Autumn 2014
Focus on Health Care Valuation Insights
Editor for This Issue: Fady F. Bebawy
Gift Tax, Estate Tax, and Generation-Skipping Tax Valuation Insights
Fady F. Bebawy
This introductory discussion summarizes all of the discussions presented in this autumn
2014 issue of Insights. The discussions cover the intergenerational wealth transfer
management continuum. The discussions are prepared and presented by a mix of (1)
trust and estate attorneys covering various topical legal issues and (2) business valuation
analysts and financial advisers from Willamette Management Associates covering aspects of
the judicial process and a number of topical valuation issues. These valuation issues affect
just about every valuation analysis (1) attached to a federal gift tax and estate tax return
or (2) challenged by the Internal Revenue Service (the “Service”). Such valuation issues are
commonly the subject of dispute in cases that go before the federal courts.
Important Considerations in Intra-Family Loans
Michael L. Van Cise, Esq., and Kathryn Baldwin Hecker, Esq.
Intra-family loans can be an effective estate planning tool in a variety of circumstances.
Practitioners need to be aware of both federal tax law requirements and state law
requirements when structuring an intra-family loan.
Thought Leadership:
Digital Assets in Estate Administration: Concerns and Considerations for Fiduciaries
Glen Goland, Esq.
Estate fiduciaries increasingly encounter “digital assets” in estate administrations. Digital
assets are electronically stored information, which may have sentimental value (such as
photo files), monetary value (such as a blog that generates advertising revenue), or both.
For estates with digital assets, fiduciaries should properly value such assets and report the
values to the Service and in the probate filings. But the unique characteristics of digital
assets—including that many are subject to the terms and conditions of terms of service
agreements—create challenges in accounting for this new category of assets. Fiduciaries
are also subject to potential liability for attempting to gain access to a decedent’s digital
accounts and property. The federal anti-hacking laws contained in the Computer Fraud and
Abuse Act (as well as individual state’s anti-hacking laws) and the federal privacy protection
laws contained in the Stored Communications Act create obstacles for fiduciary access. For
example, fiduciary use of a decedent’s password to access an e-mail account may expose
the fiduciary to both civil and criminal liability. Despite these challenges, certain steps taken
during a person’s life can ease the transfer of digital assets at death.
Guide to Intangible Asset Valuation by
Robert F. Reilly and Robert P. Schweihs
Roger J. Grabowski
When I first opened the book, the scope of the
book as shown in the table of contents immediately
brought back memories of the numerous intangible
asset valuations that I have had the opportunity to
prepare over my nearly 40 years in the valuation
profession.
The Perils and Prospects of Portability
Jeffrey M. Cheyne, Esq.
With the passage of federal tax relief laws in recent years, the porting of unused federal
estate tax exemptions has proven to be an important federal estate tax saving strategy,
especially among individuals who have accumulated substantial wealth. This discussion
considers the changing legal landscape, requirements for federal portability elections, the
status of portability under state law, complications with portability. This discussion also
presents some helpful practitioner guidance and tips.
The U.S. Tax Court Process: Practical
Guidance for Valuation Analysts
Samuel S. Nicholls
After a determination of deficiency by the Internal Revenue Service, a valuation analyst
may be engaged and called upon as an expert witness to submit direct testimony to
the U.S. Tax Court. Direct testimony often consists entirely of the written report. It is on
cross-examination, redirect examination, and rebuttal testimony that the expert witness
is challenged to demonstrate oral and cognitive abilities that are a bit different from
routine professional endeavors. Legal counsel often have difficulty finding a suitably
experienced, even-keeled, and apt testifying expert.
Tax Court Guidance Regarding
Petitioner and IRS Valuation Analysts—
Understanding What to Do and What
Not to Do When Valuing a Closely Held
Business within the Gift, Estate, and
Generation-Skipping Tax Context
Stephen P. Halligan and Michael A. Harter
The U.S. Tax Court regularly provides guidance as to appropriate petitioner valuation
analyst and Internal Revenue Service (the “Service”) valuation analyst analysis, specifically
as it relates to valuing closely held businesses within the federal gift tax and federal estate
tax context. Understanding why the Tax Court views certain analyses and reports more
favorably than others is crucial when conducting a closely held business valuation for gift,
estate, and generation-skipping tax purposes. This discussion (1) summarizes the valuation
analyst’s role within the gift and estate tax context, (2) highlights several recent court
decisions related to the valuation analyst’s role within the gift, estate, and generationskipping
tax context, and (3) provides insights into the court’s expectations as they relate to
petitioner valuation analyst and Service valuation analyst opinions.
