Summer 2010


Focus on Forensic Analysis and Dispute Resolution

Editor for This Issue: Robert P. Schweihs

Dispute 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.