99.7% of Estates Are Not Subject to Federal Tax

Posted on May 19 2015 by admin

The American Taxpayer Relief Act of 2012 (“Act”) increased tax exemptions for federal estates, gifting and generation skipping trusts (GST). The Act also escalated the aforesaid exemptions each year for inflation. Below is a summary of the 2015 status of the three exclusions along with the ceiling for the federal estate tax rate applicable to each exemption:

  • $5,430,000 federal estate tax exemption (increased from $5,340,000 in 2014) and a 40% top federal estate tax rate.
  • $5,430,000 GST tax exemption (increased from $5,340,000 in 2014) and a 40% top federal GST tax rate.
  • $5,430,000 lifetime gift tax exemption (increased from $5,340,000 in 2014) and a 40% top federal gift tax rate.

Many estate planners, accountants, wealth managers and other professionals who represent high net worth clients are taking advantage of the increased exemptions imposed by the Act to make larger lifetime gifts; to leverage more assets through a variety of estate planning techniques (such as a sale to a grantor trust); and to shift income producing assets to individuals such as children or grandchildren who may be in lower income tax brackets and/or reside in states with a low income tax rate or no state income tax.

As you would presume, only a handful of American taxpayers are able to benefit from these tax planning opportunities. For instance in 2012, the most recent year in which both Internal Revenue Service and national death statistics are available, approximately 2.543 million Americans passed away. Of that group, just 8,423 estates exceeded the $5.12 million threshold for estate exemptions that year. These figures indicate that 99.7% of decedents in 2012 were not subject to federal tax.

If you have significant wealth, it is well worth your time to sit down with your professional advisers this year to discuss estate planning techniques that might benefit you and your beneficiaries.

By Gary Ringel, Managing Director of Henry & Horne, LLP’s Business Valuation & Litigation Support Services Group


March 2015 edition of Trust & Estates written by Robert F. Sharpe, Jr. titled “Making Gifts Sooner Than Later … Accelerating Charitable Bequests.”

Proskauer Rose LLP’s December 2014 newsletter titled “2015 Estate, Gift and GST Tax Update: What This Means for Your Current Will, Revocable Trust and Estate Plan.”

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Telephone Fraud: Beware of the Big Prize Promise

Posted on May 5 2015 by admin

wheelI know an elderly lady who is disabled and in early stages of dementia. Her name is Doris. Doris was the recent victim of a telephone scam.

Doris’ four adult children recently told me that two months ago their mother received a telephone call, out of the blue, from Jamaica. It was from a slick talking guy who said his name was Jack Holiday. Jack proceeded to tell Doris that she was the winner of a $2.2 million sweepstakes prize. He said her name was chosen from a few hundred thousand participants in a magazine contest. Doris could not recall entering the contest but was elated to hear the good news.

Jack said he and the rest of his company’s award team would personally be coming to Doris’ home in Phoenix, Arizona to deliver the prize money. Jack told Doris to keep the matter quiet and to not report it to her family and friends. He said it would make the award to Doris more of a wonderful surprise if they did not know about it until Jack came to Phoenix.

Jack told Doris that before he could process the award, Doris would have to send him funds as a down payment on the income taxes Doris would have to pay to the U.S. Internal Revenue Service because of her receipt of the $2.2 million.

Doris’ daughter became aware that her mother had run up a bill with her cell phone service provider of $1,200. Upon further inquiry the daughter found that most of the charges were due to her mother making calls to Jamaica. Doris’ daughter had a talk with her and Doris finally ‘fessed up to what she was doing. Unfortunately, by this time, Doris’ daughter found that Doris had wired Jack, via Western Union, about $4,000 to apply to her “taxes” on her award.

Doris’ daughter and one of Doris’ sons immediately took her to the police station where they filed a complaint about Jack Holiday and his evil deed. The children explained to their mother that Jack was a scammer, a crook and a very bad person. Doris said she understood. It turned out she understood but didn’t care.

The children had Doris change her telephone number so that Jack could no longer telephone her. Doris then called Jack and gave him her new number. She subsequently gave Jack another $6,000 before the children realized she was still involved with Jack. Her cell phone bill had grown to $1,400.