The Treatment of Management Projections
That Require Analyst Input
Kevin P. Carey
Management-prepared financial statement projections are an important component of
the income approach to business valuation, specifically the discounted cash flow valuation
method. And, the discounted cash flow valuation method is frequently used and assigned
material weighting in the business valuation performed for gift tax, estate tax, and
generation-skipping tax purposes. This discussion considers how to approach managementprepared
projections when the valuation analyst considers them to be of low quality—or
not reflective of the subject company’s true risk profile.
Valuation of Licenses and Permits
Robert F. Reilly, CPA
Valuation analysts are often called on to perform valuations of the licenses and permits
category of intangible assets for various gift, estate, and generation-skipping tax purposes.
This discussion describes the different types of licenses and permits, summarizes the
applicable generally accepted intangible asset valuation approaches and methods, and
reviews the factors that valuation analysts generally consider in the intangible asset
valuation. In addition, this discussion presents a simple illustrative example of a license and
permit valuation analysis.
Best Practices
Considerations in Applying Multilevel
Discounts to Tiered Entities
Weston C. Kirk
Multilevel valuation discounts applied to multitiered entity ownership interests are often
subject to dispute. Complex ownership interests considered as part of a gift, estate, or
generation-skipping tax valuation may involve multitiered ownership interests. Therefore,
the valuation of these tiered ownership interests may incorporate multilevel valuation
discounts for (1) lack of control, (2) lack of marketability, (3) lack of voting rights, and/
or (4) other valuation adjustments (e.g., market absorption). The valuation of multitiered
interests should take into consideration many factors, including, but not limited to, (1) prior
court decisions involving the transfer of multitiered ownership interests, (2) the standard
of value and the purpose of the analysis, (3) the level of value of the ownership interest
being valued at each tier, (4) the risks associated with the assets held by the tiered entity,
(5) the risks associated with the contractual restrictions of tiered ownership interests, (6)
the avoidance of double discounting, and (7) the overall reasonableness of the discounts
applied to reach the value conclusion of the subject interest. These considerations should
be made during the valuation analysis to develop reasonable support for the valuation
conclusion and, thus, the value at which the subject interest may be exchanged.
Fair Market Value and Blockage
Discounts: When the Market Doesn’t Give
You the Answer
Charles A. Wilhoite, CPA, and Aaron M. Rotkowski
The fair market value of publicly traded stock is often a controversial issue in valuations
performed for gift tax, estate tax, or generation-skipping tax purposes. This controversy
occurs when the ownership interest of publicly traded stock is restricted, or when the subject
block of stock is so large relative to the stock’s daily trading volume that it cannot be sold
in open market transactions at the quoted trading prices without exerting negative price
pressure on the stock. The difference between (1) the value of the block of stock based on
the quoted stock price and (2) the fair market value of the subject block of stock—that is,
the blockage discount—is the subject of this discussion.
Regression Analysis and the Discount for
Lack of Marketability
Nathan P. Novak
This discussion considers the use of regression analyses for purposes of estimating a
discount for lack of marketability within a valuation analysis. This discussion focuses on
two published studies, which each employ a regression analysis. The first study is entitled
“Firm Value and Marketability Discounts” by Mukesh Bajaj, David J. Denis, Stephen P.
Ferris, and Atulya Sarin, which is referred to here as the “Bajaj Study.” The second study is
entitled “Market Discounts and Shareholder Gains for Placing Equity Privately” by Michael
Hertzel and Richard L. Smith, which is referred to here as the “Hertzel and Smith Study.”
Collectively, the above studies are referred to as the “Private Placement Studies.”
Willamette Management Associates
Presents 2013 Standard of Excellence
and Best Practices Literary Awards
Charlene M. Blalock
Each year the Insights editorial board presents one or more literary awards to Insights
authors who are not associated with Willamette Management Associates. The editorial
board has presented three awards this year. The first literary award—the Thought
Leadership Award—was discussed in the last Insights issue. In this discussion, we present
the Standard of Excellence Award and the Best Practices Award.