The price-to-revenue multiplier is a popular valuation multiple, especially for service firms such as accounting practices or insurance companies. Mechanically, valuing a company using a price-to-revenue multiple is relatively straightforward (i.e. multiply the underlying revenue of the subject company by the revenue multiplier to derive an indication of value). However, proper application of the price-to-revenue multiplier is more complicated than the simple mathematics suggest, as profit margins have a significant theoretical impact on the size of the price-to-revenue multiplier.

To understand this concept, let’s first begin with the basic formula for valuing a business:

In constructing the cost of equity capital, Duff & Phelps currently recommends that investors/valuation analysts use a 5.5% equity risk premium and a 4% normalized risk-free rate (i.e. a total cost of equity capital of 9.5%). The normalized risk free rate, which is based upon a long-term average rate, is used in place of the spot yield during those months in which Duff & Phelps believes the risk-free rate is artificially low (however that is determined). In my opinion, while the Duff & Phelps methodology develops an appropriate base cost of capital that is consistent with other metrics that I commonly rely upon, the concept of “normalizing” the risk free rate is problematic for two reasons. First, normalizing the risk free rate creates an “artificial” rate of return that is not available for investors to actually purchase. Second, normalizing the risk-free rate distorts the composition of investor’s future expectations of returns relative to other models. These issues are further discussed below:

Normalizing Risk-Free Rate – An Artificial Return

When we construct the cost of equity capital, we must remember that what we are constructing is an opportunity cost; that is, the cost of equity capital represents the minimum required rate of return that investors require given competing alternatives in the marketplace. One of those competing alternatives is the risk-free rate of interest, which theoretically compensates for inflation plus a real return for the use of funds over the investment holding period. When Duff & Phelps normalizes this rate to 4% vs. the roughly 2.5% actually available to investors, they create an artificial and unavailable rate of return in the marketplace. This violates an assumption of the cost of capital, which is an opportunity cost of funds. Since investors cannot actually earn 4% in the marketplace, it should not form the basis of the base cost of capital, as 4% is not the true opportunity cost of funds.

Misrepresents the Composition of Returns

The second issue with the Duff & Phelps methodology is that the method misrepresents the composition of total returns. For example, under the Duff & Phelps methodology only 5.5% of the total 9.5% expected return on the market is attributable to equity risk (i.e. the equity risk premium) with the remaining amount attributable to the “normalized” risk free rate of 4% (i.e. inflation and real interest). However, other forward looking models (such as Damadoran’s ERP calculator or my supply-side estimate), which are based upon actual rates available in the marketplace, indicate that approximately 7-7.5% of the total 9-10% rate of return on the market is attributable to equity risk, with the remaining attributable to the risk free rate. Therefore, the Duff & Phelps model, in my opinion, understates the amount of equity risk that investors are actually pricing in the market.

This has important implications when estimating the cost of equity using the capital asset pricing model. For example, using Damodarans forward looking calculator (reformulated to the 20 year treasury) we discover that the total expected return on the S&P 500 is approximately 9.91%, composed 7.34% of equity risk and 2.57% of risk free rate (as of December 31, 2011). Duff & Phelps predicts a 9.5% total return on the market, composed of 5.5% equity risk and 4% of normalized risk-free rate. Therefore, if a company had a beta of 2.0x, one would compute a cost of equity capital using the capital asset pricing model as follows:

Damodaran = 2.57% + 7.34%*2 = 17.25%

Duff & Phelps = 4% + 5.5%*2 = 15.00%

As one can see, even though the total expected market return on both methods is comparable (i.e. 9.97% vs 9.50%), the cost of capital using the implied ERP from Damodaran is 2.25% higher than the cost of capital obtained using the Duff & Phelps “normalized” ERP/risk-free rate estimate. This differential is entirely related to the composition of returns assumed by the models. Again, the Duff & Phelps model presumes that investors require a much smaller fraction of the total expected return to compensate for equity risk, while other forward looking models indicate that a much larger fraction of the total return is attributable to equity risk.

In my opinion, the forward looking models provide a better indication of the true compensation demanded by market participants for bearing the risk of equities. Furthermore, these models are more consistent with the definition of “fair market value’ because they utilize the actual spot yield on treasuries as of the valuation date, as opposed to an artificial and unavailable risk-free rate of interest (as used in the Duff & Phelps model).

- Joshua B. Angell, Valuation Analyst at Moore, Ellrich & Neal, P.A.

In recent months, there has been tremendous discussion in the valuation community about how to properly estimate the base cost of capital and equity risk premium given that the customary practice of adding the spot yield to the historical equity risk premium is yielding an artificially low estimate. To resolve this issue valuation practitioners have proposed various methods to “normalize” the cost of capital. For example, Duff & Phelps recommends normalizing the risk free rate of interest to approximately 4% and adding an equity risk premium of 5.5%. Another group recommends using the spot-yield on a 20-year Treasury and adding a 1-2% increase to the company specific risk premium as an adjustment. Another group even recommends taking a long-term average risk free rate and adding that rate to the historical risk premium reported in Ibbotson or Duff & Phelps.

In my opinion, the easiest way to resolve this issue is to simply examine the fundamentals of the marketplace to determine the markets implied required return. For example, recall that the value of a stock-index can be expressed as follows:

Value = FCF1 / (K – G)

Where:

FCF1 = Free cash flow (i.e. buybacks and dividends) on index next year

K = Required Rate of Return on Index

G = Long-Term Nominal Growth Rate in Free Cash Flow per Share

Solving the above formula for K, we discover that

K = FCF1 / Value + G

Notice that FCF1/Value is simply the total forward-yield (i.e. buybacks and dividends) on the stock index. Further notice that G, or the long-term nominal growth rate, can be bifurcated into long-term inflation and long-term real free cash flow per share growth. Therefore, by definition, the expected return on an equity index is simply:

K = Total Yield on Index + Inflation + Long-Term Real Growth

Using these fundamentals, a long-term forward looking estimate of the return on the S&P 500, or similar index, can be estimated in a relatively straight forward fashion. For example, as of December 31, 2011, the S&P 500 reported a trailing free-cash flow yield of 5.90% per annum (used as a proxy for the forward-yield). The marketplace was pricing in a long-term breakeven inflation estimate of 2.04%, based upon the yield spread between 20 year treasury and treasury inflation protection securities (TIPS). Furthermore, in the United States, long-term real GDP per capita growth, which can serve as a proxy for long-term free cash flow per share growth, has averaged approximately 2% per annum. Therefore, based upon these observable market inputs a reasonable supply-side estimate of the long-term return on the S&P 500 as of December 31, 2011 is computed as follows:

Valuation practitioners commonly rely upon the FMV Restricted Stock Study Database to quantify the discount for lack of marketability. The FMV Restricted Stock Study Database is a database of approximately 596 restricted stock study transactions (as of December 31, 2010). A restricted stock is a privately placed stock that is temporarily restricted from public resale pursuant to SEC Rule 144. These securities typically trade at a discount from the value of their freely traded shares. The discount is believed to provide a proxy for the compensation required by market participants for lack of marketability. Accordingly, valuation practitioners commonly utilize the FMV Restricted Stock Study Database to quantify the discount for lack of marketability in the appraisal of a closely held company. This analysis typically involves a tailored search of the database for comparable transactions using metrics that are considered to impact the observed discounts such as the restriction period, revenue, market value, profitability, and dividends (among others). Practically speaking, this form of analysis is relatively straightforward. However, from a theoretical perspective, this type of analysis is subject to several problems. These problems include:

1. The underlying companies in the FMV Database are generally unrepresentative of American business.

2. The underlying companies in the FMV Database are primarily unprofitable, non-dividend paying firms with substantial risk.

