The Legal Intelligencer Blog

Business Valuations for Gifting

By Terry Silver
Special to the Legal

The Internal Revenue Code allows an individual making a gift (referred to as a donor) to utilize a lifetime gift tax exclusion. Owners of businesses often wish to pass assets via gifting to children and grandchildren. This is partially or totally accomplished by the use of an individual’s lifetime allowable gift exemption, currently set at $5.25 million (indexed for inflation annually). For indirect or direct skips to grandchildren, a donor also may want to allocate the current available lifetime exemption for generation-skipping tax, also currently $5.25 million (indexed for inflation). For a more detailed description of gift taxation, consult your tax adviser.

A business owner may take advantage of the lifetime gift tax exemption by gifting an interest in his or her closely held business enterprise to a family member. Typically, if a minority, nonmarketable interest of a business is gifted, valuation discounts can be computed, which will increase the amount being gifted from generation to generation. This often can be accomplished while still avoiding the payment of gift tax by staying below the exemption levels of $5.25 million.

A significant advantage of pre-death gifting is the anticipation of the asset’s growth in value from the gift date to the donor’s death date, thus transferring the asset’s appreciation to the donee (younger generations).

Following is a case study:

A privately owned company is equally owned by two individuals via traditional voting stock. The company recapitalizes its equity via the creation of nonvoting stock, which in our case study composes 80 percent of the total equity. An original, 62-year-old shareholder gifts 60 percent of his nonvoting stock to his 35-year-old daughter; the amount represents 24 percent of the outstanding equity of the company. The company had an estimated value of $8 million, pursuant to the business valuation as of the date of the gift. Since the gift represented a minority interest, a discount for lack of control of 25 percent might be utilized. Assume further that the valuation analyst determined this ownership block was not readily marketable, so an additional 20 percent discount for lack of marketability might be utilized. It is even further possible that the analyst might consider an additional 3 percent discount for lack of voting.

In this case study, the resulting estimated value of the 24 percent noncontrolling, nonmarketable, nonvoting interest was $1.1 million. This compares to the intrinsic or nondiscounted estimated value of $1.9 million. Thus, in our case study, the donor transferred $1.9 million of value via a gift of $1.1 million, which represents just a portion of the donor’s lifetime exemption of $5.25 million. Of course, valuation discounts are not always as shown in this case study, and are determined by the valuation analyst based on the specific facts and circumstances of the particular company being valued.

In summary, business owners can utilize discounting to economically transfer company interests to their children and grandchildren during their lifetime. In addition, the donor can transfer the asset’s appreciation to subsequent generations, while still maintaining control over the asset during their lifetime.

A partner in Citrin Cooperman’s Philadelphia office, Terry Silver’s specialties include business valuation services and forensic accounting, testifying as an expert witness in Pennsylvania and New Jersey courts. He is accredited in business valuation through the NACVA and in forensic accounting through the AICPA.

Does a Child-Support Obligation Terminate at Death?

By James W. Cushing
Special to the Legal

Lawyers and laypeople alike know at least the basics regarding child support. Most people know that someone who has his or her child most of the time is entitled to child support from the other parent and someone who has his or her child partially needs to pay child support to the other parent. There are two strains of law regarding child support. The first, as established by the Pennsylvania Legislature, makes it clear that every parent has an essentially absolute duty to support his or her child regardless of whether there is a formal child-support order entered by the court. The second is what most people think of when it comes to the law: One parent formally files for child support in court, a hearing or conference is held and an enforceable court order of support is entered. While this makes sense with living parents, what happens when the parent ordered to pay support, the “obligor,” dies?

It seems pretty clear that child support terminates at the time of the obligor’s death, but what happens when the obligor disinherits his or her minor children, so not only is the child-support obligation terminated, but the obligor’s estate cuts out the child as well? The court has looked into this sort of matter.

Surviving obligees (the parents who receive support) have argued that just because the obligor dies, their own responsibilities do not, and neither do the needs of their children in need of support. Indeed, they have argued that there is, as a result, an inherent injustice and inequity if the support is potentially available in the obligor’s estate but not directed to his or her minor children or, even worse, to some minor children but not others. Pennsylvania courts have expressed sympathy for these arguments raised by obligees; in fact, the court has described these arguments as alluring. Obligees have tried to take advantage of the court’s apparent sympathy for them by presenting other states’ laws that have allowed post-mortem child support.

Unfortunately for obligees, the sympathy of Pennsylvania courts only went so far. The courts have pointed out that while some states allow after-death support, the vast majority have not. In addition, and perhaps most importantly, the courts have thus far been unwilling to extend a child-support obligation from the living to the dead, mainly because they believe doing so encroaches upon the province of the legislature. Indeed, the courts have noted that these arguments have been around for nearly 20 years at this point and the legislature has yet to take action on them. Therefore, the courts have, so far, believed that stretching existing child-support law to the point of obligating the dead moves beyond the province of developing case law and into the realm of altering statutory law as a legislature. The only exception the courts seem to have allowed in this area is when a property settlement agreement or divorce decree specifically allows for child support after death.

