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Valuation/Litigation Insights - Spring 2008

Published: 10-8-08
In this Issue:
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Contact:
Ray Dunkle, CPA, ABV, CVA, CFE
(330) 572-8046
Opening Comments
Welcome to our inaugural issue of Valuation/Litigation Insights. Through this publication, our hope is to bring our friends in the business community original, internally prepared perspectives that are brief, meaningful and useful. With each article we willidentify our intended audience, allowing the reader to focus on articlesrelevant to him or her. Over time, we will address topics that willappeal to a broad group of professional advisors. We hope you find value in this first issue and please let us know if there are any topics you would like to see addressed in the future.
Hindsight is 20/20
Mitigating the Effect of Subsequent Events in a Business Valuation for Estate Purposes

[This article is intended for attorneys and other advisors who assist clients with estate planning matters]
Business valuators have heard it a thousand times, events subsequent to the date of value should not be considered. The argument goes something like this: if a valuation is needed as a result of a specific event on a specific date (i.e., a death), it would not be appropriate to consider events that occurred after that date. While that reasoning is generally appreciated by the business valuation community, it is not always accepted by those who use our reports. This can be detrimental to a valuation prepared for estate tax purposes.
Read More...
Fraud Investigations
Protecting Privileged Information

[This article is intended for non-attorney advisors desiring conversational familiarity with issues faced in a litigation environment]

Many of us are aware of the attorney-client privilege that protects the communication of legal advice between an attorney and a client, but what happens if the attorney hires a fraud examiner to investigate facts necessary to render this legal advice to the client Can the fraud examiner safeguard these privileges of a client similar to an attorney The answer is yes.
Read More...
Hindsight is 20/20 cont'd.
It is recognized that courts have considered subsequent events going back as far as 1926. While such considerations have not always resulted in the courts adjusting values, sometimes they have. This poses a challenge since Section 3.03 of Revenue Ruling 59-60 stresses that appraisers are to use all relevant information available on the valuation date. The valuation date should be the as of date, not the date the report is prepared.
Problems do not typically arise with events that are known, knowable or reasonably foreseeable. For instance, if a new contract that will double revenues was secured before the valuation date but will begin after the valuation date, its has a foreseeable impact that should be considered in a discounted cash-flow valuation model. In contrast, a fire after the valuation date, which destroyed production capacity, would not be foreseeable at the valuation date.
The IRS supports the consideration of post-mortem facts if they were foreseeable on the valuation date and supports their consideration in Tax Court if they are relevant and reasonably timely; however, the IRS also notes in the appeals officer training manual that several recent court cases have indicated a potential willingness of the courts to relax the restrictions on the use of post-mortem facts and circumstances in valuation cases. Herein lays the risk.

The Risk
While the Tax Court has typically considered reasonably knowable subsequent events, this is not always the case. In the Estate of Helen M. Noble v. Commissioner, T.C. Memo. 2005-2, January 6, 2005, the IRSs expert opined that the value of a 11.6% interest in a business was $1,100,000 ($9,483 per share). The Estates expert opined that the value was $841,000 ($7,250 per share). In addition to these values, the subject Company was separately valued by a third valuator who concluded the value was $878,000 ($7,793 per share).
Approximately fourteen months after the valuation date, the 11.6% interest in the business was sold for $1,100,000 ($9,483 per share). Fifteen months prior to the valuation date, minority shares were sold for $1,000 per share. Two months prior to the valuation date, minority interests were sold for $1,500 per share. The Courts final decision appears to have been based almost exclusively on the sale fourteen months after the valuation date. Little consideration appears to have been given to the sales prior to the valuation date or to the facts and circumstances as of the valuation date as addressed in the three valuation reports provided.
Mitigating Risk
Faced with the risk that subsequent events could appear to impact the value of a business, several things can be done to minimize the risk that Tax Courts will adjust an experts value. These include:

In his letter to Jean Baptiste Le Roy, Benjamin Franklin famously wrote that in this world nothing can be said to be certain, except death and taxes. With careful due diligence, at least uncertainty with death taxes can be minimized.

Fraud Investigations Cont'd.
Similar to attorneys, if privileges are not protected properly, a client might ultimately be forced to produce sensitive information in certain circumstances. Thus it is extremely important for both the attorney and fraud examiner to understand the various privileges and doctrines that protect a client's confidentiality. This brief article intends to provide a basic overview of the privileges and doctrines that protect a client's confidentiality.


The two primary privileges, and probably the most well known, used to protect investigation materials are the attorney-client privilege and the work product doctrine. The purpose of the attorney-client privilege is to encourage clients to engage in open dialogue with their attorneys so they may obtain adequate legal advice. However, the presence of a third party can easily destroy this attorney-client privilege. Therefore it is imperative that the communication between the attorney and client stays confidential. Fortunately, certain third-party relationships are also privileged. For example, the attorney-client privilege is protected for any fraud examiner who works under the direct supervision of the attorney if the fraud examiners services are considered necessary for the attorney to render legal advice. Furthermore, the fraud examiner can also play a role in protecting the attorney-client privilege. This is done, for instance, when the fraud examiner is retained directly by counsel rather than the client and sets forth this arrangement within the engagement letter. It should be noted that the client, not the attorney, can still be responsible for payment of fees and expenses. Stating within the engagement letter the fraud examiner's role in the investigation, relating to the legal advice provided by the attorney to the client, can also be helpful. Finally, any oral communication should be discussed directly with the attorney, or to the client with the attorney, and any written communication should be marked as "Privileged and Confidential: Attorney-Client Privilege." Precautions such as these can help protect the privileges between the attorney-client and others involved in the investigation.

As mentioned earlier, the work product doctrine is yet another basis to protect the confidentiality of investigation materials. This doctrine basically protects the confidentiality of an attorney's conclusions, opinions, impressions, and legal theories and prevents any opponents benefiting from seeing this product. As in some cases, there is a caveat to this rule: the litigation must have been anticipated at the time the work product was created; however, this does not mean the lawsuit has to be filed, or even threatened. A mere belief that litigation could eventually arise may be enough. This doctrine does not differentiate between materials prepared by attorneys and materials prepared by others who may be assisting the attorneys. Therefore a fraud examiner's work product prepared under the attorney's direction may also be protected.


Not all documents are created equal. Financial data is not considered work product. Analysis or evaluation of such data by fraud examiners can be considered work product. Also, some regard it best practice for a fraud examiner to disburse thoughts and conclusions throughout his report so that the entire document is protected, not just a portion of the report. Similarly, as with other documentation, the language "Privileged and Confidential: Work Product" should be included in the header or footer in the fraud examiners report.


After all is said and done, the client has the ultimate power to enforce a privilege and may waive this privilege if so desired. However, understanding the legal privileges that apply in any investigation enables both the attorney and fraud examiner to play a vital role in protecting the client's privileges and preserving the confidentiality of the investigation materials.
Disclaimer: These articles are intended for our friends in the legal, banking and professional services community and merely reflect our observations. These articles should not be construed as legal counsel. Contact an attorney whenever legal advice is needed.
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