3. The most relevant transaction data for quantifying the marketability discount for a private business (i.e. the 2 year holding period restriction data) is limited and dated.

4. The majority of transactions are subject to registration rights, which increase the marketability of those transactions.

These issues are discussed further below.

Unrepresentative Companies

The first major issue with the FMV Database is that the underlying companies are generally unrepresentative of American business. For example, the table below summarizes the top 10 SIC Codes within the FMV Database.

The table shows that approximately 41% of the database is classified in the most relevant 2 -year holding period restriction. Conversely, approximately 59% of the database is classified in the less relevant 1 year and 6 month holding periods. Therefore, the workable sample of relevant transactions is much less than the 596 transactions reported in the database. Moreover, the relevance of these 2 year holding period transactions is questioned because this data is very old (i.e. all data is prior to 1997). In particular, in order for these transactions to be relevant, the appraiser must adjust the information for items such as inflation and differences in macroeconomic conditions.

Registration Rights

Another issue with the FMV Database is that many transactions include registration rights or do not indicate whether registration rights were included as a part of the transaction. Registration rights increase the marketability of the restricted shares because they typically provide a mechanism for the shareholders to register the shares prior to termination of the holding period restrictions. Only those transactions not subject to registration rights provide the most relevant discount information to a privately held business. The table below summarizes the distribution of transactions based upon registration rights:

The small business owner often needs to determine the value of their investment in a closely held business. Unlike an investment in public stock a small business owner cannot merely consult the Wall Street Journal to obtain the most recent fair market quote on their shares. Rather, the small business owner must estimate value. This estimation process typically requires a detailed analysis of the company’s future growth, risk, industry outlook, and national and regional economic conditions, not an easy task. In fact, the inherent complexities in small business appraisal make the task seem virtually impossible to most small business owners.

 

Despite the complexities business appraisers use several approaches to determine the fair market value of investments in private equity. These approaches, which are based upon different economic theories regarding the value of corporations, include the following:

 

Income Approach

Market Approach

Asset Approach

 

Income Approach

The income approach is perhaps the most theoretically appealing methodology for valuing a closely held company, as the approach focuses on the economic variable that matters most to private business owners: the cash flow distributing power of their company. More specifically, methods within the income approach equate the value of a business to the present value of its future expected cash flows; that is, the value of a company is determined by estimating or projecting the company’s future cash flows and discounting them to the present using a rate of return commensurate with the risk of achieving the cash flows. The underlying economic rationale of the approach is that buyers price businesses on the basis of earning a fair rate of return on their investment given competing alternatives in the marketplace.

 

The two most common methods within the income approach include the discounted cash flow method and the capitalization of cash flow method. The discounted cash flow method is a multi-period model that involves projecting the company’s net cash flow over a period of abnormal or unstable growth and then estimating value once the business has stabilized through application of a terminal value. The estimated cash flows and terminal value are then discounted to the present using an annual rate of return, commonly referred to as the discount rate. The present values are then summed together to determine the value of the business. This approach is most commonly applied to rapidly growing business or businesses whose cash flows have not stabilized.

 

The capitalization of net cash flow method is a short-form version of the discounted cash flow method that involves capitalizing (i.e. dividing) a single representative estimate of the company’s sustainable net cash flow (i.e. typically current years or some weighted average of prior year’s net cash flow) by a capitalization rate. The capitalization rate is literally the discount rate, or required annual return on the investment, less an estimate of the long-term sustainable growth rate in the company’s net cash flow. This method assumes that the business will grow at the sustainable long-term rate (which can be positive, negative, or zero) into perpetuity. Therefore, the method is only appropriate for companies that have stabilized.

 

The net cash flow used in both approaches refers to the amount of cash that can be distributed to the owners without affecting the company’s day-to-day operations or future growth opportunities. Warren Buffet often refers to this cash flow as the company’s owner earnings. More specifically, owners’ earnings, or net cash flow, refers to the normalized net income (on an after-tax basis) plus (a) depreciation, amortization, and non-cash charges minus (b) incremental investments in net working capital, minus (c) incremental investments in capital expenditures, plus/minus (d) net repayments of debt principal. The normalized net income should exclude non-recurring, non-operating, and unusual items, such as overcompensation to the owner.

 

The primary advantage of the income approach is its theoretical appeal; that is, the method specifically relates the price of a business to its future expected cash flows and risk. In addition, the approach is very flexible, allowing the user to specifically communicate the economic variables driving value. The primary disadvantage of the approach is that it is sensitive to the inputs. For example, a very small change in the growth rate assumption or discount rate can have a significant influence on value. The model output is only as good as its input.

 

Market Approach

 

The market approach is an alternative valuation approach that utilizes the valuation multiplies of comparable companies to determine the value of another company. A valuation multiple is merely a ratio of price to some underlying fundamental metric, such as revenue or pre-tax earnings. For example, if a comparable company with $1,000,000 in pre-tax earnings, recently sold for $5,000,000 the price-to-pre-tax earnings multiple would be 5x (i.e. $5,000,000 / $1,000,000 = 5x). The pricing multiple would then be utilized to value the company. The market approach is grounded in the theory of substitution, or the economic concept that similar assets should command similar prices.

 

The two common methods within the market approach include the publicly traded guideline company method and the private transactions method. The publicly traded guideline company method uses the pricing information of publicly traded companies as an indication of value. This method is generally appropriate for larger business where sufficient comparable companies can be found in the public marketplace. The private transactions method utilizes the sales terms of private market transactions. This method is generally more appropriate for smaller private companies. The transaction information can usually be obtained from a broker or a private market transactions database, such as Pratt’s Stats.

 

The primary advantage of the market approach is that the approach is market based; that is, the pricing and valuation information comes from actual prices and sales transactions in the marketplace. Therefore, the market approach can often provide very timely and compelling evidence of fair market value. The primary disadvantage of this approach is usually lack of truly comparative data. Since most small private businesses are unique in some respect, this can become a significant obstacle. In addition, the underlying assumptions driving a pricing multiple (i.e. growth and risk) are usually hidden in market data. Therefore, a subjective adjustment is often necessary to make the multiple relevant for your company.