For more information on the issues described above, the following cases and statutes may be of interest: Benson v. Patterson, 574 Pa. 346 (2003); Garney v. Estate of Hain, 439 Pa.Super. 42 (1995); Blue v. Blue, 532 Pa. 521 (1992); Gross v. Oeler, 527 Pa. 532 (1991); Sutliff v. Sutliff, 339 Pa.Super. 523 (1985); 23 Pa.C.S. Section 4321.

James W. Cushing is an associate at the Law Office of Faye Riva Cohen P.C., research attorney for Legal Research Inc. and sits on the board of directors of the Christian Legal Clinics of Philadelphia. 

Flaster Greenberg Participates in Bike MS

By Alexa Woronowicz
Of the Legal Staff

Flaster Greenberg participated in the Bike MS: City to Shore Ride to support those affected and indirectly affected with multiple sclerosis.

The firm’s team raised $2,870 for MS research.

Justin Brown, a member of Flaster Greenberg’s trusts and estates, taxation, and business and corporate practice groups, was the team captain.

Brown was recently nominated to Philadelphia’s MS Leadership Class, a group of mobile business professionals in the Greater Philadelphia area who want to make a difference in their community by undertaking a fundraising campaign to benefit local people living with multiple sclerosis, according to a release.

If interested in donating on behalf of the Flaster Greenberg team and its riders in helping Bike MS surpass its $5.6 million fundraising goal by October 31, visit http://goo.gl/XMdjoZ.

Pictured, from left, are firm attorneys Michael Homans and Brown.

 

Attorney Joins Post & Schell as Principal in Washington, D.C.

By Alexa Woronowicz
Of the Legal Staff

Barbara Rowland joined Post & Schell as a principal in its internal investigations and white-collar defense practice group.

She is resident in the firm’s Washington, D.C., office.

Rowland focuses her practice on representing large for-profit and nonprofit corporations in a variety of industries, including pharmaceutical and medical device manufacturing, retail pharmacy, pharmacy benefit management, health care and defense contracting, according to a release.

She provides trial representation and counsel regarding internal and government investigations, and represents boards, management and employees in connection with such investigations, the release said.

Rowland, who spent nearly a decade as a trial attorney with the U.S. Attorney’s Office in Philadelphia, has more than 27 years of experience in government and industry. 

Pennsylvania’s Director-Enabling Regime

By Colby W. Smith
Special to the Legal

A change-of-control transaction is a transformative juncture in the life cycle of any publicly traded corporation. Similar to many states, Pennsylvania – recognizing the significance of this event – has an evolved body of law governing the fiduciary duties applicable to a target company’s board of directors in the context of such a transaction. In this inaugural post in a series of blogs discussing M&A and litigation issues specific to Pennsylvania publicly traded companies in change-of-control transactions, we examine distinguishing characteristics of these fiduciary duties under Pennsylvania’s Business Corporation Law of 1988.

In the wake of the evolving standards similar to those articulated in Delaware’s Revlon decision, which imposed an obligation on the company’s board of directors to achieve the highest shareholder value reasonably available, the drafters of the BCL observed as Delaware courts wrestled with the variety of factors surrounding change-of-control transactions. Seeking to create as much certainty as possible, the BCL’s drafters made clear that the decision-making authority for Pennsylvania corporations is firmly vested with their boards of directors and subject only to Pennsylvania’s business judgment rule. The BCL provides that the boards of directors of Pennsylvania corporations have the power “to accept, reject, respond to or take no action in respect of an actual or proposed . . . takeover or other fundamental change.” In their rejection of the judicial standards similar to those in Revlon, the drafters’ commentary indicates that “it is intended that any decision by the board in this context will be subject only to the business judgment rule . . . and not to some special rule created for situations involving a potential change of control.”

Against the backdrop of these principles, the codification of Pennsylvania’s business judgment rule not only provides for a general tone of deference to a board’s decision-making authority, but also provides further clarification of the appropriateness of the board’s consideration of the facts and circumstances surrounding a change of control. Not surprisingly, the BCL provides that a director of a Pennsylvania corporation must act “in good faith, in a manner he reasonably believes to be in the best interests of the corporation and with such care, including reasonable inquiry, skill and diligence, as a person of ordinary prudence would use under similar circumstances.”

In exercising this general decision-making authority, however, a director is afforded broad discretion to consider the effects on any number of constituencies, including but not limited to the company’s shareholders. Thus, while a board may consider the value provided to shareholders, maximization of shareholder value is not the single determinative factor.

