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From: americast-post@AmeriCast.Com
Organization: American Cybercasting
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Subject: Executive Update
Date: Mon, 23 Nov 92 12:15:13 EST
Message-ID: <6.1992Nov23.121514@AmeriCast.com>

11/23/92


TITLE Executive Update IRS May Offer Way To Head Off Many Tax
Disputes

Agency Is Considering Providing Advance Approval Of Asset Valua-
tions Vineeta Anand In Washington

After years of slugging it out with companies over the value of
assets acquired in business purchases, the Internal Revenue Ser-
vice is considering offering advance sanctions to companies that
submit their valuations for approval before filing their tax re-
turns.

The disputes have involved the way corporations divvied up the
prices they paid for businesses among their various Taxes

assets. The valuations of these assets are important to both
buyers and sellers because they are used to calculate the tax
breaks they can claim by depreciating assets over a number of
years.  Disputes over asset valuations flared up after tax laws
were changed in the mid-1980s to make it harder for companies to
offset very high acquisition premiums by depreciating assets.
And many corporations paid rich prices to buy businesses during
the merger frenzy of the 1980s. Acquirers frequently attempted to
reclaim part of the premium they paid by simply inflating the
value of acquired assets and then depreciating them.  Under
current law, companies cannot take tax deductions for goodwill or
the premium they pay for a business above the appraised value of
its assets.  The stickiest valuations tend to be those of soft or
intangible assets, such as subscriber lists, patents, copyrights
and labor contracts. At issue is whether such assets are part of
goodwill, or whether they are separate components of value that
have limited lives and therefore can be depreciated.

The IRS has steadfastly maintained that such assets can't be
depreciated.

Even in the case of other assets that can be written off, there
are disagreements over the length of time over which they should
be depreciated.  The IRS is contemplating offering companies its
advance sanction of asset valuations and the methods used to cal-
culate the valuations, even before disputes can arise, according
to tax accountants. This process would be completely voluntary
and would be similar to the private rulings that companies can
obtain from the IRS on issues where the law is not entirely
clear.  If the IRS does not agree with a company's valuations,
the company would be free to use those numbers, but it should ex-
pect a fight from the IRS.  The IRS has asked the Tax Executives
Institute Inc., an influential Washington group of corporate tax
officials, for comment on how such agreements might work, insti-
tute officials say. Companies might, for example, ask the IRS for
its approval of asset valuations after completing acquisitions
but before filing tax returns for that year.  Such upfront appro-
vals could eliminate major headaches later. Because of its huge
backlog of cases, the IRS frequently doesn't audit companies' tax
returns until several years after they are filed. Disputes over
tax write-offs can force companies to go back and change their
calculations and tax returns for all years in which the calcula-
tions were used. Such differences also can affect reported pro-
fits or losses.  The agreements could lead companies to include
provisions in their purchase agreements that would make prices
subject to downward revision if they can't take anticipated tax
deductions, according to Ettore#m#cq#m# Barbatelli#m#cq#m#,
president of Valuation Research Corp., a consulting firm in
Milwaukee.

"It's a way of getting some certainty that your treatment will be
accepted by the IRS before you go through the process of being
audited later on," noted Jeffery#m#cq#m# P. Rasmussen, assistant
tax counsel at the Tax Executives Institute.  The IRS might con-
sider offering advance approvals of inventory valuations, the
calculations of companies' equity value used to determine the ex-
tent to which they can use back losses to shelter current income,
and other contentious valuations, according to Rasmussen.

Conceivably, the IRS could avoid protracted battles over valua-
tions of stock of closely held corporations for computations of
gift and estate taxes, an area over which it has fought bitter
battles with the estate of media magnate S.I. Newhouse, and the
Gallo family of California winery fame, according to Robert Wil-
lens, a tax specialist at Lehman Brothers Inc.  The IRS has al-
ready said it plans to offer such advance approvals to valuations
of art and other charitable donations for which corporations and
individuals can claim tax deductions.  "It's much better for us
to sit down and negotiate than argue about it later on," said a
spokeswoman for the IRS.  Such settlements, which are also known
as advanced pricing agreements, would be modeled along the lines
of similar pacts the IRS has recently signed with companies over
the "transfer pricing" of products and services between U.S.
operations and foreign affiliates. Transfer pricing determines
companies' U.S. profits and taxes.

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