Thursday, October 18, 2012

Special Purpose Valuations and Alternative Valuation Dates


The AICPA's Tax Letter in October 2012 summarizes two key changes impacting valuations for Estate Tax. The first addresses Alternative Valuation dates, and the second deals with Special Use Valuations.

...Generally the value of property includible in a decedent’s gross estate is its fair market value (FMV) on the date of the decedent’s death. Two special valuation provisions may be elected—under Sec. 2032, to value the property on the alternate valuation date (AVD), and under Sec. 2032A, to value real estate used in farming or another business based on its special use, rather than its highest and best use. Reproposed regulations were issued to limit the availability of the alternate valuation date provision, and a district court declared invalid a provision of the special use valuation regulations.
Alternate Valuation Date
A decedent’s estate may elect to use the AVD if that date results in a valuation of the decedent’s estate that is lower than its date-of-death valuation and results in a combined estate and generation-skipping transfer (GST) tax liability that would have been less than such liability on the decedent’s date of death. For property that is distributed, sold, or otherwise exchanged within six months of a decedent’s date of death, the AVD is the date of the distribution, sale, or exchange (the transaction date). For all other property includible in a decedent’s gross estate, the AVD is the date that is six months after the decedent’s date of death (the six-month date).
In 2008, the IRS issued proposed regulations3 under Sec. 2032 in an attempt to change the result in situations similar to Kohler,4 in which the Tax Court held that valuation discounts attributable to restrictions imposed on closely held stock pursuant to a post-death reorganization of the closely held company should be taken into consideration in valuing the stock on the AVD. On Nov. 18, 2011, these regulations were withdrawn and reproposed.5
The reproposed regulations would amend Regs. Sec. 2032-1(c) to identify transactions that require the use of the transaction date for purposes of Sec. 2032 (nine types of transactions are listed). If an estate’s property is subject to such a transaction during the alternate valuation period, the estate must value that property on the transaction date. The value included in the gross estate is the FMV of the property on the date of and immediately before the transaction.
Two exceptions to this general rule would allow the estate to use the six-month rule. One exception is for exchanges of interests in the same or different entities provided the FMVs of the interests before and after the exchange are deemed to be equal. The other exception is for distributions from a business entity, bank account, or retirement account in which the decedent held an interest at death provided the FMV of the interest immediately before the distribution equals its FMV immediately after plus the amount of the distribution.
Special Use Valuation
One of the statutory requirements to qualify for the special use valuation is contained in Sec. 2032A(b)(1)(B), which provides that 25% of the estate must consist of real property used in farming or another trade or business. Regs. Sec. 20.2032A-8(a)(2) provides that while a Sec. 2032A election need not be made for all property that qualifies for the election, the property for which the election is made must meet the 25% threshold requirement in Sec. 2032A(b)(1)(B). In Finfrock,6 more than 25% of the total value of the gross estate consisted of real estate used in a farming business, but the estate chose to make the special use valuation election for only one piece of farmland that, by itself, represented 15% of the total value of the gross estate. The issue before the district court was whether the regulation is a valid interpretation of the statute.
The district court applied the Chevron test to determine whether Congress has directly spoken to the precise question at issue. If the intent of Congress is clear, both the court and the agency must give effect to the expressed intent of Congress. If the statute is silent or ambiguous about the particular issue, a court must then determine whether the agency’s interpretation is based on a permissible construction of the statute.
The district court noted that Sec. 2032A does not require that the election be made for real property constituting 25% or more of the value of the gross estate. The 25%-or-more requirement is only a threshold requirement in order to be able to make the election. Once the threshold is met, the only other requirement to qualify the property for the election is to designate the property in a tax recapture agreement. The court concluded that Congress did not require that the designation be of all or a certain percentage of the real property that otherwise meets the requirements of Sec. 2032A, so the statute unambiguously provides that an estate can elect the special use valuation for any portion of the property that qualifies. Noting that Regs. Sec. 20.2032A-8(a)(2) imposes an additional requirement to make an election under Sec. 2032A that is not included in the statute, the court ruled that the regulation was invalid...
Written by Justin Ransome is a partner and Frances Schafer is a retired managing director in the National Tax Office of Grant Thornton LLP in Washington, D.C

Thursday, October 4, 2012

Patents and Trademark - The DIY dilemma?


I've been fielding a number of questions about how to file a patent. As usual there is more than one way, which leaves many entrepreneurs scratching their heads. DIY or use a third party professional? 

1) DIY...for budget reasons many entrepreneurs like to do as much as possible themselves. For those people, there follows a concise listing of six key points to bear in mind...courtesy of Docstop.

2) The other route is to use a well qualified patent attorney. A good one may charge an eye-watering $750 an hour...but may save you a boat-load of money in the long run particularly if you have a complex legal situation with products entering multiple markets with multiple uses. Chances are, down-the-track, the party that is going to infringe your patent will arm itself with an excellent attorney... so if the seed capital allows for it, it makes sense UPFRONT to make sure you seek the protection of the same caliber of professional.

