409A valuation and mark-to-market reconciliation

409A valuation, as we know by now, is supposed to be a legally sound valuation, though some offshore companies would never get this concept due to the poor legal environments in their own countries. But what about the FAS 156/157 US GAAP mark-to-market accounting that venture capitalists and other institutional investors are supposed to maintain? Currently, the 409A valuation study and US GAAP mark-to-market valuation study are two different projects. We are not sure how this can be the case. In a 409A valuation, not only is the minority common stock valued, but the pre-discount(if any discounts are allowed at all for institutional stock) values of institutional investor held preferred stock is also valued. Shouldn't this preferred stock value reconcile with the mark-to-market accounting of preferred stocks in a portfolio held by VCs? I believe the jury is out on this one and there is no clear cut direction from the FASB or the audit firms. One line of thinking is that companies are private for a reason, and should not be subject to such reconciliations. But if the fair market value definitions of both 409A and US GAAP mark-to-market accounting are the same, I am unable to see why there should be two different valuations. 409A valuations, for the most part, mark down the valuation offered by VC firms during a term sheet financing, as a VC financing valuation cannot be fully supported as the only method of valuation. Therefore, there is a conflict right away in that VCs have to mark down their portfolio values.I see this as an area of conflict in the future and currently we are unable to determine which way the tide will turn.

IRC 409A tax court cases

With some of the first court cases appearing in the 409A area (See Slater vs Commissioner of Internal Revenue at http://www.leagle.com/unsecure/page.htm?shortname=in20100111d35), it is time to assume that the IRS is auditing 409A provisions and associated valuations. It is in this background we have to note the mushrooming of firms in this area. It has come to our notice that several firms are getting the work done overseas and in fact there are foreign firms offering these services in the US. One of the main issues with working in an outsourced manner is the lack of an expert that can be relied upon as expert testimony in such cases. As we all know, the IRS imposes penalties if the tax liabilities have not been measured under a fair market value standard under the 409A regulations. Given the size of IRS penalties and the nature of add-on penalties, it is important to work with US based firms that have a good understanding of the legal systems here, an understanding of what it takes to be an expert witness and have solid relationships with audit firms. We have been concerned a bit by the outsourced model, where foreign analysts compute and calculate the valuations with no experts out here to back such values. While costs are a major factor for start-up companies in getting this work done, firms such as ours have used technology extensively to negate the cost savings arising from an outsourced model. Given that we fully back our valuations and our principals have been subject to audit processes,  we believe that we offer the best possible affordable service in this area.