To further entrench decision-making authority with a board alone, the drafters codified a deferential standard of judicial review of a board’s decision. In a rejection of Revlon’s heightened scrutiny, the BCL provides that disinterested director approval of a sale transaction “shall be presumed to satisfy the [business judgment rule], unless it is proved by clear and convincing evidence that the disinterested directors did not assent to such act in good faith after reasonable investigation.” Similar to the commentary described above related to the BCL’s enabling provisions, the commentary to this standard of judicial review states that “case law imposing a stricter standard or heightened level of scrutiny with respect to director action in these circumstances . . . is rejected.”

It is not surprising that, in light of the deferential standards codified in the BCL (and further explained in commentary), shareholder challenges to a transaction approved by the board of a Pennsylvania corporation often face an uphill battle. The next post in this series will focus on the unique challenges to shareholder suits in this context.

Colby W. Smith is a partner in Morgan, Lewis & Bockius’ business and finance practice, resident in Philadelphia. He counsels public and private company clients on various matters, with an emphasis on merger and acquisition transactions and securities offerings. He represents clients in a variety of industries, including technology, health care, manufacturing and consumer products.

PBA Reissues Judicial Candidate Ratings

By Zack Needles
Of the Legal Staff

The Pennsylvania Bar Association judicial evaluation commission has reissued its candidate ratings for the upcoming judicial elections on November 5.

The JEC rated the two candidates for retention on the state Supreme Court – Chief Justice Ronald D. Castille and Justice Max Baer – as well as the two candidates for retention on the Superior Court – Judges Susan Peikes Gantman and Jack A. Panella – as “recommended for retention.”

The JEC also gave both candidates vying for the lone vacancy on the Superior Court – Allegheny County Court of Common Pleas Judge John T. McVay Jr. and Harrisburg attorney Victor P. Stabile – a “recommended” rating.

The JEC said in a press release that Castille has seen the high court through a tumultuous period that has included the Luzerne County “kids-for-cash” scandal, the Philadelphia Traffic Court ticket-fixing scandal and the political corruption conviction and resignation of former Justice Joan Orie Melvin.

“He is credited for his efforts in reorganizing the court system in Philadelphia, for strengthening and improving the judicial discipline system, and for encouraging lawyers to render public interest and legal services work by initiating a law school loan repayment assistance program for their benefit,” the JEC said in the release. “He is recognized for his friendly and forthcoming demeanor, excellent judicial temperament, strong work ethic and substantial output of articulate and well-reasoned opinions.”

Baer, meanwhile, “has distinguished himself by his legal and administrative abilities, integrity and judicial temperament,” according to the JEC.

“He is a collegial member of the court and a consensus builder,” the JEC said. “He writes clear, intelligent and well-reasoned opinions that reflect respect of established law, the precedents set forth by prior Supreme Court decisions and the decision-making responsibility imposed upon that court.”

For the Superior Court, Gantman was credited by the JEC for being “scholarly and energetic,” as well as “possessing exemplary knowledge of legal principles and procedures.”

“She demonstrates sound judgment and possesses the requisite judicial temperament,” the JEC said. “Her opinions are clear, concise and thorough.”

The JEC recognized Panella for his “excellent judicial temperament and a reputation for being a thoughtful and respected jurist” and called his opinions “well reasoned, clear and concise.”

As for the candidates seeking to join the bench, the JEC said McVay “is regarded as having outstanding legal ability in his current position.”

“He is recognized for his diligence, excellent temperament and willingness to employ unique solutions in matters that come before him,” the JEC said.

The JEC credited Stabile, the managing partner of Dilworth Paxson’s Harrisburg office, for his “strong writing skills, administrative ability and experience in handling cases in the appellate courts.”

“He is held in high regard by his peers, who have noted his intellect, strong work ethic and integrity,” the JEC said.

Zack Needles can be contacted at 215-557-2493 or [email protected]. Follow him on Twitter @ZNeedlesTLI.

The C-Suite and the Evolving Alphabet Soup

By Barbara S. Kaplan
Special to the Legal

Law firms and corporate America are questioning the role of the CMO as we know it. Fortunately, they are referring to the position, not the person.

Increasingly, in response to the forces of the new economy and client pressure – it’s a buyers’ market out there – firms have turned to a veritable C-suite of alphabet soup to remain profitable and truly client-focused.

Where does this lead us? To a unique combination of some of the following: CEO, CTO, COO and CIO. Newer to the mix are the CPO - chief pricing officer; CHRO - chief human relations officer; CCO – chief customer officer; and CSO - chief sales officer. Remember the CMO?

This is a universal issue. Even Forbes published an article titled “The Chief Marketing Officer is Dead” in its April 21 issue in which it said that the influence of the CMO is declining and should be reconfigured as the CCO, who adds value (and reclaims power) by being the voice of the client. What does the client need?