Doris’ oldest son always prepared her federal and state income tax returns. A few weeks ago he excitedly told Doris that she had a $2,200 federal tax refund coming. Doris was happy. So happy that she tried to wire Jack $1,700 of her refund when it arrived. Fortunately, the funds were returned to Doris’ bank account because of a wire transfer error. Doris’ son, who was also a signer on her checking account, quickly put the tax refund money into another account he established under his and Doris’ daughter’s name. The funds were now protected from Slick Talking Jack Holiday.

In the meantime, the children have turned the matter over to the FBI. The children have told me that the FTC, who is investigating other telephone scam cases, will be given the information about Doris’ plight as well.

As of this writing, Doris is still communicating with Jack. Jack is still trying to get money from Doris. Just last week Doris gave him another $435. Her cell phone bill has ballooned to $1,700 and the cell phone service provider wants Doris to pay immediately.

The children have asked Doris why she keeps trying to give Jack money.“Because he is a nice man,” she replies.


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Protecting Your Inventory and Customers from Employees

Posted on April 28 2015 by admin

During the last year, I have received more phone calls than usual from business owners who believe employees are stealing inventory from them. Many of the concerns I hear from small business owners fall into two categories. The first scenario is the extremely popular and growing internet business, in which entrepreneurs keep inventory in warehouses, garages, and other storage spaces to fulfill orders. Often, they find that tracking and managing their inventory is difficult. As a result, they may not have the expected inventory on hand to fulfil orders, resulting in customer dissatisfaction and lower profits.

The second scenario is not a new problem; however, due to the economic impact on the construction and service trades, business owners are taking a stronger stance relating to their employees and subcontractors performing side jobs for their customers, and possibly using company inventory and resources. Companies invest funds and resources into getting leads and customers. Employees and subcontractors who go out on calls and have customer contact may cut the business out of the loop and perform the job for less on the side.

Following are some suggestions of policies and controls that may reduce employee theft of inventory and the occurrence of employees using company resources to perform side jobs:

  • Show your employees that you treat your inventory like money. Employees may not realize the value of your stock inventory. Often, employees who would never think of taking money out of the cash register have no qualms about “borrowing” inventory. By installing proper controls, you can help your employees appreciate the true value of inventory.
  • Security cameras and other theft-deterrent devices are not as expensive and difficult to install as they once were. Although, an employee who is truly a thief can often get around these systems, it is an effective deterrence for many employees.
  • Physically counting inventory on hand and comparing it to internal inventory records is extremely important. Nowadays, many small companies rely on electronic systems to manage their inventory. However, while computer software programs to manage inventory are efficient and useful, they can also be manipulated to hide fraud. Nothing can replace physical inventory counts. In addition, these counts will act as a psychological deterrent, especially if you conduct them on a random basis.
  • Reduce the people who have access to your warehouse and inventory storage areas. Oftentimes, salespeople, vendors, drivers, and subcontractors all have access, which can lead to more inventory shortage.
  • Oftentimes, inventory is removed, which is not invoiced (or sold), in order to make a sales call, provide samples or for an emergency situation. Implement a tool that allows salespeople and drivers to easily record material they remove, which could be as simple as a clip-board hanging on the door. Management/owners should review these regularly. It is often surprising how many “samples” are removed and never returned.
  • Pay your employees fairly and create a work environment where employees feel valued to reduce the incentive to steal or take side jobs. Communicate to your employees that inventory generates revenues and increases the bottom line, which will result in better pay and benefits.
  • Your employee manual should clearly explain the company’s policy on performing side work. For example, it may state that any request by a client for the employee to work on any job other than those contracted for by the company must be reported to the company immediately, or it may be a termination offense.
  • Your subcontractor agreement should also state that the subcontractor should not talk to the customer about any other work. Again, they should report all such requests directly to you immediately. It should be a termination offense if they are caught doing such work.
  • Many employees have use of a company truck and cell phone during work and non-work hours. GPS vehicle and cell phone tracking systems are becoming more popular to determine whether employees are performing work for customers during non-work hours, and to match up locations with time billing sheets. However, due to concerns over employee privacy, employers need to ensure that any tracking or electronic surveillance is legal.
  • Review the corporation commission websites to determine if employees have set up companies with a similar name or offering the same services.
  • Follow up with customers or sales leads to potentially uncover instances of employees performing side work. Sometimes, the customer is under the impression that the company is performing the work, and is surprised to hear that the work will not be covered or warrantied, because the employee actually performed the work on the side.

