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The Basics of a Special Needs Trust

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Caring for a loved one with a disability or extra needs is wrought with many challenges. One of these challenges can be how to leave assets to this beloved after your death in such a way that does not disqualify them from the governmental benefits to which they are entitled. A “special needs trust” can be one solution to this problem.

Funding Special Needs Trusts

Sometimes called a supplemental needs trust, a special needs trust is established for the benefit of a person with special needs to help him or her financially after your death. Usually established by parents for their disabled children or by children for their elderly parents, it is a vehicle by which to leave money or property behind without giving direct control over the assets. In this manner, the value of the assets in trust can be excluded from being considered in federal or state means-tested benefits of the beneficiary, thus allowing them to still receive such items as Supplemental Security Income (SSI) or Medicaid.

Several kinds of assets such as cash, real estate, business interests, stocks or intangible assets can be held in a special needs trust. Property belonging to the beneficiary can be used to fund the trust or assets from another party can be used instead, but both sources of assets should not fund the same trust, meaning there can be more than one special needs trust established for someone.

Improving Quality of Life

Collectively, these assets are used by the trustee(s) (who cannot be the beneficiary) to fund expenses that improve the quality of life for the beneficiary and that are not already covered by existing government benefits. Some examples of such expenses include:

  • Additional caregiving or personal therapy, including visits to or expenses of a companion
  • Reasonable expenses for experiences such as travel and visits to relatives or entertainment
  • Costs for special transportation
  • Personal items

The trust would pay for such expenses directly rather than the beneficiary receiving cash to pay for these expenses him or herself, which might jeopardize benefits.

Finally, a special needs trust has a finite life. It will terminate either when the funds in the trust are depleted, the beneficiary no longer needs the trust, or the beneficiary passes away.

Other Options

Note that there are other avenues by which to give assets or the use of assets to your disabled loved one, one of them being a 529-ABLE plan administered by each state. However, with those plans there are limitations on the annual contribution to the plan and the total value the plan can achieve.

If you are considering one of these vehicles to improve the quality of life of someone in your life with special needs, please contact us so we can help you get started.

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Good News from the IRS for S-Corp Shareholders!

Bona fide indebtedness determination lowers hurdle to obtain debt basis.

For S corporation shareholders, borrowing from one company they own to fund another is a common way to inject some cash into a growing business—especially in these days of conservative lending. But previously, if the funded company experienced losses and you wanted to take deductions for those losses on your personal tax returns, you had to meet a high bar to prove that loan increased your debt basis in the company.

As a result of the previous position of the IRS and tax courts, shareholders who borrowed from one related entity in order to loan to another had a particularly hard time defending their debt basis. But thanks to final rules from the IRS, that bar has been lowered and S corporation shareholders are now more likely to qualify for tax deductions for entity losses that have been passed through to them.

Bona Fide Indebtedness Determination

On July 23, the IRS issued final regulations on debt basis determinations for S corporation shareholders (T.D. 9682). These final rules implement a “bona fide” debt basis determination as opposed to the controversial “economic outlay” doctrine that has been developed by the courts over the last several years. 

Under the economic outlay doctrine, in order to obtain debt basis an S corporation shareholder must incur a true economic outlay through a transaction, which when fully consummated, left the taxpayer poorer in a material sense.

On the other hand, bona fide indebtedness is determined under general Federal tax principles and depends on all the facts and circumstances. Basically, a bona fide debt is one that creates a true debtor-creditor relationship that is based on a valid and enforceable obligation to pay a fixed or determinable amount of money. This means that shareholders who structure and document their loans to an S Corporation in the correct way can now qualify for debt basis in that S corporation, and as a result, can claim current tax deductions for their share of any losses that S corporation experiences.

This is a win for both the shareholder and the company.  The shareholder has potential for additional deductions and the company gets a cash infusion that has potential tax minimizing opportunities for the shareholder.

Back-to-Back Opportunity

Previously, the IRS and tax court often used the economic outlay doctrine to deny debt basis to shareholders for funds borrowed from a related entity and then loaned to the S corporation by the shareholder. These transactions are often referred to as back-to-back loans. The reasoning was that, by borrowing from Peter to pay Paul, the shareholder was not considered to be making a true economic outlay.

But with the new debt basis rules, shareholders who structure and document their back-to-back loans to qualify as bona fide indebtedness (see below) are more likely to obtain debt basis—and claim tax deductions—as result of those loans.

The Look-Back Opportunity

While the final debt basis rules were issued with minimal changes to the proposed regulations, one significant highlight is that the final rules did expand their application to open tax years.

What does this mean for you? In addition to the potential tax benefits of restructuring related entity loans going forward, shareholders who have made back-to-back loans in any open tax year and didn’t increase their debt basis now have the opportunity to go back and claim deductions for any previously disallowed losses—if they can demonstrate there was bona fide indebtedness.

Determining Bona Fide Indebtedness

While there is no bright-line test to prove that a debt is bona fide, the key is to demonstrate that there is a true debtor-creditor relationship. Based on federal tax principles, the following steps can help support the determination of bona fide indebtedness:

  1. Make sure there is documentary evidence of the transaction (i.e. a written loan agreement).
  2. Both parties should reflect the transaction as a loan in their records.
  3. Setup a fixed repayment schedule and make efforts to follow the schedule in order to create a history of regular repayments.
  4. The loan should require interest and the rate should be at least as much as the Applicable Federal Rate (AFR).
  5. Consider collateral to secure the debt.
  6. A demand for repayment should be issued if necessary.
  7. There needs to be intent to create a valid debtor-creditor relationship and the lender must have an expectation of receiving repayment at the time of the loan.

