S S CORPORATIONS: TO TAX OR NOT TO TAX? by by Gary R. R. Trugman CPA/ABV, MCBA, ASA, MVS

Transcription

1 S S CORPORATIONS: TO TAX OR NOT TO TAX? by by Gary R. R. Trugman CPA/ABV, MCBA, ASA, MVS Flow Flow through through entities entities come come many shapes sizes, wher an an S S Corporation, Limited Limited Liability Liability Company, Company, Partnership, etc. etc. This paper will primarily focus focus on on S S Corporations, but but same same economic economic ory ory can can applied applied or or flow flow through through entities entities as as well. well. This This paper is not tended cover everythg you need know about valug se types paper is not tended cover everythg you need know about valug se types entities cause this subject take up a book, not just a paper. In fact, Nancy entities cause this subject take up book, not just a paper. In fact, Nancy Fannon wrote a book on this pic entitled Fannon's Guide Valuation Subchapter Fannon S Corporations, wrote a book published on this by pic Busess entitled Valuation Fannon's Resources, Guide LLC. Valuation It was just Subchapter recently S Corporations, published late published last year. by Busess Valuation Resources, LLC. It was just recently published late last year. Over past few years, several Tax Court cases were decided significantly changed Over lscape past few years, how S several Corporations Tax Court are valued. cases were These decided Tax Court cases significantly have now changed also had lscape fluence how on S non-tax Corporations cases as are well. valued. Without These gog Tax Court a lot cases detail have about now each also had an fluence Tax Court on cases, non-tax here cases is a quick as well. snapshot Without gog problem: a lot detail about each Tax Court cases, here is a quick snapshot problem: th Gross v. Commissioner, T.C. Memo , affd. 272 F.3d 333 (6 Cir. 2001). th Gross In this v. Commissioner, case, taxpayer's T.C. expert Memo. argued , affd. S corporation 272 F.3d 333 earngs (6 Cir. G&J 2001). In this Pepsi-Cola case, Bottlers, taxpayer's Inc. (G&J) expert should argued tax-effected S corporation its earngs C corporation G&J equivalent earngs should capitalized with an after-tax discount rate based on Pepsi-Cola Bottlers, Inc. (G&J) should tax-effected its C corporation Capital Asset Pricg Model. The expert Internal Revenue Service equivalent earngs should capitalized with an after-tax discount rate based on argued G&J's earngs were after corporate taxes, particularly sce an S corporation Capital Asset does not Pricg pay any Model. taxes, The e expert personal taxes Internal Revenue shareholders. Service argued Consequently, G&J's accordg earngs this were expert, after corporate appropriate taxes, discount particularly rate applicable sce an S corporation S corporation's does not earngs pay any taxes, was an after-tax e discount personal rate. taxes The Court shareholders. agreed with Consequently, this argument accordg its written this opion. expert, The appropriate valuation subject discount consisted rate applicable small, mority S corporation's terests earngs G&J. was an after-tax discount rate. The Court agreed with this argument its written opion. The valuation subject consisted small, mority Wall v. terests Commissioner, G&J. T.C. Memo , March 27, This case volved several small gifts S corporation sck. Both experts tax-affected come Wall stream v. Commissioner, application T.C. Memo come , approach, March although 27, at different This case rates. volved The several Tax Court small cited gifts Gross S corporation determed sck. Both come experts stream tax-affected should not come taxeffected. application come approach, although at different rates. The stream Tax Court cited Gross determed come stream should not taxeffected. Heck v. Commissioner, T.C. Memo , Filed February 5, In this case, expert taxpayer used a discounted cash flow method which pre-tax, flow through earngs F. Korl & Bros., Inc. (Korl) were considered. Heck The v. discount Commissioner, rate T.C. he used Memo. was , an after-tax Filed weighted February average 5, cost In this capital. case, The expert expert taxpayer IRS used used a similar a discounted cash flow flowmethodology which an pre-tax, after-tax flowweighted through average earngs cost F. capital. Korl The & Bros., Court's Inc. opion (Korl) cited were Gross considered. The issue discount rate cost capital. he used The was fdg an after-tax The Court weighted this average case was cost based capital. on The discountg expert pre-tax IRS used earngs a similar Korl discounted with an after-tax cash flow cost methodology capital. In this an after-tax stance, weighted a 39.6 percent average mority cost terest capital. was The g Court's valued. opion cited Gross on Florida issue cost capital. The New fdg Jersey The Court this case was based on 8751 W. Broward discountg Blvd. Suite 203 Plantation, pre-tax FL earngs Page 2001 Korl Rte Suite 34 with 310 Parsippany, an after-tax NJ cost capital. In this stance, a 39.6 percent mority terest was g valued. O: F: O: TRUGMAN

2 - 2 - Adams v employees, Commissioner, all T.C. ferg Memo. accountg , Filed pressional March 28, services In this case, on half tax-effectg T&A. issue came extremely important. In this case, taxpayer s expert, rar than proposg S corporation earngs Waddel Sluder Adams & Co., Inc. (WSA) tax-effected, developed an after-tax discount rate usg a build-up method converted correspondg capitalization rate (after 11. subtraction At all times expected relevant growth) here, a T&A pre-tax held capitalization itself out rate. He public, deemed this discount represented rate applicable Platiffs S corporation here, earngs it was an WSA. accountg This stream firm come was e corporate taxes any distributions may have en distributed which possessed shareholders special expertise pay ir personal knowledge come concerng taxes. The IRS correct expert argued an after-tax discount rate was applicable S corporation earngs WSA. lawful While fair this market seems valuations consistent with purposes Gross Heck, mation with respect establishment issue pre-tax earngs ESOPs so an after tax any discount such valuation rate, appraisal subject Adams was a 61.6 percent, controllg terest. conmance with all Generally Accepted Accountg Practices, Dallas v. Commissioner, T.C. Memo , Septemr 28, After a long hiatus all applicable cases volvg laws, cludg S corporations, but not this limited case hit, our ERISA radar. In 406, this 29 case volvg U.S.C. Dallas 1106(a). Group America, Inc. (DGA), one issues related taxaffectg come. The first taxpayer valuation analyst tax-affected S corporation earngs usg a 40% tax rate second taxpayer valuation analyst used a 35% tax rate. Accordg Court, testimony taxpayer s 12. analysts At all was times relevant y tax-affected here, Stephen under Jones assumption (hereafter DGA Jones ) lose wasits S corporation a licensed, status certified after or public as a result accountant hypotical a partner, sale shareholder its sck. The Court said re was no evidence DGA expected lose its S corporation status. /or The employee Court also noted T&A. DGA had a hisry distributg sufficient cash shareholders pay ir taxes on ir share S corporation earngs re was no evidence this practice change. The Court gave little weight taxpayer s valuation analysts testimony. The botm le is The Court 13. At all times relevant here, Jones held himself out public, said, We conclude re is sufficient evidence establish a hypotical buyer represented seller tax-affect Platiffs DGA s here, earngs he was an accountant tax-affectg who DGA s earngs is not appropriate. possessed special expertise knowledge concerng correct These cases caused an absolute uproar valuation community. Almost everyone lawful fair market valuations purposes mation thought Tax Court was nuts. After dust settled, an entire new way thkg was born. establishment Relyg on same ESOPs old ory so any always such tax-effectg ESOP valuation earngs doesn t fly anymore. conmance with all Generally Accepted Accountg Practices, However, with g said, above four cases could result bad law if all valuation all applicable laws, cludg but not limited, ERISA 406, 29 analysts assume Tax Court was correct its rulgs same rules should apply U.S.C. a different 1106(a). set circumstances. In fact, as a result rulgs, it appear an S corporation election has value. Why should it have value entity? This make an S corporation worth more than an equivalent C corporation. Besides defyg basic economic ory, this lacks common sense Revenue Rulg At all times relevant here, Michael Axelrod (hereafter Axelrod ) suggests we apply valuation process. was a licensed, certified public accountant a partner, shareholder /or employee T&A. Page 2 34

3 - 3 - There 15. have At en all times numerous relevant articles here, published Axelrod over held himself past several out years public, Busess Valuation Update, Busess Valuation Review, Busess Appraisal Practice Fancial Valuation There have represented en Litigation numerous Expert. articles Platiffs Furrmore, published here, over re he past was have several an accountant en an years abundance Busess who conference Valuation Update, possessed presentations Busess special on Valuation this expertise pic Review, as well. Busess knowledge In order Appraisal save concerng space, Practice I am correct not Fancial gog repeat Valuation mation Litigation cluded Expert. all Furrmore, or re stuff. have However, en what an abundance seems conference abundantly lawful presentations clear fair is market on this empirical valuations pic as data well. does In purposes order not support save space, mation notion I am not gog an S repeat 1 Corporation mation sells more cluded than a C all Corporation. or stuff. However, what seems abundantly establishment clear is ESOPs empirical so data any does such not ESOP support valuation notion an S 1 So Corporation Where Do sells conmance We Go more From than with Here? a all C Generally Corporation. Accepted Accountg Practices, Every So Where all valuation Do applicable We analyst Go From laws, faces Here? cludg but not limited, ERISA 406, 29 question what do about taxes when valug an entity has elected U.S.C. 1106(a). treated as an S Corporation under Internal Revenue Code. Some Every valuation analysts lieve analyst faces g question an S corporation what adds do about value taxes when entity valug sce an it entity does not pay has come elected taxes. Ors treated lieve as an S Corporation makg an under S election Internal reduces Revenue value Code. an ownership Some analysts terest lieve cause g personal an S corporation taxes will adds paid value on prits entity are sce allocated it does not 17. In Novemr 1993, Fisher Jones met with Platiffs pay shareholder, come taxes. without Ors nefit lieve receivg makg distributions an S election reduces enable value dividual an ownership pay personal terest purposes taxes cause when presentg y personal come taxes Platiffs due. In with this will section, paid on nefits we prits will mg explore are an allocated ABC neverendg shareholder, question, without does an S election nefit crease receivg or distributions decrease value? enable dividual pay personal ESOP. taxes when y come due. In this section, we will explore neverendg What Is question An S Corporation?, does an S election crease or decrease value? Although What Is An this S is Corporation? 18. On or not about a treatise Decemr on come 7, tax 1993, laws, ABC a good by place through g a discussion Platiffs, about as value an S corporation is underst rules regardg this type entity. The term Although S corporation this ficers is not a means treatise ABC, a small on come reliance busess tax on laws, corporation a good advice place which g representations an election a discussion about taxed 2 under value Subchapter an S corporation S Internal is underst Revenue Code rules is effect regardg this year. type Once entity. made, The term this election S corporation Green remas means Smith, effect a small Fisher, until busess T&A, it is revoked. corporation Jones, To decided classified which an as election m an a small ESOP. busess taxed 2 under corporation Subchapter purposes S Internal Subchapter Revenue S, a Code corporation is effect must meet year. all Once followg made, requirements: this election remas effect until it is revoked. To classified as a small busess corporation 20. The ESOP purposes was mally Subchapter established S, a corporation on Decemr must meet 23, all followg requirements: The corporation must a domestic corporation. It must not an eligible corporation. 22. The It must Based corporation not have upon must more Fisher s than a domestic advice, 100 shareholders. Platiffs corporation. also retaed services It Only must dividuals, not an eligible decedents corporation. estates, estates dividuals bankruptcy, It certa must T&A trusts not have may Jones more shareholders. than perm 100 shareholders. a correct Partnerships, lawful corporations, fair market many valuation types trusts Only dividuals, may ABC not decedents purposes shareholders. estates, estates dividuals bankruptcy, ESOP. No certa shareholder trusts may may shareholders. a nonresident Partnerships, alien. corporations, many types The trusts corporation may not may shareholders. have only one class sck but different votg rights are allowed. No shareholder 3 may a nonresident alien. 24. The Jones corporation gave may advice have only provided one class services sck but Platiffs, different votg both rights irare allowed. 3 capacities as Trustees ESOP ficers ABC John Phillips wrote a terrific article Busess Valuation Update, March 2004 summarizg several or articles cludg a discussion empirical data. John Phillips wrote a terrific article Busess Valuation Update, March 2004 summarizg several Code Sec. or 1361(a)(1) articles cludg a discussion empirical data. 25. Platiffs relied on advice Fisher Jones, Fisher Jones Code were Sec. 1361(b) 1361(a)(1) well aware y relied on ir advice when ESOP Code was Sec. 1361(b) med. In Page fact, 3 Fisher 34 Jones represented Platiffs if Platiffs followed Page 3 ir 34 advice counsel, ESOP