By Julia Allen Miessner, CPA, CFF, CGMA

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Can You Apply a Discount to a Promissory Note?

Posted on April 13 2015 by admin

Hoffman v. Commissioner: Tax Court Accepts 12.5% Discount Rate

Treasury Regulation 20.2031-4 states that the fair market value of promissory notes, secured or unsecured, is presumed to be the amount of unpaid principal, plus accrued interest at the date of valuation, unless the taxpayer provides sufficient evidence to the Internal Revenue Service which supports a lower value.

In the Estate of Marcia P. Hoffman v. Commissioner, T.C. Mem. 2001-109; Mark Mitchell was retained by the Internal Revenue Service to value two unsecured promissory notes. In order to quantify a discount rate to apply to the future cash flows of each note, Mr. Mitchell took the following interest rates, or yields, into consideration when contemplating a rate of return that would be acceptable to a hypothetical buyer of the debt instruments:

  1.  Interest rates of various debt securities;
  2.  Corporate bonds of various ratings;
  3.  Interest rates for conventional mortgages; and
  4.  Venture capital returns.

After analyzing the risk attributes associated with each of the four types of interest rate proxies, Mitchell formed an initial opinion of the rate of return expected by a hypothetical buyer of the promissory notes and then made adjustments to his rate based on specific criteria such as the:

  1.  Creditworthiness of the borrower;
  2.  The payment history of the borrower;
  3.  The absence of security provisions in the notes such as covenants related to late and prepayment penalties;
  4.  The omission of collateral assignments should the borrower default; and
  5.  The lack of marketability for the notes attributable to the fact that a formal secondary market is nonexistent for private debt.

Mr. Mitchell determined that discount rates ranging from 10% to 15% would adequately account for the level of risk associated with the promissory notes and concluded that 12.5% was a reasonable rate to apply to both notes’ future cash flows in order to calculate their present (fair market) values.

The Court was not persuaded by the report and testimony of the Estate’s expert, rejected his value conclusion, and concluded that a discount rate of 12.5% appropriately reflected a hypothetical buyer’s anticipated internal rate of return between the date of death and the maturity dates of the notes.

By Gary Ringel, CGREA

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Why CPA Testifying Experts Can’t Accept Contingent Fee Engagements

Posted on March 24 2015 by admin

StopAttorneys are often asked to take on a litigation assignment where there is a potential for a large monetary amount to be awarded to their clients by the court. They may take on the work solely based on a contingent fee arrangement with their client. What this usually means is that if the attorney wins the case for their client, they will get paid. If they don’t win, they don’t get paid. CPAs who are retained by clients to be testifying expert witnesses cannot similarly accept a litigation support engagement on a contingent fee arrangement.

The American Institute of CPAs (AICPA) indicates in its rules that a contingent fee is a fee established for the performance of any service pursuant to an arrangement in which no fee will be charged unless a specified finding or result is attained or in which the amount of the fee is otherwise dependent upon the finding or result of such service. The AICPA also states for purposes of this rule, fees are not regarded as being contingent if fixed by courts or other public authorities or, in tax matters, if determined based on the results of judicial proceedings or the findings of governmental agencies. (*)

The AICPA is pretty explicit regarding the prohibition of its CPA members from taking contingent fees when the member performs: I) an audit or review of a financial statement; or II) a compilation of a financial statement when the member expects, or reasonably might expect, that a third party will use the financial statement and the member’s compilation report does not disclose a lack of independence; or III) an examination of prospective financial information; or IV) prepares an original or amended tax return or claim for a tax refund for a contingent fee for any client. (**)

But, what about a CPA providing expert witness services in a litigation case? The AICPA’s 2009 publication, Special Report 09-1, FVS Section, Introduction to Civil Litigation Services, states the following in footnote 39 on page 19 in reference to the paragraph, Timekeeping, Fees and Billings:

“Contingent fees arrangements are almost never acceptable for an expert witness. Laws in many jurisdictions preclude expert contingent fees, as do the ethics rules of many bar associations, including rules of the American Bar Association. Even if an expert witness was in a situation that did not preclude a contingent fee by law or rule, a contingent fee creates the appearance that the expert witness lacks objectivity because fees are potentially dependent on the favorable testimony of the expert, or perhaps the successful outcome for the practitioner’s client. Regardless of the fee arrangements, it is advisable for the practitioner to collect any outstanding balances prior to expert testimony to avoid unintentionally creating a contingent fee arrangement, or the perception of one.”

