Taxpayer Victory in Personal Goodwill Case

Posted on February 9 2016 by admin

In August of 2014, the U.S. Tax Court (the Court) made a decision in a case that addresses personal goodwill, the Estate of Adell v. Commissioner, T.C. Memo 2014-155. In this case, the decedent, Franklin Z. Adell, and his son Kevin formed The Word Network (The Word), a 24-hour television station that broadcasts urban religious ministries and gospel music, as a §501(c)(3) organization. The decedent was also sole owner of STN.Com which was organized to provide the satellite uplink services necessary to give The Word access to national and international cable television distribution. Although Mr. Adell was a board member and officer of STN.Com and The Word, Kevin operated both companies and was the face of the operation as he was the individual soliciting content and pursuing broadcast opportunities. On the date of Mr. Adell’s death, August 13, 2006, Kevin, who was the personal representative of the estate, reported the value of Mr. Adell’s 100% interest in STN.Com at $9.3 million . The respondent (Commission of Internal Revenue) reported the value at $26.3 million.

The primary dispute in this case was the treatment of the goodwill associated personally with Kevin. This was not a corporate asset; indeed, Kevin served as STN.Com’s president, but had never entered into an employment agreement or a noncompete agreement with STN.Com, and his personal connections with The Word and its religious affiliates were crucial to the future of both The Word and STN.Com.

After analyzing the opinions of the various experts, the Court found that the estate’s appraiser presented the best evidence of value in that it properly accounted for Kevin’s personal goodwill. Therefore, the Court concluded that the fair market value of the STN.Com stock owned by the estate on August 13, 2006, was $9.3 million, the amount originally reported on the estate tax return.

For more details on this case and a review of the U.S. Internal Revenue Code and U.S. Treasury Regulations as they pertain to the value of an estate and calculating the goodwill of a business, refer to the full article.

By Cindy Andresen, ASA

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Greater Phoenix Office Market Looking Positive for 2016

Posted on February 2 2016 by admin

Vacancy Rates Trended Lower for Fifth Consecutive Year in 2015

The chart below presents statistical data in the fourth quarter of 2015 for Class A, Class B and Class C office space in Metro Phoenix related to total inventory, vacancy, vacancy rates, net absorption, and average rental rates. Note that the Class A category had the lowest vacancy rate of the three building types coming in at 15.4%. Economists, developers and investors were delighted to learn that the overall vacancy rate in the Greater Phoenix office market ended 2015 at 17.2% down 90 basis points from 18.1% on December 31, 2014.

Table 1

The next chart further delineates fourth quarter statistics for the largest office submarkets within Greater Phoenix.

Table 2

2015 Greater Phoenix Office Market Golden Nuggets

  • Net absorption peaked in the fourth quarter of 2015 bringing the total for the year to approximately 3.5 million square feet making it the strongest single year of office absorption since 2006.
  • Because tenant demand is on the rise, construction of new space is accelerating at a rapid pace. Developers currently have nearly 3 million square feet of new space under construction.
  • Class A asking rents increased 6.6% in 2015 to $26.56 per square foot after gaining 5.3% in 2014.
  • Vacancy rates in Class A building throughout Metro Phoenix declined in 2015 from 17.5% to 15.4%.
  • With employment growth rates projected to grow in Metro Phoenix during 2016, tenant demand for office space will cause further declines in vacancy rates.
  • Sales attributable to office buildings totaled about $3 billion in 2015 reflecting an impressive growth of 50% compared to 2014.

In summary, the future of the office market sector in Metro Phoenix looks bright and optimistic in the coming year.

By Gary Ringel, CGREA

The primary source for information in this article is the Greater Phoenix/Office 4Q 2015 Research & Forecast Report published by Colliers International.

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When Should an Appraisal of a Non-Cash Charitable Contribution be Performed?

Posted on January 19 2016 by admin

ValueTaxpayers who make charitable contributions of non-cash property could be putting themselves in IRS penalty danger if the contribution is more than $5,000 and the property has not been appraised by a qualified appraiser who has issued a qualified appraisal report. A recent Tax Court case emphasizes the need for an appraisal report to be made.