4 - 4 - A corporation can conm elect come with all an applicable S corporation laws, by filg cludg appropriate but not limited m with Commissioner ERISA 406, Internal 29 Revenue. U.S.C. 1106(a). This election can also revoked, voluntarily or voluntarily under certa circumstances. Once elected, a corporation will rema an S corporation until such time as a revocation takes place. One thg worth notg is election is free. Theree, why a willg buyer pay more S election, if he or she 27. could One elect it purpose free? ESOP was effectuate purchase outstg ABC shares Clifd Morris (hereafter Morris ), a counder prits ABC, who losses personally are passed through along with shareholders, various family any Keepg this discussion tax law simple, an S corporation is a pass-through entity. This means tax is payable, will paid by shareholders, not corporation. The origal purpose memrs, an S election at was allow time, se owned small approximately busess corporations 47% (ty-seven treated as if y were percent) a partnership, ABC s while shares. contug provide shareholders with legal protection operatg a corporate m. Beg an S corporation provides shareholders with certa tax nefits. These clude, but 28. are not Anor limited, purpose followg: ESOP was restructure ABC s corporate debt, whereby ESOP, practical purposes, assume said Not g questioned by Internal Revenue Service about reasonable compensation debt take advantage shareholder/employees. certa tax nefits. Not g subjected accumulated earngs tax if dividends are not paid shareholders. 31. Avoids Jones double taxation T&A were upon retaed sale corporation s perm a assets correct (or fair than market those assets may subject built gas tax see discussion low). valuation ABC so ESOP did not unlawfully pay more than While re are certa tax advantages electg S corporation status, re are also disadvantages. adequate The consideration major disadvantage Morris relates ABC C shares corporations or newly-issued convert S corporations. ABC Any shares ga pursuant corporation ERISA recognizes 406, 29 U.S.C. with 1106(a). 10 years after election is made convert a C corporation an S corporation is taxed as if asset was owned at time conversion S status. This is known as built gas tax. Not only does corporation pay tax on se items, but shareholders will also 32. Jones T&A s fal valuation was dated March 15, 1994, taxed on come is flowed through after corporate taxes are paid. This constitutes double taxation. should have corporated mation available m as Anor tax date. consideration relatg S election is shareholder s come tax basis corporation s sck. Whereas a C corporation, come tax basis is generally purchase price sck, an S corporation s shareholders will constantly adjustg 33. Axelrod come served tax basis an dependent ir shares. reviewer The S corporation s valuation shareholders preparedwill crease ir basis all earngs reported by company are not distributed. A simplified basis by Jones. calculation is as follows: Origal Investment $ 1, On March 15, 1994, based upon valuation permed by T&A + Prit- Year Jones, reviewed by Axelrod, arrangements made by Green - Distributions- Year 1 ( 200) Smith Cra Cra, two SPAs (Sck Purchase Agreements - added by Page author 4 34clarification) were closed. The Platiffs, as Trustees, participated closg SPAs

5 - 5 - reliance Basis representations - End Year 1 said $ Defendants 1,300 ESOP transaction comported Basis + Prit - End - Year with 2Year all 1 applicable $ 1, laws, cludg but not limited, ERISA - + Distributions Prit 406, - Year 29-2U.S.C. Year (a). ( 400) Basis Distributions - End - Year 22 $ ( 1, ) 39. On Septemr The tax implication Basis 14, 1998, adjusted - End basis Thomas Year is 2 Sacks, amount $ et 1,700 al. v. Rort B. Jackson, tax is paid by shareholder et al. upon United eventual States sale District Court, corporate W.D.KY, sck Jacksonville will depend Division, wher Civil sale is The tax a greater implication or lesser amount adjusted than basis tax is basis. While amount a tax basis tax adjustment, is paid by shareholder itself, does Action upon not No. affect 3:WP-591-C, eventual value sale (hereafter corporate sck, Sacks will depend shareholder s Complat on wher return or Sacks will sale affected. is a greater Investment or lesser decisions amount may than vary dependg tax basis. upon While a tax shareholders basis adjustment, goals relatg a itself, particular does litigation ) not vestment. affect was filed, This value will with claims discussed corporate arisg, later. sck, shareholder s relevant part, return out will affected. Platiffs Investment roles decisions as mer may vary Trustees dependg upon ESOP. shareholders goals relatg Valuation a particular Issues vestment. This will discussed later. Valuation In valuation Issues an terest an S corporation, two ma issues arise. First, do 41. The Sacks Complat alleged Platiffs violated ir fiduciary come tax advantages S election create value? This gets carried one step furr by In raisg valuation questions an terest value an S whom, corporation, how two do ma we account issues arise. First, cremental do duties by agreeg cause ESOP purchase ABC sck from value come tax advantages valuation process? S election The second create issue value? is, This if we gets value carried an S one corporation step furr by comparg by raisg Morris this questions entity his non-s family value corporation whom, ABC entities, at how more what do than adjustments we account fair are market necessary cremental value, valuation value process? valuation process? The second issue is, if we value an S corporation by comparg causg this entity fancial non-s loss corporation ESOP entities, what Platiffs adjustments are Sacks necessary litigation Many valuation appraisers process? who were feel neficiaries an S corporation should ESOP. valued same fashion as y value a C corporation. This is cause: Many appraisers feel an S corporation should valued same fashion as y 1. value C corporations a C corporation. are substance This is cause: nearly identical S corporations S corporations After a nch may trial lose ir lastg S status over ten trial future days, convert which spanned C corporations Most C corporations period measures are April corporate substance 16, 2001 permance nearly identical February used 26, 2002, valuation S corporations. on models, or about such July as growth 2. 30, S corporations discount rates, may lose are ir derived S status from C corporations; future convert ree, C S corporations. 3. should Most 2002, measures United valued as States corporate C corporations District permance Court mata Judge used consistency valuation Jennifer models, Ronstadt with se such issued measures. growth a 4 discount rates, are derived from C corporations; ree, S corporations Accordg should Memorum, Internal valued as Revenue Opion C corporations Service, Order mata consistency Sacks litigation with se which measures. held 4 Accordg ter alia, Platiffs had violated ir duties as Trustee S Corporations Internal lend Revenue mselves Service, readily valuation approaches comparable ESOP. those used However, valug at closely time held Judge corporations Ronstadt (C did corporations). not decide wher You S need Corporations only adjust lend mselves earngs readily from valuation busess approaches reflect comparable estimated those ESOP used had valug sustaed closely held any corporations monetary (C loss corporations). as a result, You need only adjust earngs from busess reflect estimated appoted a Special Master determe damages, if any On January 26, 2004, Special Master Sacks litigation issued 4 Simpson, William E. Wrol, Peter D., Income Tax Issues Valug S Corporations, CPA Expert, Sprg, 1996, American Institute Certified Public Accountants, Jersey City, Simpson, NJ. William E. Wrol, Peter D., Income Tax Issues Valug S Corporations, CPA Expert, Sprg, 1996, American Institute Certified Public Accountants, Jersey City, NJ. an Opion which estimated damages sustaed ESOP were approximately 9.9 Page million 5 dollars, 34 plus terest atrneys fees. Page 5 34