Before you start filling out an application to register your trademark with the United States Patent and Trademark Office (“USPTO”) online atwww.uspto.gov/trademarks/index.jsp, there are six things you need to know.

1. How Much Does it Cost to File an Application and Which Is Right for Me?
The cost to file an application to register a trademark is either $275 or $375 per mark for each International Class in which you seek registration, depending upon the filing method you choose. If you choose the “regular” TEAS application process, the fee is $375. If you choose the TEAS Plus form the fee is only $275, but there are stricter requirements that must be met – such as requiring that USPTO classifications be used to identify the goods and services, prohibiting “free-text” entries for goods and services identifications and requiring that all communications from the USPTO be received by the applicant via e-mail during the pendency of the application. For further information on what is required to file a TEAS Plus application, go here.

For information on which application you should file, go here and review the bullet point list identifying what youmust agree to if you want to file the less expensive TEAS Plus form. The bottom line is that if you cannot satisfy the TEAS Plus application requirements as identified in the bullet point list, your only choice is to file the “regular” form with the higher filing fee.

2. What Must the Application Contain?
A “regular” TEAS application must contain at least four things, in addition to the filing fee:
1. the owner's name and address;
2. a clear drawing of the mark;
3. a list of the goods or services for which the mark is being used or will be used and the corresponding International Class number(s) that are appropriate for the identified goods or services; and
4. the filing basis.
As discussed above in Paragraph 1, more information is required to file a TEAS Plus application. To take a look at the TEAS Plus online application process and the questions that will be asked, without actually starting the electronic application form, the USPTO provides screen images in a Word document here.
3. Identifying and Classifying the Goods and Services
The USPTO has a searchable index of identifications for goods and services available that they recommend you use for your application. If you are filing a TEAS Plus form you must use these identifications for your goods and services. If you decide to file a “regular” TEAS application, you will be allowed to use identifications not identified in the USPTO index. Also, you can register your trademark for use in connection with more than one set of goods or services. However, if the goods and services you list fall into more than one International Class you will have to pay an additional filing fee. For additional information regarding International Classifications click here.
4. Actual Use or Intent-to-Use
When filing your application, you will need to decide under what “basis” you are seeking registration – either under the “use in commerce” basis (under §1(a) of the Trademark Act, 15 U.S.C. §1051(a)), or the “intent-to-use” basis (under §1(b) of the Act, 15 U.S.C. §1051(b)).

If you have already begun using the trademark in interstate commerce, you should file a use in commerce based application. When filing a use in commerce based application, in addition to filling out the application, you must supply the USPTO with a specimen showing the mark as it is used in connection with your goods or services, as well as the date(s) on which you first used the mark anywhere and in interstate commerce.

If you have not yet begun using the trademark, you must file an intent-to-use application. Initially, you will not be required to submit a specimen and date of first use, but such information must be filed at a later date (after actual usage) for your application to be approved for registration. However, even if filing an intent-to-use application, you must have a bona fide intent to use the mark in commerce. A bona fide intent means more than just an idea.

5. What Happens Next?
Within approximately 3-6 months after you file the registration forms (either use based or intent-to-use) an attorney with the USPTO will examine and research your application. The attorney will contact the person filing the application with any questions or concerns they may have about the application, and with notifications regarding the status of the application.
The USPTO attorney may contact the applicant to resolve an issue with the application, by issuing what's called an "Office Action." If you receive an Office Action, you will have six months in which to respond to any issues raised by the examining attorney.
If the USPTO approves your application, it will publish your trademark in the Official Gazette, and anyone who believes that they would be damaged by its registration (such as a senior user of a confusingly similar mark) will have thirty days in which to oppose registration of the mark.
If no one opposes (or requests an extension of time to oppose) within those thirty days, the USPTO will either approve your mark for registration (if you have already submitted an acceptable specimen of use) or issue a Notice of Allowance (if your application is still based on an intent-to-use). If the USPTO issues a Notice of Allowance, you will have six months from the date on which it was issued to either submit an acceptable specimen, or request an additional extension of time in which to do so. You can request up to five 6-month extensions of time in which to submit a specimen of use. The registration process can easily take 1-2 years, but once it is approved your rights date back to the day on which you filed your application.

6. Trademark Symbol Tips
Do NOT use the circle “R” (®) trademark symbol until a federal registration has issued. Such use is considered fraud and a registration might be denied as a result. Prior to actual registration by the USPTO, use the symbol “TM” to identify your trademark. Only after actual registration has been issued should the circle “R” symbol (®) be used.

 Finally, its worth pointing out that many times, I see entrepreneurs waste significant worry time on the patent issue. Before you decide which of the two paths to go down, make sure you ask your business and legal advisers whether it makes sense to invest in patent/trademark protection. You may be surprised how often the answer comes back a resounding NO!