The new breed of CMO is projected to be an agent of change by:

• Leading change internally, serving as the collaborator who makes others aware and leads them to make change.
• Delivering efficiencies for the firm and its clients.
• Questioning how to do things differently – expanding and eliminating services; packaging services in new ways; making technology more relevant; matching the right talent to the right roles.

By using client and customer knowledge to build influence, the CMO becomes indispensible to making the firm more sensitive to the market by putting the client at the center and changing the way people think.

In this scenario, marketing is everyone’s job and, for some firms, it may no longer be looked at as an expense.

The firms that move in this direction will do so because it fits with their goals, resources and cultures. Others will not because it doesn’t. In either case, it’s valuable food for thought and exploration.

Barbara S. Kaplan is the principal of BSK Strategies. She works with individuals and firms to help build their business development skills, target and win higher-value work, establish thought-leadership and earn client loyalty.

RatnerPrestia Adds Associate in Washington, D.C.

By Alexa Woronowicz
Of the Legal Staff

Martin E. Miller joined RatnerPrestia as an associate in its Washington, D.C., office.

He focuses his practice on patent prosecution, with expertise in mobile technology, social networking, LED display technology, computer software, analog circuit design, telecommunications, consumer electronics, video coding, image analysis and business methods.

Miller has more than 10 years of legal experience. He previously worked at other Washington, D.C., firms and the U.S. Patent and Trademark Office, according to a release.

He has experience in drafting patent applications and managing complex patent prosecution dockets including U.S. and foreign patent applications.

The Philadelphia Association of Paralegals Celebrates 40th Anniversary

By Alexa Woronowicz
Of the Legal Staff

The Philadelphia Association of Paralegals celebrated its 40th anniversary September 19.

Philadelphia District Attorney Seth Williams received the Paralegal Professional Development Award; Edwin Miller, assistant dean of Peirce College, received the Student Paralegal Professional Development Award; and Pepper Hamilton received the Continuing Paralegal Professional Development Award.

Pictured, from left, are Ruby Gala committee members Clare McManus, Kirsten Fullerton, Christine Flynn, Robert Hrouda, Renee Mazzeo, Judy Stouffer, Vivian Luckiewicz and Lyndora Patterson Tiller.

Photo by Andrew Ludewig/MTI Photography.

E-Discovery Tips to Benefit Your Law Practice

By Gina F. Rubel
Special to the Legal

The Legal Intelligencer hosts its annual Litigation Summit in Philadelphia, which covers a potpourri of issues from e-discovery to trends in the courtroom. As an avid Twitter user, I often share important tips from the speaker using the conference hashtag #TLILitSum. Another way to share those tips is to compile them in a blog for all of our lawyer friends who do not actively use social media.

Here are just a few of the e-discovery takeaways from the CLE program presented by Gerard Dever of Fine, Kaplan and Black, Stephen Harvey of Pepper Hamilton, Shawn Huston of Legal Support Partners, Michael Nelson of DFDR Consulting and Melinda Sungenis of the TASA Group.

• Changes have been proposed for the Federal Rules of Civil Procedure regarding e-discovery. Keep an eye on Rules 1, 26 and 37.
• Requests for social media information are standard in litigation today. However, the social media being requested must be relevant and specific; requests cannot be fishing expeditions. In order to get social media data via e-discovery, you must request specific data including user credentials from the custodian or access the information publicly, if security settings make the information available to all.
• E-discovery needs to be considered early in litigation in order to preserve evidence, especially electronic data, which exists everywhere. Create a data map including all computers, email accounts and servers, smartphones and cellphones, network servers, clouds, databases, proprietary systems, black boxes, fax machines, printers, GPS systems, social media sites, photos, apps, shared drives, PowerPoint presentations, Dropbox files, etc.
• A button on Facebook that says "download my data" allows users to capture their full activity log. Directions on how to do this may be found here.
• Facebook has a 14-day data hold policy until it will overwrite a deactivated account.
• Geolocation data, such as location tags on photographs or “check-ins” on Facebook or the social location app Foursquare can be extremely valuable in litigation.

‏Do you have any other e-discovery tips that you’d like to share? Include them in the comments.

Gina F. Rubel is the owner of Furia Rubel Communications Inc., an integrated marketing and public relations agency with a niche in legal marketing. She and her agency have won national awards for law firm marketing, PR, website and graphic design, social media, strategic planning, corporate philanthropy and leadership. She maintains a blog at www.ThePRLawyer.com and is a contributor toThe Legal Intelligencer Blog, AVVO Lawyernomics and The Huffington Post. Find her on LinkedIn atwww.linkedin.com/in/ginafuriarubel or follow her on Twitter at twitter.com/ginarubel. For more information, go to www.FuriaRubel.com.