6 - 6 - Accordg corporate Order come taxes United States have District en Court, payable Western had Subchapter District Arkansas, 5 Jacksonville S election not en made. (Added clarification). corporate Division, come dated taxes Decemr 1, 2004, have en signed payable by had Honorable Subchapter Jennifer B. 5 Ronstadt Some S appraisers election matter not lieve en Thomas made. Sacks, (Added tax nefits et al. clarification). v. Rort havg Jackson made an et S al., election Civil Action shouldno. crease value entity. Many fundamental issues affect appraisal C. Some process appraisers must lieve considered, as well, tax nefits determation havg made an wher S election or not should an S crease corporation election value adds entity. value. Many Some se fundamental facrs clude: issues affect appraisal process must considered, as well, determation wher or not an S corporation On Stard July election 29, 2002, value adds this value. court Some found se facrs defendants clude: liable breach fiduciary Control duty vs. mority ir roles as trustees an employee sck ownership plan ( ESOP ) Distributg Stard violation vs. value non-distributg ERISA 406,29 U.S.C Sacks v. Jackson. The Holdg Control court vs. period determed mority vestment case such a breach, loss will Time Distributg value vs. S non-distributg measured as difference corporation tween nefits what ESOP paid ABC sck Holdg period vestment Stard Time its fair value market Value S corporation value at nefits time transaction, plus terest. Id. at 881. (footnote omitted). Stard The stard Value value any busess valuation assignment can have a significant impact A Special on fal Master estimate was appoted value. Valug review an entity reports has elected testimony S status several is no different. valuation The Probably stard more value significant any busess differences valuation will assignment arise tween can have fair a market significant value impact pressionals, vestment on fal value. estimate Mr. Jones value. g Valug one an m. entity The Court has elected adopted S status Special is no different. Master s Probably more significant differences will arise tween fair market value fdgs commented Havg found special master s fal report, with its A vestment common defition value. fair market value is located Revenue Rulg This revenue supplement rulg defes fair thorough market value as well reasoned, court will adopt special master s A common defition fair market value is located Revenue Rulg This revenue fdgs rulg defes ir entirety.... price fair market at which value as property change hs tween a willg buyer a willg seller when mer is not under any compulsion buy... price latter which is not under property any compulsion change sell, hs both tween parties a havg willg The Court s buyer reasonable Order, a citg knowledge willg seller Special when relevant Master s mer facts. Court is report not under decisions was any extremely compulsion frequently critical state buy T&A report. Fdgs addition latter were is hypotical not under any conclusions buyer compulsion were seller not are sell, credible assumed both parties able, havg as valuation well reasonable willg, knowledge trade relevant facts. well med Court decisions about frequently property state methods concerng addition were applied market improperly hypotical such buyer his property. report seller 6 SMR are at assumed 7,19. While able, discussg as well as willg, trade well med about property discounted future earngs method, The Court noted The special master found Jones This defition concerng fair market market value such is widely property. used 6 valuation practice. Also implied this testimony defition is such an value adjustment is stated 1 was unnecessary cash or cash not equivalents credible. SMR at 16. property This defition have en fair exposed market on value is open widely market used valuation a long enough practice. period Also implied time allow this defition market is ces value teract is establish stated cash value. or cash equivalents property have en exposed on open market a long enough period time allow We are not gog reiterate Court s or Special Master s fdgs this report by Investment market ces value is teract defed as establish value value. a particular vesr based on dividual analyzg vestment Order requirements, or Special as distguished Master s report. from However, concept our market dependent value, which analysis Investment value is defed as value a particular vesr based on dividual vestment T&A report requirements, dicates as re distguished were substantially from concept more problems market than value, were which poted is out earlier litigation. We will highlight se problems as we proceed this report. 5 IRS Valuation Guide Income, Estate Gift Taxes, Commerce Clearg House Rev. IRS Valuation Rul Guide ( Income, C.B. 237). Estate Gift Taxes, Commerce Clearg House Page 6 34 Rev. Rul ( C.B. 237). The adjustment had do with subtraction debt from value determe equity value ABC. Page 6 34

7 - 7 - Clearly, impersonal Mr. Jones detached. opions 7 While were this discarded defition comes as lackg from real credibility, estate termology, validity a similar application is used 7 reasonableness. impersonal In detached. a footnote While busess on page this valuation. 7 defition Order, comes Investment The from Court real value estate stated: may differ termology, from fair a similar market application value a numr is used busess reasons. valuation. Among se Investment reasons are: value may differ from fair market value a numr reasons. Among se reasons are: 1. Differences estimates future earng power. With 2. regard Differences Jones testimony, perception court degree its liability risk. opion expressed its own concerns Differences Differences about estimates tax status. credibility future earng Jones power. testimony, cludg his downplayg 2. Differences 4. Synergies time with restrats, perception or operations his testimony degree owned concerng risk. or controlled. 8 existence a 3. Differences tax status. lower draft valuation, vagueness his testimony, his ability 4. Synergies with or operations owned or controlled. If recall purpose wher evidence valuation prelimary assignment calculations is determe was contaed 8 fair market value files. a controllg If purpose terest an valuation S corporation assignment purchasg, is determe sellg, or mergg fair market corporation, value a controllg corporation's terest tax structure an S corporation may have little purchasg, or no impact sellg, on value. or mergg If most corporation, probable "willg corporation's buyer" is an tax eligible structure shareholder may have little (i.e. or a no C corporation), impact on value. n If shareholder most probable will "willg not pay buyer" come is an eligible tax nefits shareholder it cannot (i.e. a take C corporation), advantage. n Theree, shareholder corporate will come not pay taxes come should tax nefits a part it valuation cannot take calculations. advantage Conversely,. Theree, if corporate willg buyer come can taxes qualify should a S part election, valuation buyer calculations. may pay Conversely, nefits if willg will buyer received, can qualify no corporate S come election, taxes may buyer appropriate may pay nefits determation will received, nefit stream no corporate vesr. come taxes may appropriate determation nefit stream vesr. An important component determg fair market value is determation who will 9 An important "willg component buyer." This came determg evident fair market Estate value is Samuel determation Newhouse where who will it was demonstrated different classes vesrs pay different amounts 9 "willg buyer." This came evident Estate Samuel Newhouse where under it was fair demonstrated market value scenario. different Followg classes this vesrs logical foundation, pay different an appraiser amounts must under make certa fair assumptions market value about scenario. who Followg most likely this logical purchaser foundation, will. an However, appraiser care must must make exercised certa assumptions not fall about a tax who trap by most identifyg likely purchaser a specific buyer. will. The However, Tax Court care has must gone on exercised record not state: fall a tax trap by identifyg a specific buyer. The Tax Court has gone on record state: We need not identify directly who buyer or even what class We vesrs need not buyer identify directly long who. buyer The willg buyer or even is supposed what class vesrs a hypotical buyer amalgam long potential. buyers The willg marketplace. buyer is supposed Although we have, a hypotical prior opions, amalgam identified potential types buyers hypotical marketplace. buyers, we Although did so only we have, determe prior opions, which identified valuation types approach, hypotical among buyers, several we reasonable did so only approaches, determe which result valuation highest approach, bid, among ree several reasonable one most acceptable approaches, a willg result seller. The highest question bid, is not so ree much who but one how. most 10 acceptable a willg seller. The question is not so much who but how rd The Dictionary Real Estate Appraisal, 3 ed. (Chicago: Appraisal Institute, 1993). rd Shannon The Dictionary P. Pratt, Real Rort Estate F. Reilly, Appraisal, Rort 3 ed. P Schweihs. (Chicago: Valug Appraisal a Busess: Institute, 1993). The Analysis rd Appraisal Closely Held Companies, 3 ed. (New York: McGraw-Hill, 1996). pp. 25. Shannon P. Pratt, Rort F. Reilly, Rort P Schweihs. Valug a Busess: The Analysis rd Appraisal Closely Held Companies, 3 ed. (New York: McGraw-Hill, 1996). pp. 25. Estate Samuel Newhouse, 94 T.C. 193 Estate Samuel Newhouse, 94 T.C. 193 Estate Mueller v. Commissioner, TC Memo. No at 1415, 63 TCM Estate (citations Mueller v. omitted). Commissioner, TC Memo. No at 1415, 63 TCM (citations omitted). Page 7 34 Page 7 34

8 - 8 - OPINIONS The issue who most likely purchaser property will is an essential element determation highest price fered a prudent seller. Durg periods The issue dustry who most consolidation, likely purchaser companies are property fered will greater is an essential amounts element (higher premiums) determation than y might highest get from price non-synergistic buyers. fered If a re prudent is seller. expectation Durg by periods seller dustry his or consolidation, her company companies will sell one are fered dustry greater players, amounts n it (higher seems In our premiums) opion, fair market than T&A, y value Steven might warrants Jones get from non-synergistic valuation Michael Axelrod buyers. permed (hereafter If re collectively this fashion. expectation referred This argument by seller can carried his or her one company step furr will by sell statg one when dustry an appraiser players, reviews n it market seems as T&A, data, fair Mr. a determation market Jones value or Mr. is warrants Axelrod) generally have made valuation breached as ir who permed duty render is buyg up this various se fashion. services companies. This a manner Theree, argument can is consistent issue carried who one with step willg furr stard buyer by statg is most care required likely when an appraiser needs pressional reviews addressed. accountants market data, a determation is generally made as who is buyg up se companies. For Theree, advisors smaller appraisal issue renderg subjects, who valuation willg this determation buyer services is most likely will ABC more needs easily ABC made. ESOP. addressed. Small busesses are frequently purchased by an dividual, or a group a few dividuals, who will For contue smaller appraisal qualify as subjects, an S corporation. this determation For se will types more busesses, easily made. contuity Small In our busesses an opion, S election are appears frequently valuation purchased services a reasonable by permed an assumption. dividual, by or T&A However, a group ABC even a few small dividuals, busesses ABC who ESOP may will contue not qualify qualify an as S an corporation S corporation. if y For are se purchased. types busesses, As meltg pot contuity violated United an S accountg election States contues appears valuation grow, a reasonable stards. a large assumption. In our opion, flux nonresident However, Rule aliens even 201 small are enterg busesses American marketplace may not qualify as possible an S purchasers corporation if y se are busesses. purchased. As It may meltg no longer pot Institute Certified Public Accountants (AICPA) Code Pressional Conduct awas reasonable United States assumption contues grow, S election a large will flux contue nonresident after aliens acquisition. are enterg violated marketplace as T&A as did possible not comply purchasers with followg: se busesses. It may no longer a Larger reasonable corporations assumption are even more S problematic election will than contue small after corporations acquisition. when appraiser must make assumptions about willg buyer. Larger entities are more likely purchased Larger A. corporations by Pressional a C corporation, are even Competence. more which problematic immediately Undertake than small negate corporations only those S election. when pressional Theree, appraiser it must may make not services assumptions reasonable about assume memr willg or buyer. target memr's company Larger firm entities will can reasonably are able more contue likely expect its present purchased tax by status. a C corporation, which immediately negate S election. Theree, completed with pressional competence. it may not reasonable assume target company will able contue its Purpose present tax B. status. Due The Assignment Pressional Care. Exercise due pressional care permance pressional services. In Purpose addition The Assignment stard value, purpose assignment may also cause valuation analyst make certa assumptions. For example, if appraisal is g C. Planng Supervision. Adequately plan supervise permed In addition stard determation value, fair market purpose value assignment used a matrimonial may also cause litigation, permance pressional services. it valuation may analyst considered make unfair certa assumptions. non-busess owner For example, spouse if make appraisal assumption is g permed S election determation will lost. However, fair market sce value matrimonial used courts a are matrimonial courts litigation, equity, it it may may D. equally considered Sufficient unfair unfair Relevant busess Data. non-busess owner Obta not sufficient owner assume spouse relevant taxes will make data paid afd assumption sce ay are paid S at election reasonable personal will basis level lost. even However, conclusions if no distributions sce matrimonial or recommendations are made. courts are courts relation equity, it may equally any pressional unfair busess services owner permed. not assume taxes will paid sce y 11 With are paid at said, personal Judith E. level Bernier even v. if no Stephen distributions A. Bernier, are made. Massachusetts Supreme Court addressed issue tax-effectg an S corporation. I truly commend court 11 In addition, takg With on T&A said, this controversial failed Judith E. comply Bernier issue. with v. Followg Stephen Unim A. Bernier, methodology Stards Massachusetts Delaware Pressional Open Supreme Appraisal MRI Court addressed issue tax-effectg an S corporation. I truly commend court Practice (USPAP), an dustry stard all appraisers are guided follow takg on this controversial issue. Followg methodology Delaware Open MRI publications AICPA, with respect followg: Bernier v. Bernier, 2007 Mass. LEXIS 598 (May 7, 2007). Bernier v. Bernier, 2007 Mass. LEXIS 598 (May 7, 2007). Page 8 34 Page 8 34

