Opening Comments
Welcome to our Summer 2009 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 identify our intended audience, allowing you to focus on what is relevant for your practice or business. Please let us know if there are any topics you would like to see addressed in future issues.

The Pomeroy Bill: Reflections on Implications
Isnt Fair Market Value the Fair Thing
[This article is intended for advisors who consult in the areas of gifting and estates]

The Pomeroy Bill (H.R. 111-436), which was introduced earlier this year, is an attempt to reintroduce the family attribution doctrine. This doctrine required fractional interests in family controlled businesses to be treated as controlling interests but was abandoned by the IRS in 1993 with the publication of revenue ruling 93-12. By reverting to family attribution rules and eliminating discounts on certain minority ownership interests, the Pomeroy Bill may lead to an increase in tax revenuesbut it also presents some serious difficulties:

Fair market value Valuations for gifts and estatesare determined based on fair market value. An underlying tenant in determining fair market value is the existence of a hypothetical buyer and a hypothetical seller. Hypothetical (and real) buyers generally require discounts on minority ownership interests. By eliminating such discounts, the Pomeroy Bill would violate an underlying tenant of business valuation practice. Yes, tax revenues may increase but accurate determinations of value certainly would take a turn for the worse.

Existing regulations - Gifts and estates are determined based on fair market valuebecause the law requires them to be! By eliminating discounts, valuations in compliance with the Pomeroy Bill would contradict the fair market value directives of Revenue Rulings 59-60, 77-287 and 93-12. They would also be contrary to Treasury Regulation Section 20.2031-1(b) for estate taxes and 22.2512-1 for gift taxes. It is unclear as to whether or not Congress is prepared to rewrite all those rules if the Pomeroy Bill passes.

Do the right thing By eliminating discounts, the Pomeroy Bill essentially asserts that fair market value is not fair for family members. The implication is that when family members dispose of their minority ownership interests, they will receive the undiscounted pro-rata valuefurther implying unjust enrichment at best or tax evasion at worse. With no basis for such assertions, these positions reflect a presumption of guilt on the part of the taxpayers and reflect no consideration of economic realities.

Sixteen years ago, the IRS abandoned its pursuit of family attribution a policy that resulted in inaccurate valuations. Perhaps this comment is more editorial than educational, but we do not believe tough economic times are an excuse for raising taxes via flawed reasoning. As we have in the past, we encourage advisors, who join us in understanding the implications of the Pomeroy Bill, to educate their representatives in congress. Fair market value is the fair thing.

Electronic Evidence
Practical Considerations
[This article is intended for advisors involved in litigation]

Many have now heard the 98% Rule the belief that on any legal matter, 98% of information relative to the case will now be in electronic format. With so much information in electronic format, litigators and those who support them must be able to demonstrate that evidence pulled from electronic files is what it claims to be. To this end, some law firms have hired counsel knowledgeable about proper procedures for obtaining and protecting electronic evidence. For those who do not have such a resource, here are some considerations andpractical tips:

Federal judges have identified two major concerns related to electronic evidence:
	oWhether reliable procedures were used to ensure that electronic records haveremained unaltered, and
	oWhether, in spite of procedures in place, there were any intentional or unintentional alterations to electronic evidence.

With such a focus on the quality of evidence, the court handling the case of Lorraine v. Markel American Insurance Co. (D. Md. 2007) identified the following 11 points for parties to demonstrate proper consideration of electronic evidence:

1.Whether the business uses a computer,
2.Whether the computer is reliable,
3.Whether procedures have been established for entering data into a computer,
4.Whether such procedures have controls to protect accuracy and identify mistakes,
5.Whether the computer has been kept in a good state of repair,
6.Whether an authenticating witness had the computer read out certain data,
7.Whether the procedures used by the witness were appropriate for the readout,
8.Whether the computer was working appropriately during the readout,
9.Whether a readout used by a witness is recognized by the witness,
10.Whether the witness acknowledges that he recognizes the readout, and
11.If the readout has unusual symbols or terms, they are explained by the expert.

While those individuals who are not well versed on the proper handling of these matters should seek appropriate support, this list should help create greater awareness of issues to consider.

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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