly traded international company. In 1985, he co-founded Republic Bancorp, a Michigan bank holding company that was rated recently by Fortune magazine as the fifth-best corporation in America at which to work. He was the founder and chairman of the board of directors of Re- public Bank Ann Arbor, a position he held until he became a federal judge. Judge Laro has also held several public offices, including a Regent of the University of Michigan, a member of the State Board of Education in Michigan, and chairman of the State Tenure Commission in Michigan. He formerly served as director of the Ann Arbor Art Association and as a member of the Holocaust Foundation in Ann Arbor. As adjunct professor of law at Georgetown University Law Center, Judge Laro teaches a class in business planning. He is also a visiting professor at the University of San Diego School of Law, where he teaches business valuation and tax litigation. He lectures on tax pol- icy at Stanford Law School and is a member of the National Advisory Committee for New York University School of Law. A frequent guest speaker, Judge Laro lectures for the American Bar Association, the American Society of Appraisers, the American Institute for Certified Public Accountants, and other professional organizations and associations. In addition, he has authored numerous arti- cles on taxation printed in the American Bar Association Journal, the University of Illinois Law Review, and other publications. He is a fellow of the American College of Tax Counsel. At the request of the American Bar Association and the Central Eastern European Law Initiative, Judge Laro contributed written comments on the Draft Laws of Ukraine, Ka- zakhstan, Uzbekistan, Slovenia, and the Republic of Macedonia, and on the creation of spe- cialized courts in eastern Europe. As a consultant for the Harvard Institute for International Development and Georgia State University, Judge Laro lectured in Moscow to Russian judges on tax reform and litigation procedures. Judge Laro has also lectured to judges and tax offi- cials in Azerbaijan on tax reform. Judge Laro’s noteworthy tax decisions include Simon (depreciation of antique musical in- strument), Mandelbaum (lack of marketability discount), Wal-Mart (inventory shrinkage), ACM Partnership (corporate tax shelter), Lychuk (capitalization issues), and Bank One (valua- tion of financial derivatives). vii viii ABOUT THE AUTHORS Judge Laro’s family shares his interest in tax law. His wife is a certified public accountant. Both of his daughters and one son-in-law are tax attorneys. For variety, his other son-in-law is a urologist. Judge Laro enjoys spending time with his family, especially his grandchildren, Sophie, Alexander, Benjamin, and Asher. Shannon Pratt’s reputation for knowledge and experience in the field of business valuation is legendary and unparalleled. He is the best-known authority in the field of business valuation and has written numerous books that articulate many of the concepts used in modern business valuation around the world. He is chairman and chief executive officer of Shannon Pratt Valuations, LLC; Publisher Emeritus for Business Valuation Resources, LLC; and a member of the board of directors of Paulson Capital Corp., an investment banking firm specializing in small-firm IPOs and sec- ondary offerings.1 Dr. Pratt holds an undergraduate degree in business administration from the University of Washington and a doctorate in business administration, majoring in finance, from Indiana University. He is a Fellow of the American Society of Appraisers, a master certified business appraiser, a chartered financial analyst, a master certified business counselor, and a certified mergers and acquisitions advisor. His professional recognitions include being designated a life member of the American So- ciety of Appraisers and also a life member of the Business Valuation Committee of the Amer- ican Society of Appraisers, past chairman and a life member of the ESOP Association Advisory Committee on Valuation, a life member of the Institute of Business Appraisers, the recipient of the magna cum laude in business appraisal award from the National Association of Certified Valuation Analysts, and the recipient of the Distinguished Achievement Award from the Portland Society of Financial Analysts. He served two three-year terms (the maxi- mum) as a trustee-at-large of The Appraisal Foundation. Besides lecturing, writing, and teaching courses for such organizations as the American Society of Appraisers, the Alliance of Merger & Acquisition Advisors, the American Bar As- sociation, and several state bars, Dr. Pratt is author of the following books published by John Wiley & Sons, Inc.: Business Valuation Discounts and Premiums; Business Valuation Body of Knowledge: Exam Review and Professional Reference, 2nd edition; Business Valuation Body of Knowledge Workbook; Cost of Capital: Estimation and Applications, 2nd edition; Cost of Capital Workbook; and The Market Approach to Valuing Businesses. He is also the author of The Lawyer’s Business Valuation Handbook, published by the American Bar Association. He is coauthor of Valuing a Business: The Analysis and Appraisal of Closely Held Companies, 4th edition, and Valuing Small Businesses and Professional Practices, 3rd edition (both pub- lished by McGraw-Hill), Guide to Business Valuations, 14th edition (published by Practition- ers Publishing Company), and Guide to Canadian Business Valuations. He was a founder of Willamette Management Associates, and served as a managing direc- tor of that firm through December 2003. For more than 35 years, Dr. Pratt has performed val- 1Due to judicial ethical considerations, Judge Laro is not able to and therefore does not endorse, promote, or rec- ommend any commercial or business services Shannon Pratt or others have created or with which they are in- volved, some references to which are included in this book for informational purposes only. About the Authors ix uation engagements for mergers and acquisitions, employee stock ownership plans (ESOPs), fairness opinions, gift and estate taxes, incentive stock options, buy-sell agreements, corpo- rate and partnership dissolutions, dissenting stockholder actions, damages, and marital disso- lutions, to name a few.