9 - 9 - Radiology STANDARD Associates, 9 12 P.A. v. Howard B. Kessler, et al., (a case I will discuss shortly), court applied a methodology determe 12 tax impact I really like. Radiology In developg Associates, a busess P.A. v. or Howard tangible B. Kessler, asset appraisal, et al., (a an case appraiser I must will discuss shortly), When stard court applied value a methodology is vestment determe value, consideration tax impact should I really given like. aware, underst, correctly employ those recognized methods as wher procedures specific are buyer necessary will qualify as produce an S corporation. a credible appraisal. The specific buyer's goals When regardg rates stard return, value or is wher vestment he or value, she consideration wants current should cash flow given or capital as wher appreciation specific must buyer considered will qualify when as decidg an S corporation. on an S election. The specific More ten buyer's than goals not, valuations regardg Stards permed rates Rule return, 9-1 transaction or wher purposes he or use she pre-tax wants earng current streams, cash flow sce or it capital is buyer's appreciation expected must tax status considered should when decidg considered on an S place election. More seller's ten hisrical than not, tax structure. valuations In developg permed a busess transaction or tangible purposes asset use pre-tax appraisal, earng an streams, appraiser sce must: it is buyer's expected tax status should considered place seller's hisrical tax structure. Control (a) vs. Mority aware, underst, correctly employ those recognized methods procedures are necessary produce a credible If Control busess vs. appraisal; Mority terest g appraised is a mority ownership terest-- is, appraisal ownership terest not havg prerogatives control--n a direct If comparison (b) busess not with commit terest values a g substantial or appraised mority error is terests a mority omission ownership most or appropriate commission terest-- method is, valuation. appraisal In essence, ownership if terest mority not terest havg cannot prerogatives effectuate a change control--n company's a direct significantly affects an appraisal; tax comparison structure, with no such values change or should mority assumed. terests is most appropriate method valuation. In essence, if mority terest cannot effectuate a change company's An tax (c) argument structure, not could no render such change appraisal made should services a mority assumed. a careless or negligent manner, such as a series errors, considered shareholder dividually, could, may fact, not cause significantly a change an S election by sellg shares a non-qualified shareholder S corporation. An This argument affect violation could results rules made regardg an a mority appraisal, ownership shareholder but which, could kill could, when election, fact, considered ree cause a change changg an S status election aggregate, voluntarily. by sellg However, shares misleadg. a valuation a non-qualified analyst should shareholder also consider S corporation. likeless This violation shareholders rules actions. regardg It ownership seem could kill shareholder election, ree have changg have special Stards status motivations voluntarily. Rule 9-2 tentionally However, a kill valuation S election analyst should balance also consider shareholders. likeless These shareholders special motivations actions. may It enough seem violate shareholder defition fair market have value. have special In developg motivations a busess tentionally or kill tangible S election asset appraisal, balance an appraiser shareholders. must The These observe S election special motivations may followg have en may specific made enough appraisal by shareholders violate defition guideles: reasons fair market have value. nothg do with value. For example, an S election may made so issue reasonable compensation The S election (a) adequately may may have avoided en made identify upon by busess audit by shareholders enterprise, Internal assets, Revenue reasons or Service. have equity under Anor nothg reason do with value. consideration, an S election For example, may defe an S avoid election purpose double may taxation made at so tended time issue use company reasonable is sold. compensation For a appraisal, shareholder may avoided consider want upon tentionally audit by elements violate Internal S Revenue appraisal election, Service. vestigation, company Anor could reason exposed an S greater election risk may loss, thus avoid reducg double its taxation value. at The prudent time shareholder company is sold. consider any special limitg conditions, identify effective date not want For a shareholder dimish value want tentionally vestment. violate In fact, many S election, shareholder company agreements could prohibit exposed transfer greater appraisal; by risk shareholder loss, thus reducg an unqualified its value. entity. The prudent shareholder not want dimish value vestment. In fact, many shareholder agreements Although prohibit (b) defe transfer mority by shareholder value shareholder g can considered. cause an unqualified S election entity. voluntarily termated, it does not seem logical assume this will occur. However, facts Although (i) mority if shareholder appraisal can concerns cause a S election busess enterprise voluntarily or termated, equity it does not seem logical assume this will occur. However, facts terests, consider any buy-sell agreements, vestment letter sck restrictions, restrictive corporate charter or partnership 12 agreement clauses, any similar features or facrs Delaware Open MRI Radiology Associates, P.A., Petitioner, v. Howard B. Kessler, et al., may have an fluence on value. 12 (ii) Respondents. Howard B. Kessler, et al., Platiffs, v. George J. Broder, et al., Delaware Defendants, Open MRI Court Radiology Chancery Associates, State P.A., Petitioner, Delaware, v. Howard Newcastle B. Kessler, County, et al., Consolidated, Respondents. C.A. No. Howard 275-N. B. Kessler, al., Platiffs, v. George J. Broder, et al., Defendants, if appraisal Court concerns Chancery assets, State Delaware, appraiser must Newcastle consider County, Consolidated, wher C.A. No. assets 275-N. are: Page 9 34 (1) appraised separately; or (2) appraised as Page parts 9 34 a gog concern.

10 circumstances (iii) if situation appraisal must dictate concerns wher equity or not terests make such a an busess assumption. enterprise, consider extent which terests do or do Distributg vs. Non-Distributg not conta elements ownership control. An S Stards corporation Rule may 9-3 favorable or unfavorable dependg upon wher corporation has ability distribute its earngs its shareholders. If only some, or possibly none In earngs developg can a busess distributed, or tangible result can asset extremely appraisal unfavorable relatg an equity vesr. Let terest me illustrate with this pot ability by usg cause a real liquidation example. This appears enterprise, as exhibit an 1. appraiser Our firm did a critique must vestigate anor valuation possibility analyst s work a busess litigation. enterprise One many may have issues a was we tax-affected earngs he did not. This is an excerpt from our critique higher value liquidation than contued operation as a gog concern (names have en changed protect guilty!) absent contrary provisions law a competent jurisdiction. If liquidation is dicated basis valuation, any Exhibit real 1estate or personal property liquidated must To Tax valued or Not under To Tax- Critiqug appropriate Anor s stard. Report Tax Stards Affectg Earngs Rule The In issue developg tax affectg a busess earngs or tangible S corporations asset appraisal, or or an pass-through appraiser must entities such observe as general partnerships, followg specific limited appraisal partnerships, guideles or limited when liability applicable: companies, is a highly debated issue busess valuation. The conventional wisdom used you tax (a) affect consider earngs all appropriate a pass through valuation entity cause methods willg procedures. buyer may not able avail itself non-taxable status seller. Appraisal ory has stated it is essential (b) collect match analyze earngs relevant stream data g regardg: capitalized, when usg come approach, with correct capitalization rate. Sce publicly traded companies report ir (i) nature hisry busess; earngs on an after-tax basis, sources compile this data use by appraisers determg (ii) discount fancial capitalization economic rates consider conditions se affectg rates applicable busess aftertax earngs streams enterprise, (or cash flow). its dustry, The most widely general used source economy; appraisal field is data publish (iii) by Ibbotson past results, Associates. current Ibbotson operations, data is clearly future after prospects tax at entity level. busess enterprise; The argument (iv) first past started sales raised capital about sck after-taxes or or ownership entity terests Tax Court case Estate Gross. busess I will address enterprise this shortly. g It appraised; not uncommon an appraiser tax affect earngs (v) sales S corporations similar busesses by applyg margal or capital C corporation sck publicly tax rates held ir earngs. This is similar consistent busesses; with approach employed our reports. (vi) prices, terms conditions affectg past sales similar Contrary Mr. Smith s busess assertion assets; we reduce available cash flow by a hypotical corporate come tax, this adjustment does not assume The Companies will deed cur a tax, but rar is a necessary adjustment when applyg hisrical Ibbotson return Stards Rule 9-5 data (which is presented on an after-tax basis) subject earngs stream. The followg are additional reasons tax affectg S corporation earngs: In developg a busess or tangible asset appraisal, an appraiser must; 1. The S election has no impact on operatg cash flows busess. (a) select employ one or more approaches apply specific appraisal assignments. (b) consider reconcile dications value resultg from various approaches arrive at value conclusion. Page 10 34