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

(*) AICPA Code of Professional Conduct, effective December 15, 2014; Section 1.510.001 Contingent Fees Rule, par. .03. The Arizona State Board of Accountancy’s Rule R4-1-455 Professional Conduct: Independence, Integrity, and Objectivity, par. B.1, contains similar language.

(**) Ibid; par. .01 (AICPA)

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Personal Injury Damages

Posted on March 19 2015 by admin

When Stan was injured in an automobile accident between his car and a tractor trailer operated by one of the largest shipping contractors in the U.S., his wife Maria wanted to “sue them for all they are worth.” When Stan and Maria consulted counsel, their attorney started by explaining the type of damages which were potentially available for them to pursue.

Economic Damages – assessed to provide compensation for monetary losses such as past and future earnings, past and future medical expenses, value of domestic services and loss of employment.

Non-economic Damages – subjective compensation for non-monetary losses such as pain and suffering, emotional distress, loss of consortium and loss of enjoyment of life.

Punitive Damages – awarded with the purpose of punishment; not awarded to compensate a loss but to deter intentional or reckless behavior.

Stan and Maria’s attorney retained a forensic accountant to calculate the amount of economic damages attributable to Stan’s accident. The forensic accountant was tasked with preparing a personal injury economic damages report which provided an analysis of any monetary amounts Stan would have realized “but for” the injuries sustained in the accident.

The forensic accountant’s report included damages related to:

Lost Earnings – expected earnings capacity of the injured party “but for” the accident.

Fringe Benefits – the loss of fringe benefits available to the injured party “but for” the accident.

Household Services – value of services which can no longer be performed by the injured party.

Medical Care – costs incurred and expected to be incurred in the future related to the medical conditions sustained in the accident.

Stan and Maria were able to settle prior to trial for $1,500,000 of economic damages and $1,000,000 for pain and suffering.

For more information of damages in a personal injury case, see the article “Determination of Damages in a Personal Injury Case” in the March 2015 BV/Lit Essentials e-Newsletter.

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

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Did the Fraudster Act Alone? The Impact of Collusion on Fraud

Posted on March 17 2015 by admin

When performing forensic accounting engagements to detect or quantify employee theft or other types of fraud that has occurred in organizations, we often find that there is more than one person involved in the fraudulent scheme.

A recent study discussed in Fraud Magazine analyzed the impact of collusion on fraud. In the study, convicted fraud perpetrators from three federal prisons were interviewed. Approximately 59 percent of the interviewees stated that their fraudulent activity involved more than one person.

The Association of Certified Fraud Examiners’ 2014 Report to the Nation compared the types of fraudulent schemes committed by a single individual versus the types of schemes committed by groups. The biggest difference related to corruption schemes. Less than one-quarter of solo fraudsters were engaged in corruption schemes. When there were multiple people involved in the fraud, the frequency of corruption schemes jumped to 57 percent. Additionally, the misappropriation of non-cash assets was much more common when collusion was involved.

According to the ACFE, the types of schemes that are more common among fraudsters who act alone are expense reimbursement schemes, skimming, check tampering, payroll fraud and cash larceny.

Organizational leaders should be aware of the types of collusion that can lead to fraud in their company. Leaders should consider how groups of employees may be able to overcome internal controls and commit fraud. Paying close attention to corporate culture and different sub-groups or close-knit groups of employees in high risk areas of the organization can help address the chance of collusion occurring.

By Julia Allen Miessner, CPA, CFF, CGMA

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Home Sales Across Metro Phoenix on Track to Jump More than 30%

Posted on March 10 2015 by admin

“Home sales across metro Phoenix are on track to jump more than 30 percent during the next few months, potentially signaling the restart of the area’s stalled housing recovery.” Cathy Reagor, Arizona Republic

Although Valley home sales fell 14% in 2014, many economists and real estate experts are looking forward to a substantial increase in 2015. One of them is Cathy Reagor who published an article in the February 28, 2015 Arizona Republic.

Below are some interesting facts and commentary included in her article.