 

Asset Approach

 

The asset approach takes a different perspective of the company by examining the economic value of the company’s assets and liabilities. The approach essentially involves the identification and revaluation the company’s assets and liabilities, including the company’s intangible assets and contingent liabilities. The method begins with the company’s historical cost basis balance sheet. The balance sheet is then adjusted to fair market value. Some of the common adjustments include the write-off of bad debts and obsolete inventories and the revaluation of equipment and real estate to their current appraised values. The economic value of the liabilities is then deducted from the economic value of the assets to determine the economic value of the business equity.

 

The asset based approach can be used to value any business, but is usually more appropriate for an asset intensive business, such as an asset holding company. The method is usually less suitable for a business with substantial intangible value, such as a very profitable service business. Nonetheless, the asset based approach can often provide a minimum or “floor” value on a business with substantial intangible value.

 

The primary advantage of the asset based approach is its intuitive appeal. In addition, the method can help explain which specific assets and liabilities are contributing to the economic value of the corporation. The primary disadvantage of the method is that it can be expensive and time consuming to implement, especially if done properly. The method usually requires outside expertise from real estate and equipment appraisers, for example.

 

Conclusion

 

The valuation of a small business is as difficult task. Despite the complexities, however, the value of a small business can be estimated using one of several commonly accepted business valuation approaches: the income approach, the market approach, and the asset approach. The discussion above presented a very simplistic view of these three approaches. Each approach has strengths and weaknesses and each may be more or less suitable for different situations. The actual process of performing a detailed business valuation is much more complicated than the simplified explanations above. Typically, a detailed valuation will require an extensive analysis of the company’s industry, customers, suppliers, facilities, outlook for growth, financial statements, and risks. In addition, the national economic outlook and other market conditions can have a dramatic impact on the fair market value of a private company’s shares.

 

If you would like to obtain more information about the appraisal of your company, please do not hesitate to contact our valuation services department.

- Joshua B. Angell, Valuation Analyst at Moore, Ellrich & Neal, P.A. 

 

Selling a privately held company can be a time consuming process due to the absence of a liquid market. For example, unlike a publicly traded security, an investor in a private company cannot simply execute a sell order at the market price and receive cash proceeds within three business days. Rather, a private business owner must engage in a relatively lengthy sales process, wherein a potential buyer must actually be found in the marketplace. This marketing period is time consuming and reduces the liquidity of an investment in private equity. A relevant question in the appraisal of a closely held company, therefore, is how long does it take for the average business to sell in the private market?. The purpose of this post is to address this question.

Data & Methodology

Data for my analysis was obtained from the Pratt’s Stats Database. The Pratt’s Stats database is a merger and acquisition database that reports transaction information on 18,031 private business sales (based upon data through December 31, 2011). The database includes over 83 data points for the transactions, including the “Sale Initiation Date” and the “Sale Date.” Pratt’s Stats defines the “Sale Initiation Date” as the date the business was listed for sale. The “Sale Date” is defined as the date the business sale was closed. Using these two data points, I compute the number of days to sell the business (defined as the difference between the “Sale Date” and the “Sale Initiation Date”). I exclude transactions that either (a) do not report date information or (b) have a “Sale Initiation Date” after the “Sale Date.” This reduced the sample of transactions to 9,096 transactions, which forms the basis of my analysis.

Results

The chart below presents the frequency histogram of transactions based upon the number of days to sell.

The following summarizes pertinent statistics (summary tables are attached at the end of this post) regarding the analysis:

1. The average business is sold in 203 days, or approximately 6.8 months

2. The median business is sold in 144 days, or approximately 4.8 months

3. Approximately 60% of businesses sell within 180 days, or 6 months

4. Approximately 85% of businesses sell within 1 year

4.The inter-quartile range, which measures the middle 50% of transactions, suggests that the majority of businesses sell within 75 to 260 days, or 2.5 months to 14.2 months.

5.Only 6.5% of businesses sell within 30 days

6. Businesses sell within 60-90 days with the most frequency (i.e. 12.6% of transactions occur within this range).

7. Approximately 97% of businesses sell within 2 years.

8. The number of days to sell ranged from 0 to 5.8 years

Overall, the analysis indicates that a privately held business is significantly less liquid than a publicly traded security. Nearly 15% of transactions take more than 1 year to close from the date of sale initiation, with the majority of transactions closing within 150 days, or approximately 5 months, from the initiation of sale.

The Effect of Market Value on the Number of Days to Sell

I also analyzed whether market value of invested capital (or purchase price) affected the number of days to sell the business. The chart below summarizes the average number of days to sell grouped by market value of invested capital:

The chart reveals a relationship between market value of invested capital and the number of days to sell. In particular, the number of days to sell a business appears to increase for firms with a market value below $10 million. For example, firms with market value of invested capital less than $500,000 took approximately 195 days to sell on average, whereas firms with market value of invested capital between $2.5 million and $5 million took approximately 301 days to sell on average. I also performed the analysis using median days to sell in order to remove outlier transactions:


The relationship using medians is less pronounced than the relationship using averages. However, the medians confirm the general observation that the median number of days to sell increases for business with a market value of invested capital (MVIC) less than $10 million. For example, the median number of days to sell a business with MVIC less than $500,000 is approximately 162 days vs. 224 days for a business with MVIC between $2.5 million and $5 million. It appears that firms with MVIC between $2.5 million and $10 million take a longer time to market than firms with MVIC less than $2.5 million or greater than $10 million.

Statistical Analysis

I also performed a multivariable regression analysis to determine what factors can help explain the number of days to sell a private business. The variables I used included:

1. Market Value of Invested Capital (using logarithms)

2. Sales Revenue (using logarithms)

3. Operating Profit Margin

4. Profitability Flag (1= Positive Operating Profit, 2= Negative Operating Profit)

5. Sale Type Flag (i.e. 1 = Asset Sale; 2= Stock Sale)

6. Buyer Type (i.e. 1 = Private Buyer; 2 = Public Buyer)

The sample of transactions had to be reduced to 9,017 to analyze all the variables above. The table below summarizes the regression output:



The model has very low explanatory power, explaining less than 2% of the variation in the days to sell. However, certain variables were statistically significant in predicting the day to sell. These included the following variables:

1. Sales – Larger firms (as measured by sales) take longer to sell than smaller firms.

2. Profit Flag - Profitable firms (as measured by operating profit) sell faster than non-profitable firms. In particular, profitable firms sell 19 days faster than non-profitable firms.

3. Buyer Type – The buyer type (i.e. private buyer vs. public buyer) matters. In particular, it takes approximately 132 days longer to sell to a private buyer vs. a public buyer.

