These guidelines come straight from the IRS Examination manual.
Part 4. Examining Process
Chapter 48. Engineering Program
Section 4. Business Valuation Guidelines
4.48.4 Business Valuation Guidelines
126.96.36.199 Development Guidelines
188.8.131.52 Resolution Guidelines
184.108.40.206 Reporting Guidelines
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.
Valuations of assets owned and/or transferred by or between controlled taxpayers (within the meaning of Treasury Regulation section 1.482-1(i)(5)) may present substantive issues that are not addressed in these guidelines.
Successful completion of a valuation assignment includes planning, identifying critical factors, documenting specific information, and analyzing the relevant information. All relevant activities will be documented in the workpapers.
A review appraisal may be the best approach to the assignment.
Valuators will adequately plan the valuation assignment. Their managers will supervise the staff involved in the valuation process.
Quality planning is a continual process throughout the valuation assignment.
In developing a valuation conclusion, valuators should define the assignment and determine the scope of work necessary by identifying the following:
Property to be valued
Interest to be valued
Effective valuation date
Purpose of valuation
Use of valuation
Statement of value
Standard and definition of value
Restrictions, agreements and other factors that may influence value
Sources of information
In developing a valuation conclusion, valuators should analyze the relevant information necessary to accomplish the assignment including:
The nature of the business and the history of the enterprise from its inception
The economic outlook in general and the condition and outlook of the specific industry in particular
The book value of the stock or interest and the financial condition of the business
The earning capacity of the company
The dividend-paying capacity
Existence or non existence of goodwill or other intangible value
Sales of the stock or interest and the size of the block of stock to be valued
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
Other relevant information
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.
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.
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.
The valuator will determine an appropriate discount and/or capitalization rate after taking into consideration all relevant factors such as:
The nature of the business
The risk involved
The stability or irregularity of earnings
Other relevant factors
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:
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.
Ability of the appraised interest to control the operation, sale, or liquidation of the relevant business.
Other levels of value considerations (consistent with the standard of value in Section 220.127.116.11.2 (1) list item g) such as the impact of strategic or synergistic contributions to value .
Such other factors which, in the opinion of the valuator, that are appropriate for consideration.
Workpapers should document the steps taken, techniques used, and provide the evidence to support the facts and conclusions in the final report.
Valuators will maintain a detailed case activity record (Form 9984, Examining Officer's Activity Record) which:
Identifies actions taken and indicates time charged
Identifies contacts including name, phone number, subject, commitments, etc.
Documents delays in the examination
The case activity record, along with the supporting workpapers, should justify that the time spent is commensurate with work performed.
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.
In reviewing a business valuation, a valuator should:
Identify the taxpayer and intended use of the opinions and conclusions, and the purpose of the review assignment.
Identify the report under review, the property interest being valued, the effective date of the valuation, and the date of the review.
Identify the scope of the review process conducted.
Determine the completeness of the report under review.
Determine the apparent adequacy and relevance of the data and the propriety of any adjustments to the data.
Determine the appropriateness of the valuation methods and techniques used and develop the reasons for any disagreement.
Determine whether the analyses, opinions, and conclusions in the report under review are appropriate and reasonable, and develop the reasons for any disagreement.
In the event of a disagreement with the report’s factual representations, underlying assumptions, methodology, or conclusions, a valuator should conduct additional fact-finding, research, and/or analyses necessary to arrive at an appropriate value for the property.
Valuators will make efforts to obtain a resolution of the case after fully considering all relevant facts.
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.
The valuator will work in concert with the internal customer and taxpayer to attempt to resolve all outstanding issues.
Arriving at Conclusions
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.
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.
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.
Valuators should prepare reports of their findings.
This section requires specific information to be included or addressed in each report.
The primary objective of a valuation report is to provide convincing and compelling support for the conclusions reached.
Valuation reports should contain all the information necessary to allow a clear understanding of the valuation analyses and demonstrate how the conclusions were reached.
The extent and content of the report prepared depends on the needs of each case.
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.
Subject to the type of report being written, valuation reports should generally contain sufficient information relating to the items in Identifying and Analyzing to ensure consistency and quality.
Reports written with respect to Reviewing shall contain, at a minimum, information relating to those items in Identifying and Analyzing necessary to support the revised assumptions, analyses, and/or conclusions of the valuator
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:
The statements of fact contained in this report are true and correct.
The reported analyses, opinions, and conclusions are limited only by the reported assumptions and limiting conditions.
I have no present or prospective interest in the property that is the subject of this report, and I have no personal interest with respect to the parties involved.
I have no bias with respect to the subject of this report or to the parties involved with this assignment.
My compensation is not contingent on an action or event resulting from the analyses, opinions, or conclusions in, or the use of, this report.
My analyses, opinions, and conclusions were developed, and this report has been prepared in conformity with the applicable Internal Revenue Service Valuation Guidelines.