Summer 2012

Focus on Gift and Estate Tax Issues

Editor for This Issue: Robert P. Schweihs Gift and Estate Tax Valuation Insights

Thought Leadership:
The 2011 Proposed Alternate Valuation Date Regulations

Nathan Honson
The alternate valuation date provides relief from estate taxes if the fair market value of the assets held by the estate has declined during the six-month period following the date of death. In late 2011, the Internal Revenue Service issued proposed regulations that were intended to discourage taxpayers from avoiding taxes by voluntarily maneuvering the estate’s assets during the six-month period. The 2011 proposed regulations need considerable refinement and change in order to achieve their apparent goals and to be workable for taxpayers

The AFR and the Value of Debt
Robert P. Schweihs
Gift and Estate Tax Valuation Insights When a promissory note that was established at the prevailing applicable federal rate (AFR) is recapitalized at the current, lower AFR, is there a gift tax consequence?

Estate Planning with Conservation Easements
Kimberly E. Civins, Esq., and Tiffany N. McKenzie, Esq.
There are many attractive tax incentives available to property owners who create and donate a conservation easement. Property that is burdened by a conservation easement can also help with the property owner’s estate planning.

Valuation Adjustment for Built-in Capital Gains in a C Corporation
Robert P. Schweihs
Income taxes that will be due on the appreciation in the value of assets owned by a business can affect the value of an ownership interest in that business. This discussion demonstrates that, under most circumstances, every dollar of built-in gains taxes in a C corporation (even though payment of those taxes is not due until the asset is sold in the future) reduces the value of the C corporation by one dollar.

Voting Stock and Nonvoting Stock: Allocating Equity Value
Aaron M. Rotkowski
Business valuations performed for gift tax or estate tax purposes often involve the valuation of companies that are capitalized with both voting stock and nonvoting stock. In these situations, the analyst should perform two additional procedures that would not be required if the company was capitalized with only one class of stock: the analyst must (1) estimate a premium for voting rights (or a discount for lack of voting rights) and (2) allocate value between the company’s voting stock and nonvoting stock. This discussion addresses the second additional procedure. Specifically, this discussion presents two methods that the valuation analyst can use to allocate value between a company’s voting stock and nonvoting stock. This discussion also explores the strengths and weaknesses of those two equity allocation methods.

The Estate of Gallagher: The Tax Court’s Valuation Is a Smorgasbord
Katherine A. Gilbert and C. Ryan Stewart
When a valuation analyst presents inconsistent, confusing, or inadequately supported assumptions and conclusions, the Tax Court can adopt certain pieces of the expert’s analysis and reject or disregard other pieces of the expert’s analysis. While the valuation analyst opinions are presented to the Tax Court for consideration, the Tax Court is not restricted to the opinions presented. Very rarely does the Tax Court accept all of the supporting analysis of a valuation expert’s opinion. The Estate of Gallagher v . Commissioner demonstrates how the Tax Court selects and rejects certain portions of valuation expert reports. And, this judicial decision reveals the Tax Court’s views on topics of interest to taxpayers, attorneys, and valuation analysts.

Practical Guidance on Valuation Practices and Procedures from the Estate of Mitchell Decision
Robert F. Reilly, CPA
In the Estate of Mitchell, the Tax Court concluded the value of a decedent’s estate that included unique real estate and artwork assets. What is particularly noteworthy about this judicial decision is the Tax Court’s practical guidance (to both taxpayers and valuation analysts) with regard to tax-related valuation practices and procedures.

The Value of a Valuation Formula
Robert P. Schweihs
A valuation formula is often relied on by closely held business owners to manage the business and to conduct transactions involving the ownership transition of the business equity. The Internal Revenue Service is not obligated to agree with the results of a valuation formula. The long-term investment perspective, usually one of the primary reasons why a valuation formula is preferred, should also be considered in an independent valuation.

IRS Office of Chief Counsel Promulgates Guidance on the Application of the Valuation Overstatement Penalty
Robert F. Reilly, CPA
Internal Revenue Code Section 6662 applies accuracy-related penalties that relate to overvaluations resulting in tax underpayments. Historically, the Service has not enforced those penalties in tax controversy cases where the taxpayer conceded the tax deduction or tax credit on grounds other than the overvaluation. In 2011, the Service’s Office of Chief Counsel issued two pronouncements on this issue. According to both pronouncements, the Service will pursue the application of the overvaluation penalty even if the taxpayer concedes the merits of the disputed tax issue before trial on grounds unrelated to valuation.

Forensic Analysis Insights

Best Practices:
The Relationship between the Attorney and the Valuation Analyst

Robert P. Schweihs
Too often in litigated matters the attorneys are surprised and the valuation analysts are disqualified. Standards of conduct between the attorney and the valuation analyst have been established to avoid the risk of losing a decision or of delaying the proceedings because information has been inadequately disclosed.

How to Be an Effective Expert Witness: A Tutorial
Robert F. Reilly, CPA
On February 2, 2012, Robert Reilly presented a webinar on “How to Be an Effective Expert Witness” for the American Institute of Certified Public Accountants (AICPA). This webinar was the 17th and final presentation in the AICPA’s Business Valuation Webinar series. At the conclusion of the webinar, several of the attendees submitted written questions for follow-up discussion. With minor modification and editing, this discussion presents these webinar questions—and the associated answers—related to “how to be an effective expert witness.”

Income Tax Discharge Considerations in an Individual Debtor’s Chapter 7 Bankruptcy
Robert F. Reilly, CPA, and Ashley L. Reilly
Many professional practitioners and small business owners consider a Chapter 7 bankruptcy filing in order to discharge their income tax liabilities. The tax liability discharge rules are complex. This discussion summarizes the costs and benefits of an income tax discharge through the process of a Chapter 7 bankruptcy filing

Ad Valorem Property Tax Insights

Functional Obsolescence and Economic Obsolescence Considerations in the Property Tax Valuation
Robert F. Reilly, CPA
Rapid technological changes have caused many industrial and commercial properties to experience functional obsolescence. The prolonged weak economy has caused many industrial and commercial properties to experience economic obsolescence. Taxpayer property owners should recognize such obsolescence in the valuation of their complex, special purpose properties and, if appropriate, appeal their ad valorem property tax assessments. This discussion summarizes considerations for the taxpayer property owner (and for the valuation analyst) with regard to both the identification and the quantification of obsolescence at large scale industrial and commercial properties.