Conclusion

The analysis shows that private business are significantly less liquid than publicly traded securities. In particular, while a publicly traded security can be sold within 3 business days, the median closely held company takes approximately 144 days to sell. In addition, the time to sell a business appears to depend on the size of the business. Larger businesses take longer to sell than smaller businesses. This may be related to the complexity of analyzing a large business or difficulty in finding a buyer with enough resources to consummate a transaction. Furthermore, other factors appear to explain the length of time to sell, including (a) whether a firm is profitable or (b) the potential buyer. Specifically, profitable firms sell faster than unprofitable firms, while sales to public buyers occur more quickly than sales to private buyers. The profit margin, sale type (i.e. asset sale or stock sale) appear to have no impact on the time to sell.

Summary Tables:


















































Other summary information is described below:

Valuation practitioners commonly rely upon restricted stock studies to estimate the discount for lack of marketability. Restricted stock studies, however, are subject to several problems that make estimating reliable marketability discounts problematic. For example, recent research suggests that restricted stock discounts are not entirely related to lack of marketability (see Robert Comment’s article entitled “A Skeptical Restricted Stock Study”). Furthermore, the companies underlying restricted stock study transactions are usually unprofitable, non-dividing paying firms in very risky sectors of the U.S. economy. Moreover, the most relevant restricted stock study transactions (i.e. 2-year holding period transactions) are dated and do not provide timely market evidence of marketability discounts. These factors, among others, create problems for valuation practitioners who rely upon this data to quantify discounts. Consequently, valuation practitioners need alternative and more reliable methods to quantify the discount for lack of marketability.

One alternative method is to compare the yield of non-brokered certificates of deposits to the yield of on-the-run U.S. treasury bonds of the same maturity. A non-brokered certificate of deposit is a bank issued fixed income instrument that is federally insured (up to $250,000) by the U.S. Government. This investment is risk-free but, because of prepayment penalties and the absence of a liquid market, is relatively illiquid. On-the-

run U.S. Treasury Bonds, however, trade in one of the most liquid markets in the world. Therefore, the primary difference between non-brokered certificates of deposit and on-the-run U.S. Treasury bonds is their liquidity. Consequently, the difference in yield between these two securities provides a market derived benchmark for the additional return demanded for illiquidity.

















The chart below summarizes the historical average weekly yield spread between the 5 year certificate of deposit and the 5 year on-the-run U.S. Treasury bond from 1999 through 2011. The yield on the 5 year certificate of deposit is measured by Bankrate.com US 5 Year CD National Avg. (BLOOMBERG: ILSONAVG Index). The yield on the on-the-run U.S. Treasury bond is measured using Bloomberg’s Generic United States 5 Year Government Bond Index (BLOOMBERG: GT5 Govt).

As one can see, the yield spread between these two investments has ranged from a negative premium of 0.27% in 1999 to a positive premium of 1.02% in 2008. The average premium over the entire period (not shown) was 0.41%, which suggests that market participants demand an additional 0.41% per annum to invest in comparable, but illiquid, 5 year certificates of deposit relative to liquid 5 year U.S. Treasury obligations. The table below summarizes the historical yields on U.S. Treasury Bonds and Certificates of Deposit, the yield spread between these two investments, and the relative yield premiums (i.e. yield spread expressed as a percentage of the U.S. Treasury Yield).

Several notable characteristics can be identified from the chart and table above. First and foremost, the illiquidity premium demanded by the marketplace fluctuates over time. More importantly, the illiquidity premium appears to correlate highly with macroeconomic conditions. For example, the illiquidity premiums were very low prior to the 2000 and 2008 recessions. Those premiums, however, rose rapidly during the recessions, and started to decline during the expansionary/recovery periods. This is an important observation because it suggests that the illiquidity premium is not static, but rather time specific and macro-dependent. Consequently, the best evidence of marketability discounts must take into consideration current macroeconomic variables.

Using the Illiquidity Premium from the Risk-Free Asset to Estimate Illiquidity Discounts

A useful feature of the illiquidity premiums observed from the risk-free asset is that they can be used to develop a illiquidity discounts (via the cost of capital) for a private company. For example suppose we are valuing a firm at year-end 2011 that has a cost of capital (before application of an illiquidity discount) of 20%. We observe that illiquid certificates of deposits are generating a yield of 1.92% vs. 1.50% for comparable U.S. treasury bonds (see table above). This represents a yield spread of 0.42%, which is equivalent to a 28.2% relative yield premium (i.e. 0.42% / 1.50% = 28.2%). Therefore, assuming investors require the same relative return premium on the equity investment, we can quickly compute the equivalent “illiquid” cost of capital for the security as follows:

If the firm generated $100 million in free cash flow with a long-term growth rate of 4% we could compute the illiquid value of the security as follows:

$100*(1.04)/(.256-.04) = $481.48 million.

Notice that the liquid security would have been valued as follows:

$100*(1.04)/(.20 – .04) = $650 million

Therefore, the implied illiquidity discount is 25.93%. (i.e. $481.48/$650 – 1 = 25.93%), which is consistent with the illiqudity discounts commonly applied using other valuation analyses. Some of the attractive features of this approach are as follows

1. The cost of capital adjustment is time specific and based upon current market data. Therefore, the illiquidity discount obtained from this method should reflect current macroeconomic conditions specific to the valuation date. This is an improvement over restricted stock studies, which are based upon out-dated data

2.The methodology provides a market based mechanism to estimate the increment to the discount rate for use in models such as the Quantitative Marketability Discount Model (QMDM). In the QMDM, one of the primary inputs is the “incremental holding period return.” Therefore, using the relative yield premium as of the valuation date, the valuation analyst could estimate a market derived incremental return to add to the base cost of capital in the QMDM.

3.The methodology specifically isolates the incremental return demanded by market participants for illiquidity by comparing the yields on two comparable investments that differ primarily in terms of liquidity only. This is an improvement to restricted stock studies which may have other factors contributing to the observed discounts

4.The methodology is a cost of capital based model. Therefore, factors such as dividend yield, do not have to be “qualitatively” analyzed, as the dividend yield is explicitly considered by computing the present value of future cash flows. This is an improvement to the restricted stock studies because those underlying companies generally do not pay any dividends. Therefore, unlike restricted stock analysis, a subjective adjustment is not necessary for the dividend yield of the investment.

5.The methodology is a relative return model. Therefore, the risk of the underlying security does not have to be directly considered, as the risk is implicitly considered by multiplying the relative return by the security’s cost of capital. For example, suppose you have two investments of different risk. One has a liquid return of 10% the other has as liquid return of 20%. The relative return premium observed in the marketplace is 30%. Therefore, the illiquidity premium on the first investment is 3% (i.e. 10%*(30%) = 3%), while the illiquidity premium on the second investment is 6% (i.e. 20%*30% = 6%). As one can see, the illiquidity premium added to each security automatically factors in differences in the underling risk via the cost of capital.

The primary unattractive feature of the model is that it is based upon a risk-free investment maturing in 5 years. Therefore, the illiquidity premium demanded on this investment may not be comparable to the illiquidity premium demanded on a common stock investment. This factor is partially addressed by using the relative yield premium, instead of the simple yield spread. However, the assumption that investors would require the same relative return premium maybe unreasonable without further empirical verification. Either way, this methodology provides an alternative method for computing the illiquidity discount.