In Gemperle v. Commissioner, TC Memo 2016-1 on January 4, 2016, the IRS argued and the Court agreed, that a 20% negligence penalty under 6662(a), and a 40% gross valuation misstatement penalty under 6662(h) should be applied when no appraisal was attached on this charitable contribution case. The Internal Revenue Code, the instructions for Form 8263, and the commentary from the Joint Committee on Taxations’s Technical Explanation clearly indicate that an appraisal should have been attached to the return. An appraisal was required, in this instance, as a matter of law. It was not attached, the taxpayer lost the case, and had penalties applied as a result. Clearly, an appraisal was required to substantiate the charitable contribution. (*)

The Internal Revenue Code provides the following guidance with regard to: a) appraisals of non-cash charitable contributions; and, b) definitions of a qualified appraisal and a qualified appraiser:

“A taxpayer’s deduction for charitable contributions is generally permitted under IRS § 170(a), subject to certain limitations depending on the type of taxpayer, the nature of the property contributed, and the type of done organization. In particular under § 170(f) (11) (C), taxpayers are required to obtain a qualified appraisal for donated property for which a deduction of more than $5,000 is claimed. Under § 170 (f) (11) (D), in certain cases the qualified appraisal must be attached to the tax return. Section 1219 of the Pension Protection Act of 2006 amends § 170(f) (11) (E) and provides definitions of a qualified appraisal and qualified appraiser for appraisals prepared with respect to returns filed after August 17, 2006”. (**)

A “qualified appraisal” is an appraisal that is conducted by a “qualified appraiser” in accordance with generally accepted appraisal standards; e.g., consistent with the substance and principles of the Uniform Standards of Professional Appraisal Practice (USPAP), as developed by the Appraisal Standards Board of the Appraisal Foundation. (***)

A “qualified appraiser” is an individual who has earned an appraisal designation from a recognized professional appraiser organization, if the designation is awarded on the basis of demonstrated competency in valuing the type of property for which the appraisal is performed, or has otherwise met minimum education and experience requirements set forth by the Secretary. An appraiser will be treated as having demonstrated verifiable education and experience in valuing the type of property subject to the appraisal if the appraiser makes a declaration in the appraisal that, because of the appraiser’s background, experience, education, and membership in professional associations, the appraiser is qualified to make appraisals of the type of property being valued. And, that the individual regularly performs appraisals for which she/he receives compensation.” (****)

Taxpayers who are making non-cash charitable contributions of more than $5,000 should check with their tax accountant to make sure a qualified appraisal is, or is not, required in support of their contribution.

By Don R. Bays, CPA, ABV, CVA, CFF

(*) From online QuickRead of the National Association of Certified Valuators and Analysts, When Should an Appraisal be Attached to a Return? January 13, 2016; Michael Gregory.

(**) Internal Revenue Bulletin: 2006-46, November 13, 2006, Notice 2006-96, Guidance Regarding Appraisal Requirements for Noncash Charitable Contributions.

(***) Pension Protection Act of 2006.

(****) Ibid.

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Happy New Year!

Posted on December 31 2015 by admin


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Happy Holidays!

Posted on December 23 2015 by admin


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Can Shareholders of a C-Corp be Subject to Taxable Income if They are Beneficiaries of a Life Insurance Policy?

Posted on December 1 2015 by admin

A C-Corporation should always be the owner and beneficiary of a life insurance policy to avoid taxable income to the surviving shareholders.

When contemplating the manner in which to fund a buy-sell agreement, life insurance is an extremely attractive option. A life insurance policy can provide liquidity when it is needed most upon the death of a business owner. Funds attributable to the death benefit of a policy can be used by the remaining shareholders to purchase the decedent’s equity interest.

Let’s assume that the three equal shareholders of Wannabe Inc., a C-corporation, enter into a buy-sell agreement which obligates the company to purchase three insurance policies insuring the life of each of the stockholders. Wannabe is the owner of the policies and the surviving shareholders are named as the beneficiaries of each policy.

Upon the death of shareholder 1, the death benefit is paid proportionally to the two remaining stockholders. The IRS deems the surviving stockholders’ insurance proceeds to be subject to ordinary income taxes.

In order to avoid income taxes, the corporation should be the owner and beneficiary of each policy.

By Gary Ringel, CGREA


“Business Succession Planning With C Corporations” published by Transamerica Insurance & Investment Group

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The Estate or Gift Tax Return is Filed with the IRS – Then What?