11 STANDARD The nefits 10 S election are shareholder nefits ree capitalizg se nefits overstate value enterprise sce nefits can In reportg taken away voluntarily results if a busess S election is or broken. tangible asset appraisal an appraiser must communicate each analysis, opion, conclusion a 3. manner S corporations is not usually misleadg. pass through a sufficient portion ir earngs ir shareholders allow m pay ir taxes which leaves S corporation almost same position after taxes as if it were a C corporation. Stards Rule The public sck markets tend price earngs publicly traded partnerships Each on written a basis or equivalent oral busess after or tangible tax earngs asset publicly appraisal traded report C corporations must: same les busess. (a) clearly accurately set th appraisal a manner will not 5. Most misleadg. likely buyers S corporations are C corporations or groups vesrs who may need organize as C corporations. There is no apparent advantage S corporation buyers C corporation buyers. (b) conta sufficient mation enable tended user(s) 6. Every underst C corporation it. Any (with specific eligible limitg shareholders) conditions concerng eir make mation S election or should have noted. option convert if this was desirable. If a higher value is attaable followg S election, corporate sales companies reflect this (c) value. clearly There is no accurately logic disclose existence any two extraordary levels corporate assumption value eligible entities directly when affects re are no appraisal logical or practical dicate barriers its prohibitg impact on election value. obta higher value. 7. It has en suggested buyers will pay no more an S corporation than an Stards Rule 10-2 equivalent C corporation; ree re are no S corporation premiums. To Each address written tax busess treatment or tangible pass through asset entities appraisal from an report dependent must perspective, comply withwe consulted followg textbooks specific articles reportg written guideles: published by some leadg practitioners busess valuation field. In general, well-known busess valuation authorities cludg (a) identify Shannon Pratt, descri Chrispher Mercer, busess enterprise, Roger Grabowski assets all or agree equity g re is no hard--fast appraised. rule applies treatment pass-through entities all cases. There is a general consensus among se dividuals issue wher or not tax affect earngs a pass-through entity is one must addressed on a caseby-case basis. (b) state purpose tended use appraisal. This (c) debate defe has also value en highlighted estimated. four recent Tax Court Cases: 1. (d) Gross set v. th Commissioner, effective T.C. date Memo , appraisal affd. 272 F.3d date 333 (6 Cir. report. 2001) 2. Wall v. Commissioner, T.C. Memo , filed March 27, (e) Heck descri v. Commissioner, extent T.C. Memo. appraisal , process filed Feb. employed. 5, Adams v. Commissioner, T.C. Memo , filed March 28, 2002 (f) set th all assumptions limitg conditions affect In all four se cases, Court ultimately determed it was appropriate capitalize analyses, S corporation opions, earngs usg conclusions. an after tax rate. In each case, valuation (g) set th mation considered, appraisal procedures Page followed, reasong supports analyses, opions conclusions.

12 conclusion (h) set was th reached any without additional tax-affectg mation earngs, may which is consistent appropriate with Mr. show Smith s approach. compliance with, or clearly identify expla permitted departures from, requirements Stard 9. However, response Tax Court rulgs, Chrispher Mercer argues Gross, Heck (I) Adams, set th The Tax rationale Court has rendered valuation opions based methods on unsound procedures economic fancial ory. considered Mercer, with employed. agreement from Dr. Shannon Pratt, concludes : S corporations are worth same as orwise identical C corporations at level enterprise. Their operatg cash flows are identical, re is no rationale Each se suggests provisions will ir enterprise addressed values detail should with anythg our report. but identical. Interests S corporations may worth more or less than orwise identical terests orwise identical C corporations. The cash flows shareholders may But negligence T&A, Mr. Jones Mr. Axelrod, platiffs have suffered different tween S C corporations, se differences, considered significant context economic damages. riskess Judge ir receipt, Ronstadt can create found differences ABC value. ESOP overpaid $8,139,116 In determg sck, appropriate based discount on a valuation rate at capitalizg $26.31 million. pretax earngs, In addition, an prejudgment analogous terest situation was may also added drawn this municipal amount. bonds. Yields on municipal bonds are significantly lower than yields on taxable bonds. This is due favorable tax treatment received by vesrs holdg municipal bonds (i.e. no federal taxes some cases no state or municipal taxes). In order convert yield on a municipal bond its taxable equivalent comparison purposes, analysts divide tax-free yield by (1 tax rate), where tax rate is vesr s effective BASIS personal FOR rate OUR both OPINIONS state federal taxes. The term (1 tax rate) is simply facr used convert pretax dollars after-tax dollars. Upon issuance, both municipal bonds taxable bonds are issued at par value. Thus, tradg price (or par value) a municipal bond is a function its tax-free yield, as In order vesrs discount Trugman Valuation present value Associates, future cash Inc. flows m at our tax-free opions rate. In this essence, matter, vestment community prices municipal bonds as if taxes have en prepaid on terest numerous prcipal documents payments were received reviewed. by vesrs. In addition, Thus, Gary if a busess R. Trugman is valued CPA/ABV, usg pretax MCBA, ASA, earngs MVS, as prcipal applied charge earngs measure this engagement, rar than after-tax attended earngs, deposition n an additional Steven adjustment is also necessary discount or capitalization rate. Accordgly, future Jones cash on flows January 24, busess 25, 27 should 28, discounted The documents or capitalized reviewed at a pretax this rate, matter which clude is calculated by dividg after-tax discount rate by (1 tax rate). Mr. Smith does not make any followg: such adjustment. In addressg issue taxation light recent tax legislation, we conducted our own 1. analysis Second Amended differences Complat tween holdg Petition sck The Declaration Companies Rights under a tax-affectg matter scenario Rort (C B. corporation Jackson assumption) Miln D. versus Thompson, current Jr. v. Goldrg pass-through taxation Simpson, P.S.C. entities. Steven The argument A. Cra agast John tax-affectg J. Fox Sherry earngs P. Cra an S corporation Prison Systems, or or Ltd. pass-through Tennet entity Axelrod is predicated & Bressler, upon P.S.C. lief Michael shareholder Axelrod Stephen an orwise Jones identical Washgn C corporation Circuit is burdened Court, Division by double-layer 1, Jacksonville, taxation Arkansas, at both Case entity Numr 12- shareholder levels. Mr. Smith claims sce The ABC Organization will end up owng The Companies, S Corporation assumption should contued future. The 2. Valuation report ABC Jail Company, Inc. as Novemr 30, 1993 as prepared by Tennet & Axelrod, P.S.C. (TA Page TA ).

13 3. argument, Letter here, March is 15, although 1994 from The Tennet ABC Organization & Axelrod, P.S.C. may an Board S Corporation, Direcrs re is no Trustees guarantee ABC Jail it will Company, ultimately Inc., updatg sold a buyer valuation can ABC qualify Jail as Company, argument, here, is although The ABC Organization may an S Corporation, re S is Corporation, no Inc. guarantee March ree 15, 1994 it will it (TA ultimately is a 155). flawed assumption sold a buyer thk a can buyer qualify will pay as an Sa nefit Corporation, it will not ree realize. it is a flawed assumption thk a buyer will pay a 4. nefit Memorum it will not from realize. Steve Jones dated Decemr 1, 1993 regardg ABC Jail Anor Company, argument, Inc. s gog establishment ward, pursuant employee sck Jobs ownership Growth plan Tax (TA 676 Relief - TA Reconciliation Anor 694). argument, Act gog 2003, effective ward, January pursuant 1, 2003, dividend Jobs come Growth C corporation Tax Relief Reconciliation shareholders is Act taxed 2003, at same effective rate January as capital 1, gas 2003, ( dividend a maximum come rate C 15 corporation percent), 5. while shareholders A representation shareholders is taxed at letter pass-through dated same rate March entities as capital 7, contue 1994 gas Tennet ( a taxed maximum & Axelrod, at personal rate P.S.C. 15 tax referencg percent), rates on 13 S while corporation shareholders valuation earngs. ABC pass-through, Jail thus Company, mimizg entities Inc., differences contue Inc. (no specific tax taxed liabilities valuation at personal at report shareholder tax rates dicated) on level regardless 13 S corporation signed by earngs. J. Clifd level, Morris, thus mimizg Miln earngs Thompson differences distributed tax Rort shareholders. liabilities B. Jackson at Although shareholder on March this10, level reduction regardless was not effect level as earngs valuation distributed date this case, shareholders. given ongog Although litigation this associated reduction was with not this assignment effect valuation anticipated date transfer this case, given ownership ongog terests litigation The Companies, we lieve this facr is particularly relevant. 6. associated Valuation with Report this assignment Checklist from anticipated workpapers transfer ownership Tennet & terests Axelrod, P.S.C. The Companies, For relatg each company, we lieve valuation this facr we corporated as is Novemr particularly recent decle 30, relevant dividend dated March tax rates, 7, 1994 examed (TA cash TA 489). For each flows company, available we corporated a shareholder recent or memr decle under dividend two tax scenarios. rates, For examed taxable come, cash we flows used available adjusted a shareholder come from or memr our reports under e two taxes, scenarios. while For assumed taxable 7. payout Report ratio distributions Special is Master based on actual matter distribution Thomas levels Sacks, each entity. et al. v. Rort come, we used adjusted come from our reports e taxes, while assumed payout Jackson, ratio et distributions al. United is based States on actual District distribution Court, Western levels District each entity. Arkansas at The Jacksonville importance Division, this calculation Civil Action: is distributions 6:97:CV-123-C. make a big difference determg The importance difference this value calculation se is two distributions types entities. make a big In difference this case, determg level 8. debtedness, Amended difference Special value Master need se report revestment two types matter entities. new Thomas assets, In this Sacks, does case, not et enable al. level v. Rort shareholders debtedness, Jackson, et receive al. significant need United States revestment distributions. District It Court, is new important Western assets, note does District not enable Arkansas Estate at shareholders Gross, Jacksonville distributions receive Division, significant shareholders Civil Action: distributions. were 6:97:CV-123-C. at about It is 100 important percent. note Estate Gross, distributions shareholders were at about 100 percent. 9. Memorum Opion Order matter Thomas Sacks, et al. v. Rort Jackson, et al. United States District Court, Western District Arkansas at Jacksonville Division, Civil Action: , signed by Honorable Jennifer B. Ronstadt on July 29, Order matter Thomas Sacks, et al. v. Rort Jackson, et al. United States District Court, Western District Arkansas at Jacksonville Division, Civil Action: , signed by Honorable Jennifer B. Ronstadt on Decemr 1, Correspondence dated April 26, 1996 from Stephen D. Jones Steve Cra (GS ). 12. Deposition transcript Stephen D. Jones matter Thomas Sacks, et al. v. Rort Jackson, et al. United States District Court, Wesn District Arkansas at Jacksonville Division, Civil Action: 3:WS-667-C dated February 25, Anthony J. DeChellis, CPA, CFP Sheila Owen, CPA, A Closer Look at Qualified Dividends under 2003 Act, PPC National Tax Advisory, Septemr 9, Anthony J. DeChellis, CPA, CFP Sheila Owen, CPA, A Closer Look at Qualified Dividends under 2003 Act, PPC National Tax Advisory, Septemr 9, Page Page 13 34

