Summer 2010
Focus on Forensic Analysis and Dispute Resolution
Editor for This Issue: Robert P. SchweihsDispute Resolution Insights
Thought Leadership Article:
The Value of an Expert Witness
Robert J. Shaughnessy, Esq.
Trying a lawsuit is much more than letting the facts speak for
themselves. Regardless of the size of the case, every trial involves real people with a
real story. Expert witnesses can play an important role in telling the story.
Best Practices Article:
Measuring Lost Profits Economic
Damages on a Pretax Basis
Robert P. Schweihs
The judicial remedy for many commercial disputes is an award of
economic damages related to lost profits. In many situations, the judicial award of lost
profits-related economic damages may be calculated on a pretax basis.
How to Approach Federal Estate and
Gift Tax Valuation Disputes
Robert M. Kane Jr., Esq. and Hugh J. Davis, Esq
Many estate and gift tax disputes with the Internal Revenue Service
involve the valuation of assets. In these disputes, the most successful taxpayers rely on
experienced legal counsel. And, the most successful legal counsel know when and how to
rely on experienced valuation analysts.
Valuing
Derivatives and Share-Based Compensation for Marital Dissolution Purposes
Robert P. Schweihs
As an asset of the marital estate, derivatives and share-based
compensation are subject to special consideration. Restricted stock, stock appreciation
rights, and employee incentive stock options often require some future event to occur
before they vest. And, once vested, they are often subject to restrictions on
transferability. Various important dates (employment, grant, vesting, exercise,
expiration) affect the value of these securities to the marital estate. Valuation
analysts should be aware of the unique characteristics of these securities and of the
effect of such characteristics on the value to the marital estate.
Fire Sale! When Presented with an
Offer to Buy a Distressed Company, What Challenges and Risks Do Directors Face?
Rob Adel, Esq. and Gabriel M. Willhite, Esq.
In this economic environment, debtor corporations continue to
struggle to stay afloat. Normally, the board of directors owes a duty to the corporation
and to the corporation shareholders. But, that duty can shift to the creditors of the
corporation. Transaction opinions regarding (1) the solvency of the debtor corporation
and/or (2) the fairness of the proposed transaction may be what the board of directors
need to demonstrate that it has properly discharged its duties.
Warning Cloud
Alan S. Wernick, Esq.
There are many benefits available to companies that convert their
information technology systems to cloud computing. However, there are many legal issues
to consider before converting. One issue that is frequently overlooked is the e-discovery
implications.
Valuation Analyst
Guidelines Related to Bankruptcy Expert Reports and Expert Testimony
Robert F. Reilly, CPA
This discussion summarizes what the valuation analyst should know
about the standards for the admissibility of expert reports and expert testimony in the
bankruptcy court.
Income Tax Valuation Insights
Income Tax Consequences of an Executive's Purchase of Close Corporation
Stock
Robert F. Reilly, CPA
Family-owned and other closely held corporations often have
difficulty recruiting and retaining top executive talent. Public corporations can more
effectively attract the top executive talent. This is because public corporations can
compensate their senior executives through the use of equity-based compensation (e.g.,
stock, stock options, stock appreciation rights, etc.). To "level the playing field" with
regard to recruiting and retaining executive talent, many close corporations allow senior
executives to purchase the closely held company stock. Such stock purchases both provide
financial motivations to executives and align executive goals with shareholder goals.
However, such executive purchases of close corporation stock should be carefully
structured. This statement is particularly true if the close corporation provides a loan
to help the executive finance the stock purchase. Without proper planning, such stock
purchases could have negative income tax consequences, both to the executive employee and
to the close corporation employer.
Valuation Analysts, Tax Valuations, and the Section 6662 Accuracy-Related
Penalty
Robert F. Reilly, CPA
Section 6662 imposes a 20 percent penalty on any underpayment of
federal tax resulting from certain specified taxpayer actions (including over-valuations
and under-valuations). Valuation analysts are often called upon to perform valuations for
federal taxation purposes (including income tax, gift tax, estate tax, or employment
tax). Therefore, both taxpayers and valuation analysts should be generally aware of the
application of the Section 6662 accuracy-related penalty with regard to taxation-related
valuations.
ESOP Valuation Insights
Cash Distributions to an ESOP Used to Redeem Employer Stock Are Not Deductible as
Dividends
Robert F. Reilly, CPA
The Third Circuit has now joined the Eighth Circuit in a judicial
ruling related to cash distributions to an employee stock ownership plan (ESOP). In the
Conopco, Inc. decision, the Third Circuit concluded that, even if a cash payment to
redeem an ESOP account is an otherwise deductible dividend within the meaning of Internal
Revenue Section 404(k), an employer corporation is barred by Section 162(k)(1) from
deducting that payment if it is made in connection with the reacquisition of its own
stock. In a 2009 decision in the Conopco, Inc., case, the Third Circuit agreed with the
2007 District Court decision barring the income tax deduction. The Third Circuit also
noted that the stock redemption and the cash distribution must be treated as a single
transaction. The Appeals Court noted that this single-transaction conclusion, while
followed by the Eighth Circuit in General Mills and by the Tax Court in Ralston Purina
Co. v. Commissioner, is contrary to the Ninth Circuit decision in the Boise Cascade case.
Intangible Asset Valuation Insights
Opening the Kimono on Contract
Valuation
David Wanetick
Valuation analysts are often called on to value the contract and
expected contract renewal intangible asset. These valuations are performed for a variety
of accounting, taxation, transaction, financing, regulatory, litigation, and other
purposes. There are generally accepted approaches, methods, and procedures related to the
valuation of this contract-related intangible asset. In this discussion, the author
proposes a de novo valuation method for the valuation of commercial contracts. This de
novo valuation method applies the income approach to intangible asset
valuation.
Valuing Real Estate Fractional
Ownership Interests
Katherine A. Gilbert and C. Ryan Stewart
Intangible asset valuation analysts are often called on to perform
fair market value valuations of real estate undivided ownership interests (also called
fractional ownership interests). Many of these real estate undivided interests are owned
by holding companies or by high net worth individuals. Accordingly, those real estate
fractional ownership interests may need to be valued for federal gift or estate tax
compliance purposes or for intergenerational wealth transfer and estate planning
purposes. This discussion provides an explanation of the defining characteristics of real
estate fractional ownership interests. And, this discussion introduces (1) the valuation
approaches and methods, (2) the relevant judicial precedent, and (3) the investment risk
and expected return factors that the intangible asset valuation analyst should consider
when valuing these types of fractional ownership interests.