Posted on November 3 2015 by admin

I attended the American Society of Appraisers Advanced Business Valuation Conference a couple of weeks ago and had the opportunity to attend a session presented by an IRS attorney, Theresa Melchiorre. I always jump at the chance to hear an IRS presenter, as I like to get a glimpse of what goes on behind the scenes at the IRS, particularly as it relates to estate and gift taxes. Ms. Melchiorre provided a brief overview of how the estate and gift tax filing process works.

  1. The taxpayer files estate and gift tax returns (Form 706 & Form 709) in Cincinnati, Ohio.
  2. Each return is reviewed by the estate and gift tax staff. Based on certain criteria, it is determined whether the return will be selected to be sent to Examination.
  3. If selected, Examination decides if the return will be audited, and if so, assigns the return to an examiner.
  4. If the return has a business valuation appraisal attached, the examiner determines whether to send the appraisal on for review by an engineer (an engineer is an appraiser). The examiner can request a limited review or a full review of the appraisal.

Statute of Limitations

A statute of limitation is defined by the IRS as a time period established by law to review, analyze and resolve taxpayer and/or IRS tax related issues.

Estate Tax: In general, IRC 6501(a) requires the IRS to assess an estate tax liability within three years after the filing date (or due date, if later) of the estate tax return. The statute of limitations on assessment of estate tax cannot be extended. A deficiency must either be assessed, or a statutory notice of deficiency mailed to the taxpayer, prior to the expiration of the statute of limitations.

Gift Tax: In general, IRC 6501(a) requires the IRS to assess a gift tax liability within three years after the due date of the gift tax return, or three years after the gift tax return was filed, whichever is later. The statute of limitations on assessment of gift tax can be extended, if both the Secretary of the Treasury and the taxpayer agree in writing to do so.

Disagreements Between the Taxpayer and IRS

If the taxpayer wants to appeal an IRS decision and sufficient time remains on the statute of limitations, the taxpayer may go to the Office of Appeals. The Office of Appeals is an independent organization within the IRS whose mission is to help taxpayers and the Government resolve tax disagreements without going to Tax Court.

If there is not enough time left on the statute of limitations, the IRS will issue a notice of deficiency. Once the notice is issued, the taxpayer has the following options:

  1. Pay the deficiency;
  2. Pay the deficiency then apply to the IRS for a refund of taxes paid. If the IRS denies the refund, the taxpayer can sue in District Court or the Court of Claims; or
  3. Do not pay the deficiency and sue in Tax Court.

Chief Counsel attorneys defend the IRS in cases before the Tax Court. Department of Justice attorneys defend the IRS in cases before all other courts.

I hope this article provides some useful information regarding IRS policies and procedures associated with the filing of Forms 706 and 709. For more details on the process, refer to Article 26 §6501 of the Internal Revenue Code and Section 4.25.1 of the Internal Revenue Manual.

By Cindy Andresen, ASA


Appraisers and Their Responsibilities: An IRS Perspective by Theresa Melchiorre, ASA Advanced Business Valuation Conference, October 19, 2015

Internal Revenue Manual, Section 4.25.1. –

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Valuation Services as a Management Tool

Posted on October 21 2015 by admin

Most clients come to us for business valuation services because of outside requirements. They need an independent appraisal for tax compliance, financial reporting, marital dissolution or estate and gift planning, among other reasons. But even if you don’t have any of these needs, you might want to obtain an appraisal. Why would you want an appraisal?

Knowing the value of your business is essential to intelligent planning. Valuing the company is one of the most fundamental and important challenges faced by business owners as they consider transition plans. To execute a business succession in the most financially lucrative way, while preserving value and future growth prospects, they must know what the business is really worth. If your business were publicly owned, a value would be easy to calculate based on the price of its stock in the market. However, a private business requires a specialized understanding to determine value.

In many cases, owners believe that they have a strong understanding of the value of their business, based on their unique experience over the years with the company. Unfortunately, all too often this personal valuation does not consider certain market conditions and other key factors, and as a result, it does not represent what prospective buyers would be willing to pay. This can be attributed to a variety of factors, including the emotional attachment of an owner who developed the business. Additionally, “rule of thumb” values (e.g. 2 times revenues) provided by business brokers or hearsay about the sale of a similar business may distort the business owner’s perception of the company’s value.

As part of the appraisal process, a valuation analyst must gain an understanding of the many aspects of a business – in effect we strive to become as knowledgeable about your company as a potential buyer would be. You’ll be challenged to answer a number of questions about your company and its operations, and often the questions start with “why.” This can be a process of discovery for both you and the appraiser. We are asking questions to understand the value drivers in your business model (what drives cash flow and creates value), and you are taking a step back from your routine and refocusing your attention on the same topic: what drives value.

