Business valuation applied to tax and transfer pricing dispute litigation: methodology, deliverables, and case-specific considerations.
A tax dispute becomes a valuation when it turns on what property was worth rather than on a recurring intercompany price: intangibles or a business line transferred to an affiliate in a restructuring, a contribution to an arrangement in which affiliates share the cost of developing intangibles, or a closely held interest transferred by gift or at death. The economist values the property under the income, market, and asset approaches as the facts support, states the projections, the discount rate, and the useful lives the value rests on, and applies the standard of value the tax framework requires. Where the same dispute also tests the prices the affiliates charged one another, the valuation is reconciled with the transfer pricing analysis so that the value of the transferred property and the returns to each company's routine functions are not counted twice.
Valuation of closely held businesses and ownership interests for shareholder and partnership disputes, divorce, estate and gift matters, and buy-sell disagreements. The work applies the income, market, and asset approaches under the standard of value that governs the matter, addresses discounts for lack of control and marketability where they apply, and documents every input so the conclusion can be tested on cross-examination.
The analysis consists of the delineation of each controlled transaction at issue, whether a sale of goods, a service, a license of patents, trademarks, software, or know-how, or an intercompany loan or guarantee; the functional analysis of what each company did, owned, and risked; the arm's length range under the method that gives the most reliable measure; and the adjustment, or the restated profit, that follows from comparing the controlled result with that range, by year and by entity. Where a tax dispute concerns the value of property rather than a recurring price, such as intangibles transferred to a foreign affiliate or a closely held interest transferred by gift or at death, the analysis is a valuation under the standard the tax framework applies. The drivers are the intercompany agreements and their amendments, the transfer pricing policy and documentation for each year, legal-entity and segmented financial statements, the general ledger detail of the intercompany accounts and any year-end adjustments, the tax returns and information returns that report related-party transactions, and any advance pricing agreement.
We issue the final report and provide deposition and trial testimony and critique of opposing valuation reports.
Each state page adds the courts, the expert standard, and the tax and legal framework the report is built around in that venue.
The one the tax framework applies to the transfer. Property moved between affiliates is measured by the arm's length result the transfer pricing rules require, while most other federal tax valuations, including transfers by gift or at death, use fair market value. The approaches overlap, but the standard decides what is measured, so the report states which one applies and why.
By building both from the same projections, the same functional analysis, and the same conclusion about which company owns which intangibles, so that the value assigned to the transferred property and the routine returns assigned to each company's functions add up to the profit the business actually earns. The report shows the reconciliation so a reviewer can see that no profit is counted in both.
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