14 Deposition transcript Stephen Company D. Jones One, Inc. matter Thomas Sacks, et al. v. Rort Jackson, et al. United States District Court, Western District Comparison Tax Scenarios Arkansas at Jacksonville Division, Civil Action: 3:WS-667-C dated March 23, C Corporation S Corporation 14. Trial transcript, Day II, matter Thomas Sacks Ferman Housn v. Debt Rort Free Pre-Tax E. Jackson Income Miln Thompson, 84,166 United States District 84,166 Court, Western District Arkansas at Jacksonville Division, Case Numr 3:97-CV-1234 Corporate from April Income 17, 2001, Tax testimony 26% Stephen Jones. (21,866) 0 Net Income Available Shareholders 62,300 84, Trial transcript, Day VIII, matter Thomas Sacks Ferman Housn v. Less: Rort Addition E. Jackson Retaed Earngs Miln Thompson, (62,300) United States District (62,300) Court, Western District Arkansas at Jacksonville Division, Case Numr 3:97-CV-1234 Distributions from July 18, 2001, testimony Stephen 0% Jones. 0 26% 21, Trial transcript, Day IX, matter Thomas Sacks Ferman Housn v. Less: Personal Taxes 15% 0 40% (33,666) Rort E. Jackson Miln Thompson, United States District Court, Net Western Cash Flow District Shareholders Arkansas at Jacksonville Division, 0 Case Numr 3:97-CV-1234 (11,800) from Ocr 9, 2001, testimony Stephen Jones. 17. Net Copies Disadvantage proposed Company regulations One Shareholders Department Labor, Pension (11,800) Welfare Benefits Admistration, 29CFR Part 2510 faxed from Steve Cra Stephen Jones (TA TA 501). 18. An engagement letter tween Company Tennet Two, & Axelrod, LLC P.S.C. ABC Jail Company, Inc. regardg possibility Comparison mg Tax an Scenarios employee sck ownership plan, dated Novemr 30, 1993 signed on Decemr 13, C Corporation S Corporation 19. A presentation ABC Jail Company, Inc. about employee sck ownership Debt plan, Free Pre-Tax dated Decemr Income 6, 1993 as faxed from Steve 73,046 Cra Stephen Jones 73,046 (TA TA 707). Corporate Income Tax 25% (18,192) Net Income Various Available research Memrs materials regardg valuation 54,854 sck an ESOP (some 73,046 which appears from Tax Management, Inc.) (TA TA 715). Less: Addition Retaed Earngs H written notes from Tennet & Axelrod, P.S.C. s workpapers regardg a Distributions 100% 54, % 73,046 meetg on Novemr 30, 1993 (TA TA 752). Less: Personal Taxes 15% (8,228) 40% (29,218) 22. Deposition transcript testimony Stephen Jones matter Rort v. Net Cash Jackson, Flow et Memrs al. v. Green Smith, P.S.C., et al., 46,626 Washgn Circuit Court, 43,828 Division One, Case Numr dated January 24, Net Disadvantage Company Two s Memrs (2,798) 23. Deposition transcript testimony Stephen Jones matter Rort v. Jackson, et al. v. Green Smith, P.S.C., et al., Washgn Circuit Court, Division One, Case Numr dated January 25, Page 14 34

15 Deposition transcript testimony Company Three, Stephen LLC Jones matter Rort v. Jackson, et al. v. Green Smith, P.S.C., et al., Washgn Circuit Court, Division Comparison Tax Scenarios One, Case Numr dated January 27, C Corporation S Corporation 25. Deposition transcript testimony Stephen Jones matter Rort v. Debt Jackson, Free Pre-Tax et al. Income v. Green Smith, P.S.C., et al., 244,353 Washgn Circuit Court, 244,353 Division One, Case Numr dated January 28, Corporate Income Tax 38% (91,963) Net Fancial Income Available results Memrs Prison Systems, Ltd. 152,390 third quarter 1993 (TA 244, TA 18). Less: Addition Retaed Earngs Illegible workpaper dicatg market price Prison Systems, Ltd. from March 2, 1994 (TA 19). Distributions 100% 152, % 244, Prospectus Esmor Correctional Services, Inc. (TA 54 - TA 112). Less: Personal Taxes 15% (22,859) 40% (97,741) Net Cash Flow Memrs 129, , Research materials faxed from Smith Barney Stephen Jones on March 7, 1994 regardg Esmor itial public ferg. Net Advantage Company Three s Memrs 17, Two page summary fancial highlights Prison Systems, Ltd. period ended Decemr 31, (TA TA 117). Company Four, LLC Comparison Tax Scenarios 31. Inmation about ABC Jail Company, Inc. entitled ABC - A Public/Private Partnership (TA TA 153). C Corporation S Corporation 32. Debt Correspondence Free Pre-Tax Income from Stephen D. Jones Gary 68,813 Harper at ABC Jail Company, 68,813 Inc. dated July 12, 1994 (TA 154). Corporate Income Tax 24% (16,848) Fax transmittal m with confirmation dated April 22, 1997 (TA TA 157). Net Income Available Memrs 51,965 68,813 Less: Addition Retaed Earngs Busess valuation processg structions (TA 158). Distributions 100% 51, % 68, Cover letter dated Decemr 17, 1993 from Miln Thompson Stephen Jones transmittg Less: Personal Taxes requested mation 15% from company (7,795) (TA 40% 220). (27,525) Net Cash Flow Memrs 44,170 41, Balance Sheet ABC Jail Company, Inc. as Ocr 31, 1993 with buildg l at appraised values (TA TA 222). Net Disadvantage Company Four s Memrs (2,882) 37. Balance Sheet ABC Jail Company, Inc. as Ocr 31, 1993 (TA TA As shown, 224). three out four scenarios, shareholders actually receive less cash assumg company was not taxed at entity level. By tax affectg 38. earngs Income The Statement Companies, ABC cash Jail flow Company, owners Inc. is not as reduced Ocr on 31, an aggregate 1993 (TA basis TA 231). Page Audited fancial statements ABC Jail Company, Inc. Decemr 31, as audited by We Do Numrs, CPAs (TA TA 243).

16 In fact, Audited cash fancial flow owners statements is higher ABC after Jail tax Company, affectg Inc. earngs. Decemr Mr. Smith 31, fails 1991 consider 1990 this as audited his analysis by We by Do ignorg Numrs, impact CPAs (TA personal taxes TA 253). on shareholders by ignorg recent reduction tax rates on C corporation dividends, which has 41. seriously Audited weakened fancial statements argument ABC double-layer Jail Company, taxation is Inc. a detriment Decemr C corporation 31, 1990 as shareholders. audited by We Do Numrs, CPAs (TA TA 23). 42. Audited fancial statements ABC Jail Company, Inc. February 28, 1990 In 1989 above as audited example, by We analyst Do Numrs, on or CPAs side (TA 264 case - TA thought 277). by not taxaffectg earngs, he could support a higher value his clients. By way, 43. difference Audited fancial our valuations statements due ABC taxes Jail was Company, $14 million. Inc. February 28, as audited by We Do Numrs, CPAs (TA TA 290). It is readily accepted an vesr common sck any corporation makes an economic vestment three reasons. They are: 44. Form 1120S, U.S. Income Tax Return an S Corporation ABC Jail Company, 1) Inc. Immediate 1993 cash (TA 292 flow -(dividends), TA 329). 2) Future cash flow (capital appreciation), 45. 3) Form A combation 1120S, U.S. Income 1 2 Tax above. Return an S Corporation ABC Jail Company, Inc (TA TA 372). The tal expected return shareholder consists a part is currently taxable, 46. a part Form 1120S, is tax deferred U.S. Income until Tax time Return sale. an Under S Corporation current tax ABC law, Jail deferred Company, portion Inc. may 1991 subject (TA 373 favorable - TA 376) capital (all attached gas tax schedules rates. Although are not cluded). discount rate used application a discountg model ignores personal tax rates, vesr does 47. not. Form 1120S, U.S. Income Tax Return an S Corporation ABC Jail Company, Inc (TA TA 380) (all attached schedules are not cluded). If shareholders have control company, y will generally do everythg possible sure distributions are made sufficient amounts cover personal taxes. They 48. do not Form want 1120S, reach U.S. Income ir own Tax pockets Return pay an taxes S Corporation on prits y ABC did Jail not receive. Company, However, Inc. shareholders 1989 (TA 381 a - C TA corporation 386) (all attached will usually schedules take opposite are not position, cluded). as y generally want avoid payg tax on dividend distributions. However, new tax law 49. favors Miscellaneous tax treatment Schedules dividends K-1, out Form a 1120S C Corporation 1992 over (TA 387 distributions - TA 392). from an S Corporation. 50. H written notes from Tennet & Axelrod, P.S.C. workpapers (TA TA Sce 395). shareholders an S corporation will frequently attempt pass through dividends mselves an amount at least equal estimated tax obligation, actual 51. dividend Sck distributions Purchase Agreement may appear by attractive. tween This ABC could Jail give Company, appearance Inc. Employee a company Sck Ownership is a great Plan dividend Trust payer. ABC It makes Jail Company, vestment Inc. as appear Decemr as if it has 1993 excellent (no date) liquidity. (TA The 396 opposite - TA 422). is true with shareholders a C corporation. They will generally do everythg possible avoid dividends. This give appearance an vestment with far less liquidity. This contrastg position shareholders makes 52. dividend H payg written capacity notes from a more attractive Tennet & manner Axelrod, which P.S.C. file assess relatg value. consultg non compete agreement Cliff Morris (TA 424). 53. Consultg Non-Competition Agreement by tween ABC Jail Company, Inc. J. Clifd Morris dated January 1, 1994 (TA TA 429). 54. Employment Agreement by tween ABC Jail Company, Inc. Miln Thompson as January 1, 1994 Page (TA TA 436).

