Winter 2016
Focus on Gift Tax, Estate Tax, and Generation-Skipping Transfer Tax Valuation
Editor for This Issue: Fady F. Bebawy
Gift and Estate Tax Valuation InsightsBest Practices:
Reviewing the Service’s Job Aid on the Valuation of Noncontrolling Ownership Interests in S Corporations
Curtis R. Kimball
Valuation analysts often search for ways in which to perform valuation analyses that
provide conclusions of value that are reasonable and supportable. However, a supportable
conclusion may not be immediately recognized as such. Valuation conclusions will
be accepted as valid if the trier of fact is in agreement with the supporting methods,
assumptions, and other inputs into the valuation and if this “evidence” points the reader
or trier of fact to the same conclusions. Understanding where the Internal Revenue Service
auditors are coming from is helpful to all valuation analysts whose work will come under
their review. The Service’s Job Aid is a framework relied upon by the Service in its review of tax valuations. This discussion provides information that valuation analysts may consider
while preparing their valuation analyses.
Proposed Regulations Related to Section 2704 and the Case for Applying FLP Valuation Discounts
Weston C. Kirk
Over the past 20 years, the Internal Revenue Service has argued that valuation discounts
applied in the transfer of family limited partnership and of other family-controlled holding
entity ownership interests are “constructed” solely to avoid intergenerational wealth
transfer, gift, estate, and generation-skipping transfer taxes. The legal profession and the
valuation profession have argued the opposite position: that is, that valuation discounts
applied in family wealth transfers are prudent, legitimate, and market-based. This discussion considers (1) proposed regulations with respect to Section 2704 and (2) the case for applying FLP valuation discounts.
Thought Leadership:
Estimating Capital Expenditures and Depreciation Expense in the Direct Capitalization
Aaron M. Rotkowski and Matt C. Courtnage
Valuation analysts often rely on the income approach to estimate the value of operating
companies for gift tax, estate tax, and generation-skipping transfer tax purposes. Two
closely held business valuation variables that analysts frequently estimate when performing
the business valuation income approach are (1) the projected capital expenditures and (2)
the projected depreciation expense. These two valuation variables are related to one another
and to other income approach valuation variables. This discussion considers the relative
valuation impact of capital expenditures and depreciation expense, especially with regard to
various projected growth rate assumptions.
Measuring the Discount for Lack of Marketability for a Controlling, Nonmarketable Ownership Interest
Nathan P. Novak
A valuation analyst often has to value a controlling ownership interest in a closely held company for various taxation-related reasons. In such analyses, the analyst may initially conclude the value of a controlling, marketable ownership interest in the subject business entity. If this is the case, the analyst may have to apply a valuation adjustment to this initial value indication in order to conclude the value of the subject controlling, nonmarketable ownership interest. This discussion considers the factors that the analyst typically considers to measure the discount for lack of marketability (DLOM) related to the valuation of a controlling, nonmarketable level of value in the closely held business ownership interest.
Measuring the Discount for Lack of Marketability for Noncontrolling, Nonmarketable Ownership
Interests
Nathan P. Novak
Valuation analysts are often asked to value noncontrolling, nonmarketable ownership
interests in closely held companies. These valuations may be performed for gift tax,
estate tax, generation-skipping transfer tax, income tax, property tax, and other taxation
purposes. Depending (1) on the valuation approaches and methods applied and on (2)
the benchmark empirical data used, these analyses may initially conclude the valuation of
a noncontrolling, marketable ownership interest. In such instances, analysts often have to
apply a valuation adjustment to these initial (i.e., marketable) value indications in order
to reach the final (i.e., nonmarketable) value conclusion. This discussion summarizes the
various factors that analysts typically consider in the measurement of a discount for lack of
marketability (DLOM) associated with a noncontrolling, nonmarketable closely held business
ownership interest.
Distinguishing Personal Goodwill from Entity Goodwill in the Valuation of a Closely Held Corporation
Robert F. Reilly, CPA
The valuation of a closely held corporation often has gift tax, estate tax, and
generation-skipping transfer tax implications. In addition, the valuation of a closely held
corporation often has income tax implications. In these tax-related instances, it is often
important for the business owners (and for their professional advisers) to allocate the
total enterprise value (or the total transaction consideration) between (1) the companyowned
entity goodwill and (2) the individual shareholder/employee-owned personal
goodwill. This discussion summarizes the valuation analyst considerations with regard to
the elements of, the separability of, and the documentation of a shareholder/employee’s
personal goodwill.
Closely Held Business Goodwill Valuation Approaches and Methods
Robert F. Reilly, CPA
Valuation analysts are often called on to value closely held entity goodwill for various gift tax, estate tax, or generation-skipping transfer tax purposes. Analysts may also be asked to value the business entity goodwill for income tax or property tax purposes. These entity goodwill valuations may be performed for tax planning, tax compliance, or tax controversy purposes. This discussion summarizes the generally accepted approaches and methods that analysts typically consider in the valuation of business entity goodwill.
Symposium—What Estate and Trust Counsel Say About the Current State of Estates and Trusts
Fady F. Bebawy
This Insights symposium presents a series of questions and answers between our Insights
issue editor and a panel of distinguished and seasoned estate and trust counsel from
across the United States. These legal counsel practice in the area of estate planning, trust
administration, and transactional matters. These legal counsel share their experience and
expertise with regard to judicial developments in estate planning, estate administration,
estate tax compliance, and estate tax controversies.
S Corporation Buyers and Sellers Should Consider Making a Section 338 Election
Robert P. Schweihs
There are a variety of factors that buyers and sellers consider when deciding whether the
acquisition of a 100 percent ownership interest in the target company should be structured
as a stock acquisition or as an asset purchase. If the target company is an S corporation,
there may be a federal income tax election that achieves the best of both worlds. In certain
circumstances, the acquisition of the target company equity may be treated as a purchase of
the target company assets for federal income tax purposes. That federal income tax election
could favorably impact (1) the after-tax sale proceeds to the target company seller and (2)
the after-tax cost to the target company buyer.
Valuation of Contract-Related Intangible Assets
Robert F. Reilly, CPA
The valuation of contract-related intangible assets is often an issue in matters related to
income tax, gift tax, estate tax, generation-skipping tax, and property tax. This discussion
explains the different types of contract intangible assets. This discussion summarizes the
generally accepted approaches and methods related to the valuation of contract intangible
assets. Finally, this discussion presents an illustrative example of the valuation of the
hypothetical Taxpayer Corporation contract intangible asset.
Structuring the Selling Employee/Shareholder Transition Period Payments after a Closely Held Company Acquisition
Robert F. Reilly, CPA
Corporate acquirers often acquire closely held target companies. In such acquisitions, it is
common for the corporate acquirer to want to retain the services of the target company
selling employee/shareholders. This discussion summarizes the many reasons why corporate
acquirers would want to retain the selling employee/shareholders’ services during some
post-acquisition transition period. However, both the structuring and the characterization
of such transition period payments have income tax consequences both (1) to the corporate
acquirer and (2) to the selling employee/shareholders. This discussion explains those income
tax consequences to both transaction participants.