Conclusion

The yield spread on certificates of deposit and U.S. Treasury Bonds can provide useful information for quantifying the illiquidity discount. In particular, by analyzing the relative yield premium (i.e. yield spread expressed as a percentage of U.S. Treasury Bond yield), valuation analysts can compute an equivalent “illiquid” cost of capital for a private business. The underlying assumption is that investors should, at a minimum, require the same relative compensation to invest in an illiquid equity security as they require to invest in an illiquid risk-free asset. This methodology provides an alternative to other illiquidity models such as restricted stock studies. Furthermore, the incremental rate of return obtained from this methodology can be used as model input to other theoretical models, such as the quantitative marketability discount model.

The Susan G. Komen foundation hosts this 3 

mile walk/run every year in West Palm Beach to help support research for the fight against breast cancer and is a lot of fun to participate in. The race has become an annual tradition at Moore, Ellrich & Neal. With your help we can raise even more donations and support for a very important cause. Whether you come out and join us for the walk on January 28, 2012 or donate, we hope you know how much we appreciate your support. Thank you again and happy holidays! Please contact Karen Moore at the office (561) 624-0355 or by email for a new team T-Shirt. We look forward to seeing you out there!

Registration is open at www.komensouthflorida.org/2012rftc

PALM BEACH GARDENS, Fla. (Oct. 04, 2011) – Moore, Ellrich & Neal
P.A. donated their fundraising skills and time to this year’s Labor Day MDA Telethon. You may have seen ME&N employees and volunteers, Matt James, David Lanier, Brittany Silveus and Karen Moore working the phone banks on CW.  The firm raised $11,781 for the executive lockup and received a $10,000 donation on behalf of ME&N the night of the telethon which brought their entire fundraising to $21,781! 

“There are so many causes to support out there, but having the opportunity to really participate made the act of giving all the more sweet.  I hope everyone will take the opportunity to participate in the next event we support.  There is no better way to see the benefits of charity”- Karen Moore 

Moore, Ellrich & Neal is a full-service accounting firm offering a comprehensive range of business and personal accounting services. The main office is located at 11025 R.C.A. Center Drive in Palm Beach Gardens. For information or to schedule an appointment, call (561) 624-0355, visit www.mencpa.com, or email Karen.Moore@mencpa.com .

Sept. 16 (Bloomberg) -- Kweku Adoboli, the trader arrested yesterday after UBS AG said it discovered unauthorized trades that caused a $2 billion loss, was charged with fraud and false accounting by London police.

The 31-year-old remains in police custody and will appear at magistrates court this afternoon, the City of London Police said in an e-mailed statement today. The investigation is ongoing and police said they are working with the U.K.’s finance regulator, the Financial Services Authority and the Serious Fraud Office, which prosecutes white-collar crime.

“Lawyers from the Crown Prosecution Service Central Fraud Group have today authorized City of London police to charge” Adoboli, said Sue Patten, the head of the CPS group, in a separate statement.

Richard Morton, a spokesman for UBS, declined to comment on the charges.

Adoboli was arrested at 3:30 a.m. yesterday morning on suspicion of fraud by abuse of position. He was held at a police station in central London while the claims were investigated after the Zurich-based bank asked for the arrest their employee.

Adoboli lives in London’s Bethnal Green neighborhood and worked for UBS’s investment bank on its Delta One desk, which handles trades for clients, typically helping them to speculate on or hedge the performance of a basket of securities. The group also takes risks with the bank’s own money in arranging trades. UBS said that no client positions were affected.

Adoboli hired the criminal law firm Kingsley Napley LLP in London to represent him. Lawyers from the same firm advised Nick Leeson, the former derivatives trader who caused the collapse of Barings Plc with $1.4 billion in losses in 1995.

By Lindsay Fortado and Ben Moshinsky

--With assistance from Gavin Finch in London. Editors: Christopher Scinta, Peter Chapman

To contact the reporter on this story: Lindsay Fortado in London at lfortado@bloomberg.net

To contact the editor responsible for this story: Anthony Aarons at aaarons@bloomberg.net

Warren Buffett was in the New York Times today bragging about his low effective tax rate and saying how he would like to be paying more. Fellow Forbes contributor Tim Worstall weighed in quibbling about Mr. Buffett not factoring in the corporate taxes on Berkshire Hathaway’s earnings. I’m just a simple CPA, whose firm won’t even let him sign audit reports anymore. (That’s true of all tax partners here by the way. I don’t take it personally). I don’t want to quibble with a quibble but apparently economists have a hard time figuring out the incidence of the corporate income tax (i.e. who is really paying it), so I think we can let go of that piece of the analysis.

Still, Mr. Buffett is not sharing the real reason that he doesn’t pay much in the way of income tax relative to his great fortune. The secret is hidden in plain sight. Mr. Worstall alludes to it when he mentions that Berkshire Hathaway does not in fact pay dividends. Mr. Buffett’s secret which you can find blasted all over the Internet is one of his famous quotations:

Our favorite holding period is forever

You only pay income taxes at any rate on realized appreciation. An investment with a holding period of forever incurs a capital gains tax of 0%, while all along the holder can be getting wealthy from appreciation. That’s the real reason Mr. Buffett does not pay a lot of income taxes.

Peter J Reilly

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PALM BEACH GARDENS, Fla. (August 2, 2011) – Nancy Richardson, Senior Manager in Litigation Services with Moore, Ellrich & Neal, P.A. in Palm Beach Gardens, has successfully completed the requirements to achieve the status of certified public accountant. Nancy received the Association of Certified Fraud Examiner’s Walker Award in 1991, for obtaining the highest national exam scores on the October 1991 Uniform CFE Examination. She also holds a designation as a CVA with the National Association of Certified Valuation Analysts and has been published in the ACFE's publication "The White Paper". Richardson has been with the firm for twenty years.

CPA candidates must pass the Uniform CPA Examination which consists of a four-part examination: auditing and attestation; financial accounting and reporting; regulation/law; and business environment and concepts.
 
Moore, Ellrich & Neal is a full-service accounting firm offering a comprehensive range of business and personal accounting services. The main office is located at 11025 R.C.A. Center Drive in Palm Beach Gardens. For information or to schedule an appointment, call (561) 624-0355, visit www.mencpa.com, or email Karen.Moore@mencpa.com .

PALM BEACH GARDENS, Fla. (July 27, 2011) – Sophia Franco, a Senior accountant in the Tax and Assurance Department with Moore, Ellrich & Neal, P.A. in Palm Beach Gardens, has successfully completed the requirements to achieve the status of certified public accountant. She joined our firm in May 2005 after earning a Bachelors Degree in Finance from the University of Florida.  While completing an additional 50 hours of accounting courses, Sophia published a paper titled “The Tax Compliance”.
 CPA candidates must pass the Uniform CPA Examination which consists of a four-part examination: auditing and attestation; financial accounting and reporting; regulation/law; and business environment and concepts.
   Moore, Ellrich & Neal is a full-service accounting firm offering a comprehensive range of business and personal accounting services. The main office is located at 11025 R.C.A. Center Drive in Palm Beach Gardens. For information or to schedule an appointment, call (561) 624-0355, visit www.mencpa.com, or email Karen.Moore@mencpa.com .

