CPA expert 2004 spring

              CPA
Spring 2004
Contents
4 Response to One Man’s Opinion
6 Q&A on Business
Valuation and Forensic & Litigation Services
8 Recognizing and Prosecuting Ponzi Schemes
12 FYI...
Letters to the Editor
CPA Expert encourages read­ers to write letters on issues related to business valuation and litigation and dispute resolution services and on published articles. Please include your name and tele­phone and fax numbers. Send your letters by e-mail to wmoron@aicpo.org.
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AICPA Newsletter for Providers of Business Valuation & Litigation Services
IRS INCREASES SCRUTINY OF CHARITABLE CONTRIBUTIONS OF INTELLECTUAL PROPERTY
By Mark L. Zyla, CPA/ABV, CFA, ASA
Many companies have become proac­tive in managing the assets on their balance sheets in order to maximize value. These enlightened companies are paying closer attention to the value created particularly by their patents, trademarks, copyrights, and other intellectual property, and are actively managing the value creation and retention of these assets. One strategy to create value is to “mone­tize” intellectual property through the careful exploitation of the com­pany’s intellectual property. A com­mon way to monetize intellectual property is to use it in existing or new products or even to license the tech­nology to third parties.
Some viable intellectual property, however, may not be a candidate for this strategy. Another alternative for this intellectual property is to donate it in a charitable contribution to orga­nizations such as universities, teach­ing hospitals, or research institutions, which can readily exploit it. If struc­tured properly, the fair market value of the contributed intellectual prop­erty can provide an income tax deduction for the donating corpora­tion, which obviously creates value for the corporation.
The practice of donating intellec­tual property in a charitable contribu­tion is, however, under increased scrutiny. President Bush’s 2005 bud­get as currently proposed, would limit the tax deduction for charitable con­tributions
of intellectual property. The Internal Revenue Service is look­ing closely at corporations taking deductions in these types of transac­tions. For valuation analysts, however, this increased scrutiny creates oppor­tunities to provide well documented and supported valuations of intellec­tual property to be donated in a char­itable contribution.
To provide guidance on the deductibility of the fair market value of intellectual property donated in a charitable contribution, the Internal Revenue Service recently issued two pronouncements, Revenue Ruling 2003-28 and Notice 2004-7. The IRS has put taxpayers on notice that they are paying closer attention to the fair market value of donated intellectual property claimed by them. The pro­nouncements emphasize that a well supported valuation is critical in these types of transactions.
It is therefore incumbent upon the valuation analyst performing such valuations to understand the IRS pro­nouncements as well as the generally accepted valuation methods used in performing these valuations in con­junction with the donation of intel­lectual property in a charitable con­tribution.
MONETIZING INTELLECTUAL PROPERTY
As we mentioned earlier, one strategy in managing the intellectual property portfolio of a large company is to