Another procedure in the valuation of a business is a comprehensive analysis of historical trends in business operations, along with a comparison of your company’s results to industry trends and benchmarks. Perhaps there’s a reason for your existing costs and capital structure, or perhaps there are other opportunities to explore that can result in greater value. A valuation analyst can bring those topics to light, and illustrate for you the impact of certain hypothetical conditions or changes, all else being equal.

Ultimately, you may choose to implement changes after consulting with an appraiser, or you may keep everything exactly as is for now. Either way, you’re refocused on what drives value in your business. That is one great reason why you should want appraisal services.

By Lynne Bouvea, CPA/ABV/CFF, ASA, CFE

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No More Swiping Means Safer Transactions, at Least in Person

Posted on October 14 2015 by admin

Many of you may have received new credit cards recently which contain a small metallic square on the left front of the card. These are new EMV (Europay, Mastercard and Visa) cards which are being used to authenticate card transactions with computer chips and related technology. If you are like me, you didn’t even pay much attention when the new card came in the mail since your old one was expiring. When I went to swipe it at the store, the cashier had to show me how to insert the card into the bottom of the terminal.


The new technology is being implemented to improve payment security by making it harder for fraudsters to counterfeit cards. The magnetic strips on our previous cards contained unchanging data which if obtained by a fraudster could be easily replicated. The new chips create a new transaction code for each purchase which cannot be used again. A fraudster who tries to duplicate the transaction code will find him/herself being denied when they try to use the counterfeited card.

The use of the new EMV technology won’t eliminate data breaches but experts are hopeful it will significantly reduce them, at least from in store breaches. Online retailers will still be vulnerable as many fraudsters will switch focus from in person data breaches to online. Great Britain began using the chip technology in 2001. According to the UK Cards Association, online fraud rose 55%t between 2005 and 2008.

Small businesses may be most vulnerable due to limited resources to use sophisticated software to quickly determine whether or not a transaction is fraudulent. The software can analyze a number of factors in a transaction including matching shipping and billing addresses, whether the transaction is placed from an unfamiliar computer or whether the email provided is unfamiliar.

As always, remain vigilant in checking your personal credit card statements and credit history.

By Melissa Loughlin-Sines, CPA, CFE, CVA, CFF, ABV

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Life Expectancy – Best and Worst States to Live In

Posted on September 29 2015 by admin

Hour GlassIf I am preparing a report on lost earnings in a wrongful death litigation matter, I will need to know what the expected remaining life would have been for the deceased subject involved with the lost earnings claim. I will use authoritative tables from government and private research sources to make the life expectancy determination.

Recently, I was perusing the internet searching for other sources for life expectancy tables and came across a website entitled USA LifeExpectancy. The site caught my eye because of the many statistics it had on living long in America. For example, the site indicates the state where white American males live, on average, the longest is the District of Columbia, at 82.07 years (okay, I know D.C. is not technically a state). Who would have thought with all of the stresses of political debate and argument going on in Washington D.C. that it would be conducive to long lives for white American males.

The state with the worst life expectancy statistic for white American males is West Virginia at 72.64 years.

I was curious how my own state, Arizona, stacked up to the other states in the site’s analysis. Arizona’s white American males have an average life expectancy of 77.31 years. It ranked 20th out of 51 USA states (including the District of Columbia) analyzed.

USA LifeExpectancy also showed those states where white American females lived the longest – and where they had the shortest life expectancy among the US states. Here again, they live longest in D.C. at 86.65 years and have the shortest life span in the state of Michigan at 77.05 years. In Arizona, a white American female lives an average of 82.26 years, with the state ranking 14 out of 51 states.

USA LifeExpectancy also showed life expectancy averages for males and females classified as Asian American, Hispanic American, African American and Native American. A comparison of the states where these races have the longest average life expectancy years and those with the shortest is shown below in Table 1. I’ve also shown the average life expectancy years for Arizona in Table 2.

Table 1



Table 2


The USA LifeExpectancy website does not indicate why some states have higher life expectancies than others. I have not verified the accuracy of the website’s statistical data. However, I do find the information presented at the website to be interesting. As Star Trek’s Spock would say, “Live long and prosper.”

By Don Bays, CPA, ABV, CVA, CFF

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