The Wireless Tax Fairness Act, approved by voice vote, would only apply to new taxes imposed on wireless services and does not affect to those already in place. Supporters say wireless services are being unfairly taxed by states and localities compared with other services. They note that wireless customers pay an average of 16.3 percent in taxes and fees compared with the 7.4 percent average rate imposed on other goods and services.

"In many places, the taxation of wireless approaches or even exceeds the rates of sin taxes on goods like alcohol and tobacco," Rep. Zoe Lofgren, D-Calif., the bill's sponsor, said in a statement. "This legislation simply freezes existing discriminatory wireless taxes to help foster wireless networks as a platform for innovation and jobs growth."

Some state and local government groups, however, have voiced strong concerns with the measure, saying it would hamper their ability to raise revenues at a time when they are facing massive budget shortfalls.

" This legislation represents an unwarranted federal intrusion, as it carves out one sector of the communications industry for favorable tax treatment," according to a letter sent earlier this week to the committee from the National Association of Counties, U.S. Conference of Mayors and others.

The committee did adopt an amendment aimed at addressing some of these concerns by allowing a state or city to impose a new wireless tax if it is approved by the affected voters.

Meanwhile, in the Senate, Majority Whip Dick Durbin, D-Ill., is aiming to finally introduce his online sales tax bill before the August recess. A spokeswoman said he has been working to attract Democratic and GOP co-sponsors. The legislation is aimed at closing a loophole stemming from a 1992 Supreme Court decision that exempts retailers from having to collect sales taxes from customers in states where those companies do not have a physical presence. The decision initially applied only to catalog retailers but has since been extended to online sales. States say they are losing billions of dollars in revenues from uncollected online sales taxes.

Durbin's proposed bill would allow states that have signed on to a project known as the Streamlined Sales and Use Tax Agreement to require online retailers to collect sales taxes from customers even in states where those companies do not have a physical presence. The streamlined sales tax project was established by several states to try and simplify the differing sales tax regimes used across the country.

Some online retail groups have criticized the streamlined sales tax project, saying they have not gone far enough and that requiring online retailers to collect taxes on remote sales would impose a major burden particularly on small businesses.

Sen. Mike Enzi, R-Wyo., who has sponsored similar versions of Durbin's proposed bill in the past, told Tech Daily Dose earlier this week that he would like to see state and local governments do more to help attract support for the measure. Despite critics' claims, Enzi insisted that "it's not a new tax" but instead would allow states to collect sales taxes they are already owed.

By Juliana Gruenwald

W. David Ellrich, Jr., CPA, partner, Moore, Ellrich & Neal, PA in Palm Beach Gardens, was recently engaged in a high-stakes divorce case in the 20th Judicial Circuit in Southwest Florida.
He provided forensic accounting services for the legal team representing the wife, Linda Scott-Irwin, whose husband, James B. Irwin, a self-made millionaire, was attempting to conceal his widespread holdings across the United States, Europe and Asia.

After multiple depositions and discovery, Charlotte County Circuit Court Judge John Dommerich entered a temporary relief order on behalf of Scott-Irwin, 54, against her 73-year-old husband on September 15, 2009. He ordered an immediate $750,000 lump sum alimony payment, as well as fees and costs for her attorneys.

In his ruling, the judge said, “The court finds the husband’s testimony to be noncredible as it concerns the most significant issues in this case.”

In his first financial affidavit, Irwin admitted to ownership of more than $29 million in assets, said Ellrich. “However, the court found that Irwin owns many more assets than he had disclosed and that he used offshore entities to hold title to those assets in a manner designed to disguise his ownership.” Those assets included several homes in the U.S. and abroad, two yachts and numerous business entities.

Six days after Irwin was notified of the hearing’s outcome via telephone, he committed suicide at his home in Connecticut.

PALM BEACH GARDENS, Fla. (Jun. 14, 2011) – Moore, Ellrich & Neal are happy to congratulate Aimee Gross, Esq., Denise Jensen, Esq., and RT White  who have recently been Board Certified in Marital and Family Law.  A lawyer who is a member in good standing of The Florida Bar and who meets the standards prescribed by the state's Supreme Court may become board certified in one or more of the 24 certification fields. Seven percent of eligible Florida Bar members – about 4,400 lawyers – are board certified.  Certification is the highest level of evaluation by The Florida Bar of the competency and experience of attorneys in the 24 areas of law approved for certification by the Supreme Court of Florida.


Aimee Gross, Esq. was promoted to Junior Partner in 2010 at Young, Berman, Karpf & Gonzalez, P.A. in Miami where she continues to represent clients in issues involving family and marital law. She was listed as a Top Up and Comer in the 2008 and 2009 South Florida Legal Guide.
 







Denise Jensen, Esq. is an attorney at Gladstone & Weissman in Ft. Lauderdale. Ms. Jensen is the Chair of the Family Law Section of the Broward County Bar Association.  In June 2010, she received the Practice Section Chair Award in recognition of her outstanding leadership and guidance for the year 2009/2010.  Ms. Jensen is also active in the Family Law Section of the Florida Bar.





Ralph "RT" White of Schutz & White practices exclusively in the area of marital and family law, handling complex divorce cases, intricate prenuptial agreements, post-dissolution issues and other family law related matters, including appellate practice. He has successfully represented a broad range of clients by employing creative strategies for the cases he handles.

By The Associated Press

MOORE, ELLRICH & NEAL PRESENTING SPONSOR AT THE PALM BEACH COUNTY JUSTICE ASSOCIATION’S
11TH ANNUAL FISHING TOURNAMENT

PALM BEACH GARDENS, Fla. (May 18, 2011) – Moore, Ellrich & Neal are proud to be the presenting sponsor at this year’s Palm Beach County Justice Association’s (PBCJA) 11th Annual Fishing Tournament and After Party on May 20 - May 21, 2011. The Captain’s Meeting is on May 20th at 6:00 PM at Bradleys in West Palm Beach. The Fishing Tournament (7:30 AM - 3:00 PM) and after party take place on May 21st at Lake Park Harbor & Marina in Lake Park.
The tournament is a hallmark event for the PBCJA. Tournament boats and anglers will enjoy a day of competitive sports fishing and complete for a chance to win trophies and cash prizes. The after party festivities are fun for the entire family and will include foods, drinks, raffle drawings and an awards presentation.
The PBJCA will be donating a portion of the proceeds generated from this event to the International Game Fish Association a not-for-profit organization committed to the conservation of game fish and the promotion of responsible, ethical angling practices through science, education, rule making and record keeping. Children are encouraged to learn through the different educational outreach programs, IGFA school of sportfishing, IGFA fishing camps and much, much more.
Established in 1985, the Palm Beach County Justice Association (PBCJA) is dedicated to inspiring excellence in advocacy, upholding the honor and dignity of the legal profession, and encouraging the highest standards of ethical conduct and integrity of civil trial lawyers in Palm Beach County. To learn more about the Palm Beach County Justice Association visit: www.pbctla.org.

