Intangible Asset Valuation Expert Witness

Overview

About Intangible Asset Valuation Expert Witnesses

An intangible asset valuation expert puts a supported number on something with no physical form, such as goodwill, a customer list, a trained workforce, software or a brand. The hard part is rarely the arithmetic. It is identifying what the asset really is, what rights go with it, how long it will produce income, and whether income is being counted twice. This page covers intangible assets in tax, transaction and commercial disputes. Damages for infringement belong to an IP damages expert, and valuing a whole company belongs to a business valuation expert.

Tax law supplies one of the fullest lists of what counts. Section 197 intangibles include goodwill, going concern value, workforce in place, business books and records, operating systems, and customer-based and other information bases ¹. A purchaser generally amortizes them ratably over a 15-year period ¹. So the way a price is divided among assets has a real tax consequence.

The Three Approaches

The IRS's internal guidelines for intangible property valuation provide a useful public statement of accepted method, and appraisers must be able to justify and document any departure from them ²:

• Income. This focuses on the income-producing capacity of the property. It usually computes net present value by discounted cash flow, and Monte Carlo methods add probability analysis of estimated ranges ².
• Market. This relies on an active market for comparable intangible property, for example royalty rates in arm's-length transactions, and should identify and justify the comparable transactions ².
• Cost. This estimates the cost to reproduce, replace or buy the asset, the make or buy decision. The guidelines warn it may be hard to apply because of problems quantifying economic obsolescence or future income potential ².

The same guidelines tell the appraiser to check the sensitivity of the methods to assumptions, including projections, discount rates and useful lives ². They also ask the final report to reconcile the results and set out all assumptions and limiting conditions ². On cross-examination, those are the first things tested. A valuation that fits only one narrow set of assumptions tells the jury little.

The guidelines also list what to examine about the asset: contractual or legal restrictions, whether it needs further development, undivided or fractional interests, remaining useful and legal life, expected economic benefits, and feasibility of commercial exploitation ². A customer list, for instance, shrinks over time, so the attrition assumption can drive the result.

Purchase Price Allocation

In an asset sale, buyer and seller often have opposite tax interests. Section 1060 applies special allocation rules to certain asset acquisitions, and the regulations require both sides to allocate consideration under the residual method to determine the amount realized and basis in each transferred asset ³. Goodwill and going concern value fall at the end of that residual process. Disputes arise when a party's reported allocation does not match the agreement, or when a non-compete or a customer list carries more or less than its real worth.

Transfer Pricing

The largest tax disputes usually involve related companies. Under section 482, income from a transfer or license of intangible property must be commensurate with the income attributable to the intangible ⁴. The regulations say the arm's length amount must be determined under one of four methods: the comparable uncontrolled transaction method, the comparable profits method, the profit split method, or an unspecified method, all applied under the best method rule ⁵. An expert addresses which method fits and whether the comparables truly are comparable. Those cases are data heavy, and an economist often leads them.

Commercial and Other Disputes

Outside tax, intangible value arises in shareholder and partnership disputes, divorce, and bankruptcy. Financial reporting has its own rules for goodwill and impairment, and an expert should not assume that an accounting figure answers a legal question about value. The standard of value should be set by the governing law, and the expert should state it at the start. Fair market value, investment value, and fair value can yield different figures for one asset.

Who Is Qualified, and Who Does What

Look for an accredited valuation professional with direct experience in the type of asset, or an economist in transfer pricing cases. Ask what the expert did to test the assumptions supplied by management, since a report that repeats a client's forecast adds little. A forensic accountant addresses the underlying numbers. A tax expert addresses treatment. An industry expert can speak to customer behavior and technology life.

Qualifications

Qualifications to Look For

• ✓Recognized valuation credential, or a doctorate in economics for transfer pricing
• ✓Direct experience valuing the type of asset at issue
• ✓Working command of the income, market, and cost approaches
• ✓Knowledge of the tax rules that apply, including sections 197, 482, and 1060
• ✓Ability to test management forecasts and attrition assumptions independently
• ✓Experience reconciling results and showing sensitivity
• ✓Prior deposition and trial testimony, including in Tax Court where relevant

FAQ

Frequently Asked Questions