Autumn 2013


Focus on Gift and Estate Taxation

Editor for This Issue: Aaron M. Rotkowski
Taxation Planning and Compliance Insights

Thought Leadership:
Making GRATs GREAT for Tax-Free Wealth Transfers

Darin Christensen, Esq
When implemented in an effective and timely manner, a series of grantor retained annuity trusts (each a “GRAT”) can be used to transfer as much of an individual’s wealth as desired without any significant gift or estate tax cost. The performance of a GRAT is significantly affected by the taxpayer’s choices about the term, annuity stream, and assets transferred. This discussion provides an overview of GRATs and summarizes several planning strategies to make GRATs even more effective.

Best Practices:
Introduction to the Internal Revenue Service’s “Parallel” Investigations

Marc K. Sellers, Esq.
The nature, purpose, and impact of an Internal Revenue Service (the “Service”) audit investigation are not always apparent to the taxpayer or the taxpayer’s representatives (e.g., attorney or accountant). This discussion summarizes the Service’s criminal investigation capabilities and techniques, and it provides guidance regarding the Service’s recent practices in “parallel” civil and criminal tax investigations.

Tax and Estate Planning Lessons from a Galaxy Far, Far Away
Glen Goland, Esq.
As an estate planning attorney, the author sees individuals who look like Darth Vader every day. They may not wear the mask and cape, but many have unconventional families, own unconventional assets, and have no estate plans. This discussion analyzes the estate of Darth Vader after his death in Return of the Jedi. And, this discussion considers other lessons that taxpayers can learn from Star Wars to ensure that their own tax and estate planning is in order.

Current Controversies Regarding Option Pricing Models
Aaron M. Rotkowski and Michael A. Harter
Option pricing models (OPMs) are increasingly used to estimate the discount for lack of marketability (DLOM) in the business valuation profession. Some analysts disagree about whether OPMs are applicable for estimating the DLOM. Since OPMs were originally derived to determine option prices for publicly traded securities, many analysts question the merits of applying them to closely held securities. This discussion explores the controversies of applying OPMs to estimate the DLOM for nonmarketable securities.

Understanding the Allowable Interest Expense Deduction for Graegin Loans within the Gift and Estate Tax Context
Justin M. Nielsen
Effective communication between the valuation analyst and estate counsel is important to identify all potential deductions from the gross estate to arrive at a final taxable estate value. This discussion summarizes the role of the valuation analyst in providing estate and gift tax services. This discussion reviews the regulations associated with certain estate deductions, including interest expense deductions for so-called Graegin loans. And, this discussion considers two recent court decisions regarding Graegin loan interest deductions.

The Often Overlooked Income Tax Rules of Life Insurance Policies
Donald O. Jansen, Esq., and Lawrence Brody, Esq.
Life insurance is a unique product that provides needed liquidity during the lifetime and at the death of the insured. It is useful in business and estate planning and can be a wealth creation or wealth transfer vehicle. The taxation of life insurance proceeds is complex and subject to certain exemptions. It is important to be familiar with the particular life insurance rules in order to avoid unexpected income tax consequences. This discussion summarizes some of the unique income tax attributes associated with life insurance policies and the tax planning strategies that involve life insurance.

The Private Company Discount Based on Empirical Data
Kevin M. Zanni
Valuation analysts attempt to improve the quality of valuation reports in order to provide a more transparent work product for the report audience. One challenge for many business valuation reports is to effectively communicate the value of a nonmarketable equity interest, particularly the rationale for the selected discount for lack of marketability (DLOM). One means to support the DLOM selection is reliance on transaction pricing studies. These studies show that private companies typically sell at a price discount compared to otherwise comparative public companies. This phenomenon may be because private companies are illiquid and, therefore, sell at transaction pricing multiples that reflect this illiquidity (i.e., DLOM). This discussion summarizes the empirical data that may be used to quantify the private company valuation discount.

Judicial Decision Insights

Same-Sex Marriages—The Quagmire Continues after Windsor
Alan K. Davis, Esq., and Charles D. Pulman, Esq.
On June 26, 2013, the U.S. Supreme Court struck down as unconstitutional Section 3 of the federal Defense of Marriage Act. This decision extended for the first time a myriad of federal benefits, rights, and privileges to same-sex married couples. The breadth, applicability, and consequences of this decision, however, are uncertain. For same-sex married couples living in states that recognize same-sex marriages, the Supreme Court decision has immediate consequences, but its retroactive application is uncertain. For same-sex married couples that live in states that do not recognize such marriages, the Supreme Court decision apparently has immediate consequences in some—but not all—areas, depending on the particular federal agency. Several federal agencies have responded to this decision. For example, the Internal Revenue Service issued Revenue Ruling 2013-17 on August 29, 2013. At this time, same-sex couples should carefully analyze their particular situation to determine what steps should be taken to take advantage of this development.

Estate of John F. Koons III v. Commissioner
Aaron M. Rotkowski
Tax counsel and valuation analysts should be mindful of the guidance in the recent Tax Court decision Estate of John F. Koons, III v. Commissioner. The issues addressed in this case include (1) the appropriate selection of a discount for lack of marketability (DLOM) and (2) the deductibility of interest expense related to a loan made from the taxpayer’s company to the taxpayer (the estate). This discussion summarizes these issues.

Wandry v. Commissioner: Landmark Guidance on Formula Gifts between Family Members
Katherine A. Gilbert and C. Ryan Stewart
In certain cases, formula-driven gift giving plans have proved to be successful. In other cases they have not. What characteristics differentiate a formula gift giving plan that can withstand the Internal Revenue Service (the “Service”) scrutiny and be upheld in Tax Court from a plan that gets defeated in Tax Court? The Wandry decision1 provides insight into these questions and highlights issues that taxpayers and tax advisers should consider when structuring and implementing a gift giving plan. This discussion summarizes (1) the facts of the Wandry case, (2) the Service’s arguments, and (3) the Tax Court decision.

Economic Damages Insights

The Rule of Law Overrules the Rule of Thumb
Robert P. Schweihs
A popular rule of thumb formula often used by analysts to establish a baseline royalty rate for a patent has been discredited by the Federal Circuit in a recent patent infringement case. Individuals who previously relied on that rule of thumb should consider alternative methods to arrive at a reasonable royalty rate. This discussion describes the rule of thumb and the alternative methods to measure economic damages in a patent infringement case.