Moore, Ellrich & Neal is a full-service accounting firm offering litigation support and business valuation services along with a comprehensive range of business and personal accounting services. The main office is located at 11025 R.C.A. Center Drive in Palm Beach Gardens. For information or to schedule an appointment, call (561) 624-0355, visit www.mencpa.com, or email Karen.Moore@mencpa.com

-30-

The eight biggest global IPOs launched since January have a combined corporate value of $US75 billion, according to Dealogic, creating billions of dollars in wealth for company founders.

Even on its own, the initial public offering of Glencore will likely create six billionaires, marking the start of a new global wealth boom driven by rising financial markets and tech-sector euphoria.

The new generation of the ultra wealthy includes a Swiss medical-device tycoon and a California surfer who netted $US60 million from the sale of his clothing company.

The deals and IPOs mark the official return of the "liquidity event" -- a one-time windfall of cash that rains down on company founders or shareholders when they sell their stake. Liquidity events were common during the dot-com bubble of the late 1990s and the real-estate boom of the 2000s, when dot-com founders like Steve Case of AOL or later mortgage giants like Herbert and Marion Sandler cashed out of their companies for billions.
After the 2008 financial crisis, however, big liquidity events largely evaporated. While the latest wave is highly concentrated among a handful of social-networking and commodity companies, it's likely to spread to other industries as long as financial markets and economies continue to strengthen.

"The liquidity event is back, especially for these emerging technology companies," said George Walper, president of The Spectrem Group, a wealth research firm. "The question is whether it will broaden to cover more main street firms and brick-and-mortar entrepreneurs like we saw in the 2000s. It may take years for that to happen."

Much of the wealth creation is overseas. This week's public offering disclosures from Glencore, the Swiss commodity trading firm, valued the holdings of six of the firm's shareholders at as much as $US23bn. Chief executive officer Ivan Glasenberg's 15.8 per cent stake is potentially worth $US9.5bn.
This week's IPO of Renren, the China social-networking site, gave founder and CEO Joe Chen a net worth of more than $US1bn.

Such paper wealth may prove as ephemeral as the bull market.

During the dot-com boom of the late 1990s and early 2000s, companies like online grocery shopping service Webvan Group raised millions from IPOs, but quickly crashed because of falling markets and failed business strategies. They typically had high costs and low profits instead of the other way around. Webvan was valued at more than $US1bn at its peak, but was later forced to close.

In the US, technology companies are restarting the wealth engine, especially consumer Web companies. In a sign today's dot-com euphoria and flood of investment money may exceed the late 1990s, the founders are becoming paper billionaires even before an IPO or sale. Facebook, Zynga, Twitter and Groupon have all yet to go public, but their combined value from private investments and other deals now exceeds $US75bn.

Mark Zuckerberg leads the pack with a notional net worth of more than $US12bn. The company remains private and is expected to go public as early as next year. A private investment in the company by a group of investors including Goldman Sachs valued the company at $US50bn, making Mr Zuckerberg's 24 per cent stake worth more than $US12bn. Some investors have purchased shares on the private market that value the company at $US70bn.

Twitter late last year raised private money that valued the firm at $US3.7bn, giving the three founders paper wealth totalling hundreds of millions of dollars. Groupon, the discount deals business, has held talks that would value the firm as high as $US25bn.

Mark Pincus, CEO of online game developer Zynga, may also be on the way to becoming a billionaire. Recent investments in the company value the firm as high as $US10bn.

Some nontech entrepreneurs are also cashing in. Johnson & Johnson's deal to buy medical-equipment maker Synthes for more than $US21bn netted founder Hansjörg Wyss more than $US10bn from his 47 per cent stake.

French luxury-group PPR's deal to buy California surf-and-skate brand Volcom for $US607.5m represented a 37 per cent premium and netted $US60m for CEO Richard R. Woolcott, the 45-year-old California surfer who co-founded the company. The company's motto is "Youth Against Establishment".

TALLAHASSEE, Fla.

The Florida House has passed a bill to exempt online hotel booking companies from taxes on their price mark-ups that they consider to be service fees.

The bill passed 77-38 on Monday. It now goes to the Senate where a similar bill is stalled in committee.

The bill is supported by online companies such as Expedia, Travelocity and Priceline.

It's opposed by larger hotels that don't get the tax break because they do their own online bookings as well as counties and local tourist development agencies that say they are losing millions.

Several lawsuits have been filed over the issue in Florida and other states.

The bill's advocates argued that most services already are exempt from taxation in Florida.

Opponents said it would legalize tax cheating.

Monday, April 18th marks the Tax due date for 2011. With IRS extension and income tax federal forms being frantically mailed on the last day, many are questioning the hours of their local USPS. So is the post office open for late hours on tax day?

Apparently the answer is "no" for many United States Post Office locations. This due to the fact that e-filing and the latest tax preparation software are now available. Many websites will allow for taxpayers to file those extension forms online and free of charge.

According to a report at The Gainesville Sun, tax day was once a special event, with office hours extended until midnight.  There was even free pizza and a postal worker in an Uncle Sam costume.  Due to the increase in tax paperwork being filed and sent online, there's just not as much need for the post office.

The deadline for Gainesville's taxpayers to get their paperwork mailed is 7PM EST, but not all post offices will be open until such hour.  Should one need to get their taxes in the mail on Monday, it may be wise to consult the USPS locator.  Based on street address, or city or zip code, taxpayers can find nearby post offices that may have later hours.

Even though there aren't extended hours at all post offices, many people can just turn on their PC or laptop and e-file in the comfort of their home.  This convenience of the internet is certainly a time saver these days, and in the case of tax prep software, it's also a money saver.

Did you file your taxes yet?  Did you or will you use e-filing or old fashioned mail via the Post Office?

Tax rebates are being mailed out in droves and almost 52 million Americans have filed their 2010 income tax returns - and are eagerly awaiting that coveted rebate check. According to the IRS in March, the average refund is more than $3,000.

About 45 million people have received refunds averaging $3,129, with direct deposit refunds averaging $3,257, CNNMoney reported.

The average refund will probably drop because people getting the largest refunds usually file their tax returns earlier. Refunds a year ago averaged about $3,000.

"A lot of times people have their withholding taxes artificially high during the year and plan for this large refund to fund a vacation or car or something like that," said Robert Willens, a taxation professor at Columbia Business School. "Even though it's not a good economic thing to do since they're essentially making an interest-free loan to the government."