17 David Employment C. Dufendach Agreement raises an by 14 terestg tween pot about ABC se Jail Company, returns. He Inc. states: J. Clifd Morris as January 1, 1994 (TA TA 442). 14 David C. Dufendach raises an terestg pot about se returns. He states: Research has shown slope actual security market le is less Employment Research than predicted has Agreement shown by CAPM. by slope Riskier tween scks actual ABC have security Jail lower Company, market required le Inc. returns is less Rort Jackson than predicted, as January whereas 1, less 1994 risky 15 than predicted by CAPM. (TA Riskier scks 443 scks - suffer TA 448). from have higher lower required required returns. returns than One possible predicted, explanation whereas less is risky riskier scks scks suffer provide from higher relatively required more returns. ir 57. Various return One possible h written m explanation workpapers non-taxable is price riskier from appreciation. Tennet scks provide & Axelrod, One relatively study P.S.C. s suggests more files ir (TA TA ). this return is case. m If true, non-taxable n vesrs price appreciation. who wish One avoid study current suggests tax liability on dividend come 16 this is case. If true, n prefer vesrs higher who risk/lower wish avoid dividend current scks, tax liability drivg 58. Correspondence down on dividend ir required come dated return March low prefer 11, 1994 higher predicted tween risk/lower by dividend CAPM. Bank scks, Anor Jacksonville drivg study The supported this view, implyg dividends are undesirable (presumably ABC down Jail ir Company, required Inc. return low ABC predicted ESOP (TA by 468 CAPM. - TA 478). Anor study cause supported this ir view, immediate implyg taxability), dividends are scks undesirable with higher (presumably dividends are penalized m higher required returns Transmittal cause letter ir with immediate correspondence taxability), dated March scks 8, with 1994 higher from dividends Stephen Jones The various James are penalized studies C. Ferran cited at m by Dufendach Bank higher Jacksonville, required returns. lead conclusion providg 17 an given opion all or risk value facrs g ABC equal, Jail a Company, sck pays Inc. sck a dividend, causg acquired an by immediate ESOP. The various studies cited by Dufendach lead conclusion given tax consequence, all or risk is facrs worth g less than equal, a sck a sck provides pays a capital dividend, appreciation, causg an which immediate is tax tax deferred consequence, n 60. possibly Fax transmittal taxed at more sheet favorable account rates. The workpapers facr under causes cover dated difference March value 14, 1994 is worth less than a sck provides capital appreciation, which is tax deferred n is apparently possibly Stephen taxed personal at Jones more taxes. from favorable Sce Charles we rates. accept T. The Mitchell facr premise Company causes a (TA prudent 481 difference vesr - TA 484). considers value is personal apparently come personal taxes taxes. vestment Sce we decisions accept (orwise, premise if all a else prudent were vesr equal, why considers 61. personal anyone An engagement buy come tax taxes free letter bonds?), vestment tween decisions should Tennet not (orwise, ignore & Axelrod, if all personal else P.S.C. were tax equal, effect why ABC Jail vestment. anyone Company, buy The tax Inc. difficulty free dated bonds?), is Decemr determg we should 6, which 1993 not tax regardg ignore rates use. personal valuation tax effect common vestment. equity The ABC difficulty as Novemr is determg 30, 1993 which (TA tax rates TA use. 504). Corporate or Personal Income Tax Rates 62. Corporate ABC Jail or Company, Personal Income Inc. ESOP Tax summary Rates (TA TA 510). One difficulties faces appraiser is determation which set come taxes is appropriate use valug S corporation. This will most likely depend on 63. One Research difficulties material from faces CCH appraiser - Stard is Federal determation Tax Reporter which regardg set come terest stard taxes value. However, this can more trouble than its worth. on is certa appropriate loans used valug acquire employees S corporation. securities This will (TA most 522 likely - TA depend 535). on stard value. However, this can more trouble than its worth. If stard value is fair market value, appropriate come tax rates should 64. those Miscellaneous rates will workpapers applicable from Tennet hs & Axelrod, willg P.S.C. s buyer. The files problem (TA 536 is - TA we 538). If stard value is fair market value, appropriate come tax rates should those rates will applicable hs willg buyer. The problem is we 65. Cover letter dated March 7, 1994 from Paul E. Donough James C. Ferran at Bank 14 Jacksonville regardg real estate appraisals (TA 539). 14 Dufendach, David C., Valuation Closely Held Corporations: C v. S Differentials, Busess Valuation Review, Decemr 1996, page , American Society Appraisers, Dufendach, Herndon, Va. David C., Valuation Closely Held Corporations: C v. S Differentials, Busess Valuation Review, Decemr 1996, page , American Society Appraisers, Brigham, Herndon, Eugene Va. F. Louis C. Gapenski, Fancial Management: Theory Practice, Sixth Edition, pp Brigham, Eugene F. Louis C. Gapenski, Fancial Management: Theory Practice, Copel, Sixth Edition, Thomas pp E. J. Fred Wesn, Fancial Theory Corporate Policy, Second Edition, p Refers a study by I. Friend M. Puckett, Dividends Sck Prices, Copel, American Economic Thomas E. Review, J. Fred Septemr Wesn, 1964, Fancial pp Theory Corporate Policy, Second Edition, p Refers a study by I. Friend M. Puckett, Dividends Sck Prices, Ibid, American pp Economic Refers Review, a study Septemr by R. Litzenrger 1964, pp K. Ramaswamy, The Effect Personal Taxes Dividends on Capital Asset Prices: Theory Empirical Evidence, Journal Ibid, pp Fancial Refers Economics, a study June by R. 1979, Litzenrger pp K. Ramaswamy, The Effect Personal Taxes Dividends on Capital Asset Prices: Theory Empirical Evidence, Journal Fancial Economics, June 1979, pp Correspondence dated March 4, 1994 from Charles A. Brown, Jr. James C. Ferran, 15 Jr. at Bank Jacksonville regardg real estate appraisals (TA TA 552) Miscellaneous workpapers from Tennet & Axelrod, P.S.C. s files (TA TA 554) A summary ABC facility operations (TA TA 556) Correspondence 17 dated January 7, 1994 from Steven A. Cra Stephen Jones regardg a prelimary fer purchase busess ABC Jail Company, Inc. (TA 557). Page Page 17 34

18 do not Proposal know who recapitalize specific buyer ABC Jail will. Company, Will it Inc. an dividual, (TA 558). anor S corporation or a C corporation? Once aga, re is no distct answer. Dependg upon facts 71. Workpapers circumstances, regardg appraiser ABC revenue/cost may able from make an periods assumption 1991 through about 1996, most both probable actual willg projected buyer (or category (TA TA buyer). 572). 72. If Correspondence stard value dated is vestment Decemr value, 10, 1993 appraiser from Stephen should consider Jones Miln tax rates Rorts relatg specific buyer. additional In this stance, items needed appraiser complete is estimatg valuation value (TA a particular TA buyer. 574). This makes this task a little bit easier. 73. Schedule ficers compensation from 1989 through 1992 (TA 575). Once stard value has en identified, appraiser is still faced with choice which rates use. If corporate tax rates are used, valuation analyst, with or without 74. Article entitled Are Dog Well Dog Good Contradicry Goals help local CPA, can calculate taxes based on slidg rates applicable at Privatization? time. However, (TA if personal TA rates 586). are used, this calculation can come even more complicated due facrs such as personal exemptions, itemized deductions, 75. phaseout Depreciation rules report or come ABC or Jail losses Company, from unrelated Inc. (TA activities TA 595). could affect come tax rates may applicable. This could a nightmare. 76. A partial contract relatg facilities Arkansas (TA TA 634). The practical application come tax rates is up valuation analyst. If rates can 77. calculated A memorum a relatively understg straight ward with manner, Department analyst should Correction do so. from If personal State tax rates Florida are volved, dated Novemr most analysts 9, 1993 lieve (TA 635 re - TA is little 637). gaed by facrg personal exemptions itemized deductions. If valuation analyst represents a 78. specific A copy dividual, Florida se Legislation items may (TA 638 taken - TA 640). consideration if y are material. Common sense reasonableness should prevail. 79. Correspondence from Rort Studebaker Mahoney & Company, P.C. Stephen Holdg Period Investment Jones regardg ESOP valuation privately operated prisons (TA TA Many 645). valuation analysts feel both S C corporations should valued on an aftertax basis. Many subscri premise after-tax is corporation not 80. dividual. H written Sce notes capitalization from rates workpapers are determed Tennet from & market Axelrod, evidence, P.S.C. (TA usually 646 on- TA a pre-tax 651). basis dividual, more comparability can achieved selection se rates. Adjustg come returns personal taxes make discount rate 81. selection A blank more valuation difficult, mation particularly sce request rates m return (TA reported TA 657). empirical literature are based on pre-tax returns vesr. 82. Life surance cost summary ESOP plan (TA TA 660). Some analysts adjust nefit stream an S corporation amount distribution 83. needed Newspaper make articles shareholders regardg prisons whole after (TA payg TA 672). personal taxes. It is fairly common see distributions g made at least amount necessary pay personal taxes so shareholders do not pay taxes from monies y have not 84. Agenda Novemr 30, 1993 ESOP meetg (TA 675). received. The problem with this approach is tax law provides shareholders an S corporation can crease ir come tax basis S corporation monies 85. are Workpaper taxed not contents distributed. from Theree, Tennet & comparability Axelrod, P.S.C. cannot files truly dated achieved June 30, tween 1994 (TA 753 S corporation - TA 862). shareholders C corporation shareholders. 86. Anor Valuation consideration workpapers related from this Tennet is & S Axelrod, corporation P.S.C. shareholders files dated are Decemr permitted 31, take 1994 subsequent (TA 863 distributions - TA 1016). from S corporation without current tax implications. 87. Valuation report ABC as Decemr Page 18 31, (TA TA 920).

