we have a client that has issued some profits interests as compensation and we’re engaged to value them. we do valuations of common stock all the time and always use either the option pricing method or the prob weighted expected return method, as discussed in the aicpa guide, but not the current value method. well, this client has some tax guys that have said that their interpretation of the tax law says you can value profits interests using the current value method (total equity value less liquidation preferences equals common value). this means that in situations where the total equity value is less than the preferences, which is the case for this client, the common is worthless. our understanding is that this only flies when a liquidation is expected soon. otherwise, you should use one of the other methods because they consider the speculative value of the equity and account for the fact that it might receive cash in the future than can be discounted to the present. of course, we’re supposed to issue an opinion and we’re uncomfortable b/c its contrary to what we think the expectations of the IRS really are. Their tax guys wrote a memo detailing their position, but they don’t use anything more recent than 2001, before bv guys started moving to these alternative methods of valuation, with most of their support coming from the 70’s. we’ve considered simply quoting their memo, but that doesn’t necessarily absolve us from liability. we’ve also considered just issuing the opinion on the equity value and letting them apply the current value method themselves. does anyone know of any guidance, for or against, preferably recent, that you can point me to? other thoughts? much appreciated.
Would these tax people also lead you to believe that there is no value to out-of-the-money options? If so, sign me up for GOOG June 2050 $475 calls at a price of $0 per contract.
I am in the third camp that says granting of profit interests isn’t a taxable event and that taxes are only due when those profit interests are paid.