More people are filing returns online, while about 28 million people have had their taxes prepared by professionals this year.

Willens, who also is president of a tax-consulting firm, said the number of people preparing their own taxes online has increased 6 percent from the same period a year ago to 19 million.

"This is just part and parcel of the technology revolution," said Willens. "You can now take advantage of programs that take the mystery out of doing your taxes, so people are feeling that there's less need to hire an outside party, recognizing that the outside party will probably use the same programs."

The Internal Revenue Service has awarded a Pennsylvania accountant $4.5 million because he blew the whistle on his own employer — an act that "netted the IRS $20 million in taxes and interest," The Associated Press reports.

According to the AP, "the accountant filed a complaint with the IRS in 2007, just as the IRS Whistleblower Office opened, but heard nothing for two years." So he hired a lawyer to help push the case. That lawyer, Eric Young of Blue Bell, Pa., declines to identify his client or the company he worked for.

The whistleblower felt that his company, a financial services firm, had ignored his warning that it had failed to pay some taxes.

One bit of irony: While he's been awarded $4.5 million, the check sent to the accountant by the IRS was actually for $3.24 million, AP says.

He had to pay taxes on it.

Oh, and here's a reminder: Even if the federal government shuts down tonight, the deadline for filing federal incomes tax returns this year is still April 18.

Self-Select PIN Method

Taxpayers who are preparing their own returns using software must use the self-select PIN method. The self-select PIN allows taxpayers to select five numbers (except all zeros) to enter as their electronic PIN signature. The IRS still must verify the taxpayers’ identities. As part of the verification process, you must provide either your adjusted gross income listed on your 2009 tax return or your 2009 PIN used to e-file your return last year. It also will ask for date of birth. For joint returns, both taxpayers must create PINs using this method.

If you have never filed a tax return before, you can still use self-select PIN by using zero as your 2009 AGI. Do not leave this field blank. However, the space for the 2009 PIN should be left blank.

Practitioner PIN Method

Taxpayers who use a volunteer or paid tax preparer may use the practitioner PIN method or the self-select PIN method. The practitioner PIN method allows you to authorize your tax preparer to enter or generate your five-digit PIN on your behalf. You must sign Form 8879, IRS e-file Signature Authorization. The practitioner retains Form 8879 but does not mail it to the IRS. Some tax preparers may use an electronic signature pad for Form 8879 this year. Taxpayers who are age 16 and younger must use the practitioner PIN method.

IRS-issued Electronic Filing PIN

For taxpayers using the self-select PIN method but who cannot recall their 2009 adjusted gross income or their 2009 PIN, the IRS will issue a temporary Electronic Filing PIN (EFP.) This EFP can be used in place of the 2009 PIN and allow taxpayers to complete the self-select PIN method once their identity has been verified. Most tax software will contain a link to the EFP tool or you can search IRS.gov use keywords “ Electronic Filing PIN Request.” You also can use an automated, self-service telephone assistant by calling 1-866-704-7388.

Follow the instructions to receive your electronic filing PIN. Again, the IRS must verify your identity so you will need to provide some personal information and some tax-related information. You will need to know the filing status (i.e. single, married filing jointly, head of household, etc.) and the address used on your 2009 tax return.

The EFP will generate a five-digit number that you can substitute for your 2009 PIN. You can then return to the self-select PIN method, place the temporary EFP in the appropriate field and complete the signature process.

Ordering Your 2009 Tax Transcript

If you are unable to complete the EFP application and you cannot locate your 2009 tax return, you can order a transcript which will contain information such as your AGI that you can use to complete the self-select PIN method. There is no fee for a transcript.

The IRS has a new process for 2011 that allows you to order your transcript from IRS.gov. Just look for “online services” on the home page or search “Order a Transcript.” Your transcript will be sent to the address listed on the 2009 tax return. You also can call 1-800-908-9946 to order a transcript.

You can go to IRS.gov and print Form 4506T-EZ, Short Form Request for Individual Tax Return Transcript. The form can be completed and then faxed or mailed according to the form’s instructions. Generally, you do not need a copy of your exact tax return in order to complete the PIN process. Allow 7 to 10 days to receive the tax transcript.

Signing a joint return when spouse is not available

If your spouse is serving in a combat zone and you do not have power of attorney, you can still create a self-select PIN for your spouse and e-file the return. After e-filing your return, just submit a signed statement explaining your situation with Form 8453, U.S. Individual Income Tax Transmittal for an IRS e-file Return, and mail according to the instructions.

If you have power of attorney for a military spouse or anyone who must file a tax return, you can use the self-selection PIN method to sign their return. You must also attach the power of attorney to Form 8453 and mail both to the IRS. Again, you should follow the mailing instructions on Form 8453.

Form 8453 can be used to submit any required paper documents in support of your tax return.

Here are three important guidelines to keep in mind:

    * You are responsible and liable for the content of your tax return.
    * Anyone who promises you a bigger refund without knowing your tax situation could be misleading you, and
    * Never sign a tax return without looking it over to make sure it is accurate.

Beware of these common schemes:

Return Preparer Fraud:
Dishonest tax return preparers can cause many headaches for taxpayers who fall victim to their ploys. Such preparers derive financial gain by skimming a portion of their clients’ refunds and charging inflated fees for return preparation services. They attract new clients by promising large refunds. Choose carefully when hiring a tax preparer. As the saying goes, if it sounds too good to be true, it probably is. No matter who prepares your tax return you are ultimately responsible for its accuracy and for any tax bill that may arise due to a questionable claim.

To increase confidence in the tax system and improve compliance with the tax law, the IRS is implementing a requirement that all paid tax return preparers register with the IRS and obtain a preparer tax identification number (PTIN). Later this year, registered preparers will have to pass a competency exam and take continuing education courses.

Identity Theft:
It pays to be choosy when it comes to disclosing personal information. Identity thieves have used stolen personal data to access financial accounts, run up charges on credit cards and apply for new loans. The IRS is aware of several identity theft scams involving taxes or scammers posing as the IRS itself. The IRS does not use e-mail to contact taxpayers about issues related to their accounts. If you have any doubt whether a contact from the IRS is authentic, call 800-829-1040 to confirm it.

Frivolous Arguments:
Promoters have been known to make outlandish claims such as that the Sixteenth Amendment concerning congressional power to establish and collect income taxes was never ratified; that wages are not income; that filing a return and paying taxes are merely voluntary; and that being required to file Form 1040 violates the Fifth Amendment right against self-incrimination or the Fourth Amendment right to privacy. Don’t believe these or other similar claims. Such arguments are false and have been thrown out of court. Taxpayers have the right to contest their tax liabilities in court, but no one has the right to disobey the law.

For more information about these and other tax scams visit the IRS Web site at http://www.irs.gov. Remember that for the genuine IRS Web site be sure to use .gov. Don't be confused by internet sites that end in .com, .net, .org or other designations instead of .gov. The address of the official IRS governmental Web site is http://www.irs.gov.