19 Shareholders Valuation undistributed report checklist taxable dated come June from 21, previous 1995 (TA years 1017 is available - TA 1021). distribution sce shareholders have already paid tax on prits year it was earned. 89. Shareholders This Miscellaneous also causes undistributed a workpapers significant taxable difference relatg come from 1995 previous timg years 1996 is valuations cash available flows tween (TA distribution TA shareholders sce 1269). shareholders se different have already types paid entities. tax on prits year it was earned. This also causes a significant difference timg cash flows tween An shareholders argument can se made different types difference entities. 90. Workpapers Tennet & Axelrod, P.S.C. tween relatg a perpetual ABC S corporation ecast engagement a C corporation is present value annual corporate tax savgs. The analyst must face An argument from 1994 question can 2003 made (TA each appraisal 1270 difference - TA 1349). assignment tween regardg a perpetual an S corporation S corporation what a C holdg corporation period is present vestment value will annual while corporate corporation tax savgs. keeps its S The election. analyst Some must authors face Miscellaneous lieve question workpapers a each corporation appraisal from will assignment Tennet & lose its S election regardg Axelrod, at some an P.S.C. s S pot. corporation files (TA This means what TA holdg 1472). terest period corporation vestment g will valued while will corporation an S corporation keeps its S certa election. years Some 18 authors n a C lieve corporation a corporation its remag will lose life. its S election at some pot. This means 92. Prut terest corporation schedules g from valued ValuSource will an S corporation computer system certa relatg years When n Novemr a a C valuation corporation 30, analyst 1993 its is valuation remag requested (TA life. determe TA 1561). fair market value an enterprise, one facrs determed by analyst is who, or what group vesrs, 93. When Valuation a most valuation likely report analyst willg as is buyer. Novemr requested Anor 30, determe 1993 facr by Tennet fair considered market & Axelrod, value P.S.C. willg an enterprise, (TA buyer one scenario TA 1623). is facrs will willg determed buyer qualify by analyst an S is corporation. who, or what Once group it is vesrs, determed willg most buyer likely can willg an buyer. S corporation, Anor facr next question considered answered willg is buyer how long? scenario As is with will many willg or buyer decisions qualify confrontg an S corporation. valuation analyst, Once it re is determed is no clear 94. Fancial statement processg structions year ended Decemr 31, cut 1995 answer. willg buyer can an S corporation, next question answered is how long? with As fancial with many statements or decisions confrontg ABC Jail Company, valuation analyst, Inc. s ESOP re is (TA no clear 1626 cut - TA answer. 1634). Timg Valuation 95. A checklist fancial reportg regardg defed contribution retirement plans (TA Conventional Timg wisdom Valuation dictates when a busess valuation is permed an terest TA 1641). a corporation, value determed is based on value terest without regard Conventional vesr. wisdom This means dictates when when we a busess value shares valuation sck is permed a corporation, an terest it does 96. not a Or matter corporation, Tennet who & shareholder value Axelrod, determed P.S.C. is, nor is do workpapers based we consider on relatg value tax implications services terest permed without a sale regard terest ABC vesr. by ESOP shareholder. This (TA means TA Personal when 8799). taxes we value generally shares have sck no impact a corporation, valuation it does not corporate matter sck who (assumg shareholder is, nor shareholder do we consider is an dividual). tax implications Obviously, a sale not all shareholders terest by are shareholder. dividuals, Personal not all taxes shareholders generally have are tax no impact payg entities. valuation Pension plans, corporate example, sck (assumg do not pay taxes. shareholder Theree, should is an dividual). value a Obviously, share IBM not all In order shareholders address various issues T&A reports, as well as conduct this different if an dividual are dividuals, owns it or if not a pension all shareholders plan owns are it? tax payg entities. Pension plans, example, do not pay taxes. Theree, should value a share IBM assignment are problematic, we will cite page reference, where possible, based At different this pot, if an we dividual have come owns almost it or if full a pension circle plan our discussion owns it? about willg buyers. The on vestg bates public stamp calculates on each rates page. return on an after-tax basis. Sce different classes vesrs At this pot, have we different have come tax almost structures, full circle required our discussion rates return about will willg vary buyers. among The classes. vestg public In determg calculates an rates appropriate return on discount an after-tax rate basis. Sce net cash different flow classes an S First corporation vesrs emost, have versus different a lack C corporation, tax qualifications structures, it is reasonable required appraiser rates assume must return re will noted. vary is an In among creased our opion, risk classes. relative In determg net cash an flow appropriate S corporation discount rate enterprise net cash may at flow some an pot S T&A corporation Messrs. versus Jones a C corporation, Axelrod lacked it is reasonable requisite assume skills, knowledge re is creased credentials risk relative net cash flow S corporation enterprise may at some pot demonstrate pressional competence required perm valuation portion ir 18 engagement. Accordg T&A report (TA 173): 18 Duffy, Rort E. George L. Johnson, Valuation S Corporations Revisited: The Impact Life an S Election Under Varyg Growth Discount Rates, Busess Valuation Duffy, Rort Review, E. Decemr George 1993, L. Johnson, pp , Valuation American S Society Corporations Appraisers, Revisited: Herndon, The Va. Impact Life an S Election Under Varyg Growth Discount Rates, Busess Valuation Review, Decemr 1993, pp , American Society Appraisers, Herndon, Va. Page Page 19 34

20 time pay taxes have QUALIFICATIONS a lower cash flow. OF This APPRAISER could justification a different discount rate two entities. The question raised is, by how much? time Sce pay foundg taxes have 1980, a lower Tennet cash & Axelrod, flow. This PSC could has permed justification numerous a different discount Without valuations empirical rate data closely two entities. held marketplace, entities. The question it A comes significant difficult, raised numr is, if not by impossible, how valuations much? quantify are permed exact level adjustment. our Jacksonville Mamatical Lexgn, quantification Arkansas, cannot fices used as clients readily as Without is empirical conversion data pre-tax marketplace, after-tax it comes discount difficult, rates. Valuation if not impossible, analysts contue quantify throughout region. Valuation opions have en rendered a variety struggle exact level with adjustment. notion wher Mamatical corporate quantification cash flows cannot from an used S corporation as readily are as it after is purposes tax. Authors conversion cludg have argued pre-tax mergers re after-tax acquisitions, should discount a rates. employee equivalency Valuation sck made analysts ownership reflect contue 19 personal struggle plans, marital taxes with dissolutions will notion have wher estate paid by corporate gift S corporation cash tax shareholders. flows purposes. from an S The corporation reality are situation after tax. is Authors personal have argued taxes will re paid should wher a or tax not equivalency distributions made are made reflect Our clients clude or busess pressionals, dividuals, 19 shareholder. personal taxes It seems will reasonable have paid consider by S corporation se taxes shareholders. a similar fashion The closely as reality held corporate situation taxes. entities Eir is representg way, personal government taxes many will is different gog paid wher get types paid. or not There distributions dustries. not gog are Industries made a nefit shareholder. represented shareholder It seems or clude reasonable than pressional an adjustment consider se practices, his taxes or her a fancial basis similar fashion stitutions, corporate as corporate sck. taxes. manufacturg Eir way, government distribution concerns, gog get retail paid. dustries, There is not gog various or a nefit Arguments service shareholder have dustries. en or raised than as years an adjustment regardg his built or her gas basis tax. For corporate a long time, sck. position Tax Court has en no discount permitted a built gas tax, Arguments Several even though have Tennet vesrs en & raised Axelrod real years personnel world regardg consider have m built completed gas makg tax. various vestment For a long courses decisions. time, 20 In position Estate Tax Artemus Court has D. en Davis v. Commissioner, no discount part permitted discount a built lack gas concerng valuations closely held busesses pressional tax, marketability even though was vesrs attributed real built world gas consider tax. m This could makg fluence vestment future valuations decisions. practices. In addition this technical trag, 20 In we have substantial S experience corporations, Estate Artemus with particularly D. respect those Davis v. Commissioner, buyg have exposure sellg part built busesses gas discount tax through lack postconversion marketability years period. was attributed workg This with raises our built clients. issue gas This tax. combation S This election could havg fluence provides a possible future valuations us with discount associated S corporations, with it cause particularly those taxes have potentially exposure could built paid at gas corporate tax level. postconversion combation period. This technical raises trag issue practical S election experience havg a possible dealg discount with associated "willg buyers sellers" ability value busesses. Valuation with it hs cause owner taxes vestment potentially could an S corporation paid corporate may result level. a more realistic valuation. However, is clearly not fair market value. Personal tax rates Valuation may Tennet vary dependg & Axelrod, hs upon PSC o owner many personnel facrs vestment have have qualified nothg an S corporation testified do with may as vestment. expert result a more A valuation witnesses realistic analyst valuation. numerous cannot However, courts. expected Additionally, is clearly consider not y fair items market have such assisted value. personal Personal many exemptions large tax rates may legal itemized vary dependg deductions. accountg upon Certaly, o firms many throughout facrs smaller S have corporations country nothg with can do with ir affected valuation vestment. by se A items. valuation experience. Larger analyst S Our corporations cannot reports expected are may prepared not consider fluenced accordance items by such se as with personal items stards cause exemptions as shareholders promulgated itemized deductions. are more by likely Certaly, American higher Institute smaller tax brackets S corporations Certified where Public se can items Accountants. affected do not by matter. se Does items. Biographical se Larger mean S corporations qualifications valuation may analysts not mation should fluenced on have by our dividual two se stards, items pressionals one cause is small companies shareholders available are upon one more request. likely large companies? higher tax brackets where se items do not matter. Does se mean valuation analysts should have two stards, one small Back companies To The Future one large companies? At time acceptance this engagement, it is our lief none Now Back To we The have Future gone through numerous illustrations tell us look at facts personnel, particularly partner charge engagement, Steven Jones, had circumstances each situation on its own, let s step back where Tax Court has any taken Now credentials us we have where gone busess future through valuation. needs numerous. illustrations When In Adams, questioned The Court tell us about stated look his "The at qualifications net facts cashflow at his circumstances capitalization each rate situation used on compute its own, let s fair step market back value where WSA Tax sck Court should has deposition, taken us Mr. Jones where responded future needs as follows. In (January Adams, 24, The 2005, Court stated gng "The at net page cashflow 22, le capitalization rate used compute fair market value WSA sck should 18): See Cassiere, George G., The Value S-Corp Election The C-Corp Equivalency Model, Busess Valuation Review, June 1994, pp 84-91, American Society Appraisers, Herndon, See VA. Cassiere, George G., The Value S-Corp Election The C-Corp Equivalency Model, Busess Valuation Review, June 1994, pp 84-91, American Society Appraisers, Herndon, Estate VA. Artemus D. Davis v. Commissioner, 110 T.C. 35 Q. 20 Okay. Now, on time at time you ok on this assignment 20 value ABC Jail Company, were you a certified busess appraiser designated Estate Artemus by D. Institute Davis v. Page Commissioner, 20 Busess Appraisers? T.C. 35 Page 20 34