  • Most people who experienced foreclosures or short sales during the housing crash were required by lenders to wait seven years before they could qualify for a mortgage again. Consequently, those who lost houses in 2007 or 2008 are now eligible to buy again in 2015.
  • Interest rates are expected to tick up in in the near future, which is motivating millennials to purchase homes this year.
  • Less stringent lending standards such as the federally mandated cut to Federal Housing Administration mortgage insurance and the FHA’s required down payment of only 3.5% may be attracting new buyers.
  • The number of Valley houses under contract to sell started to surge in early February, according to Arizona State University’s W.P. Carey School of Business.
  • The biggest increases in pending sales were for residences priced from $150,000 to $250,000 and from $250,000 to $400,000.

Let’s cross our fingers and hope that these pending sales will be consummated causing a rebound in Arizona’s housing economy!!!!

By Gary Ringel, CGREA

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ESOP Appraisers Will Not be Named as Fiduciaries…At Least for the Time Being

Posted on March 3 2015 by admin

It was reported in January 2015 that the Department of Labor (DOL) will abandon the “appraiser-as-fiduciary” rule from its planned re-proposal of a broad set of rules affecting fiduciaries and prohibited transactions.

This story goes back to 2010 when the DOL issued a proposed regulation that would impose a fiduciary obligation on business appraisers in the valuation of Employee Stock Ownership Plans (ESOPs). The DOL withdrew its proposal in September 2011, announcing that a new version of the regulation would be forthcoming. Nothing has really happened in the last three years until this latest development, one that is viewed favorably by the business valuation community.

Business appraisers and organizations such as the American Society of Appraisers (ASA) and the American Institute of Certified Public Accountants (AICPA) have strongly opposed this type of regulation. Some of the reasons for opposition include:

  1. The need for appraisers to purchase fiduciary liability insurance which would drive up appraisal costs;
  2. higher costs could force out smaller appraiser firms and sole practitioners;
  3. appraisal firms may not want to take on the additional risk and avoid ESOP valuations altogether; and
  4. higher costs would be passed on to the ESOP plans which could discourage the creation of new ones in the future.

By Cindy Andresen, ASA


The ESOP Association

BVWire Issue #149-1

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Will Your 2012 Gift Tax Return be Audited by the IRS?

Posted on February 25 2015 by admin

In 2012 taxpayers and their advisers were scratching their heads about the presidential election and its impact on future gift and estate tax exemptions because the $5 million inflation indexed per person federal estate and gift tax exclusion was scheduled to drop to $1 million on January 1, 2013.

Consequently, many wealthy matriarchs and patriarchs decided to make substantial gifts to family members by December 31, 2012 in order to report them on Form 709, gift tax returns, that needed to be submitted to the Internal Revenue Service by October 15, 2013 along with their personal tax returns. (*) The intent, of course, was to reduce the size of their taxable estates.

In 2012 and 2013 approximately 258,000 and 369,000 Form 709s were filed with the IRS. The aggregate amount of the gifts in those years was nearly $135,000,000,000 and $421,000,000,000, which was significantly higher than preceding years.

Many practitioners were expecting an influx of audits in 2015 and 2016 associated with the aforementioned 2012 and 2013 filings because once a Form 709 is filed and a gift fully disclosed, the IRS may not reopen the gift tax return if three years have passed. Data regarding 2014 audits has not yet been released by the Service. However, our conversations with estate planners, accountants, financial advisers, and trust officers indicate that very few 709s filed for the 2012 calendar year have been audited to date.

We will continue to keep you apprised of the number of audits in the State of Arizona and United States, the nature of the audits, and the manner in which the IRS attacks business appraisers’ opinions of value and lack of control and lack of marketability discounts applied to noncontrolling, nonmarketable minority interests in family businesses in 2012.

By Gary Ringel, CGREA

(*) The American Taxpayer Relief Act bill of 2012 (“2012 Tax Relief Act” or “Act”) was approved by the Senate and Congress on January 1, 2013 and signed into law by President Obama on January 2, 2013. As it turned out, the 2012 Tax Relief Act continued the estate tax exemption of $5 million, indexed for inflation from 2011. The Act also provided for a maximum estate tax rate of 40%. Therefore, in 2013 a married couple could make lifetime gifts having a value up to $10.5 million without incurring any federal gift tax.


The source for statistics related to Form 709 filings is the Internal Revenue Service.

The source for information regarding the American Taxpayer Relief Act is a January 16, 2013 article titled “Summary of Estate and Gift Tax Law Changes for 2013” authored by SchiffHardin LLP.

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