Review S Corporation Financing Strategy

If you are a shareholder in one or more S corporations, work with your tax advisor to review any existing or prospective loans for the opportunity to demonstrate bona fide indebtedness—and therefore obtain debt basis to claim current tax deductions for any entity losses in the future and/or any suspended losses in open tax years.

Going forward, you and your CPA might find that funding S corporations with properly structured back-to-back loans provides a tax-advantaged way to finance a new venture with funds from a more established company.

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Samuel C. DiSalvo to Speak at the Knowledge Group’s ASC 740

New York, NY, May 17, 2014 --(PR.com)-- The Knowledge Group/The Knowledge Congress Live Webcast Series, the leading producer of regulatory focused webcasts, has announced today that Samuel C. DiSalvo, Tax Director, Freed Maxick CPAs, P.C. will speak at the Knowledge Group’s webcast entitled: “ASC 740: Income Tax Accounting for 2014.” This event is scheduled for October 16, 2014 from 12:00pm – 2:00pm (ET).

For further details, please visit: http://theknowledgegroup.org/event_name/asc-740-income-tax-accounting-for-2014-live-webcast

About Samuel C. DiSalvo
Samuel C. DiSalvo is a Director with Freed Maxick’s Tax Practice. Prior to joining the Firm, Sam spent over 25 years in the accounting profession with both Big Four firms and private industry. During this time, he gained significant experience with mergers and acquisitions, corporate taxes and compliance, and financial statement tax accounting.

Sam is responsible for providing day-to-day tax advisory services, coordinating, and supervising the preparation of the corporate income tax returns, and reviewing the annual and quarterly provisions for income taxes for both publicly held and privately held corporations. Sam concentrates his practice on joint venture tax matters, merger and acquisition issues, and corporate taxes as well as ASC 740 issues such as purchase accounting, valuation allowances, and international issues. He also has significant experience in identifying tax opportunities in connection with the due diligence reviews of companies’ prior year tax returns.

About Freed Maxick CPAs, P.C.
Freed Maxick CPAs, P.C. is one of the largest accounting and consulting firms in Upstate New York and a Top 100 largest CPA firm in the United States. Serving SEC companies, closely held businesses, governmental and not-for-profit clients across New York as well as nationally and internationally, Freed Maxick mobilizes high-performance professionals to guide client growth, compliance, and innovation. They specialize in the healthcare, manufacturing, real estate, banking, agribusiness and private equity sectors and have more than 280 professional and administrative personnel, with offices in Buffalo, Batavia, Rochester and Syracuse, New York. Freed Maxick’s Tax Practice is the largest of any accounting firm in Upstate New York with over 110 personnel, including 12 tax directors. Freed has built a significant SEC Practice through years of experience in auditing a wide variety of companies and has extensive knowledge in handling public and private capital transactions.

Event Synopsis:
In this two-hour Live webcast, a panel of distinguished professionals and thought leaders will help Finance Executives, CPAs, Attorneys, Enrolled Agents, Tax Practitioners, and other related professionals understand the important aspects of this significant topic. They will provide an in-depth discussion of the significant issues related to tax accounting rules and latest developments in ASC 740. Speakers will also offer best practices in developing and
implementing an effective income tax accounting strategies.

Key topics include:

− An overview of ASC 740: Income tax accounting

− Review issues/considerations on significant areas including valuation allowances, business combinations and uncertain tax positions

− Guidelines and best practices

− Latest tax accounting and regulatory developments and a lot more.

About The Knowledge Group, LLC/The Knowledge Congress Live Webcast Series
The Knowledge Group, LLC was established with the mission to produce unbiased, objective, and educational live webinars that examine industry trends and regulatory changes from a variety of different perspectives. The goal is to deliver a unique multilevel analysis of an important issue affecting business in a highly focused format. To contact or register to an event, please visit: http://theknowledgegroup.org

 

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How the Red Flags Rule May Apply to You

By: Michael Boeheim, Director, CIA CFE

 

Some nine million Americans will likely have their identities stolen this year, according to the Federal Trade Commission (FTC). Identity thieves may steal money, damage credit scores and rack up unpaid credit.

The goal of the Red Flags Rule is to reduce the risk of identity theft. Some commercial lenders mistakenly think it doesn’t apply unless they make personal loans. But the rule actually applies to many small business lenders, as well as business borrowers.

What the rule means

A team of Federal banking agencies and the FTC have come together to develop and enforce the Red Flags Rule. The rule requires creditors and financial institutions to create, implement and administer a written identity theft prevention program.

Who’s affected by it

Any financial institution that directly or indirectly holds consumer accounts must comply with the rule. Moreover, it applies to creditors who defer payment for goods or services, as well as those that arrange, renew, extend or set credit terms. The rule must be followed if the creditor regularly uses consumer reports or files reports with credit agencies in the ordinary course of business.

The FTC calls out small business and sole proprietor accounts as possessing a “reasonably foreseeable” risk of identity theft. If your bank requests personal financial statements from business owners, or it runs credit checks on people who guarantee your commercial loans, the rule will likely apply to you.

It also applies to many borrowers — including utility and telecommunication providers, auto dealers, and some financial services firms — that hold covered transaction accounts.

4 steps to compliance

To comply with the Red Flags Rule, you’ll need to follow this four-step process:

1.      Identify any and all relevant red flags. These include suspicious patterns or practices that can forewarn of the possibility of identity theft, such as signatures or documents that appear to be forged, inconsistent Social Security numbers or addresses, and undeliverable mail.

2.      Detect those red flags. Your bank should implement identity verification and authentication procedures to uncover possible red flags. You might ask to see prospective borrowers’ IDs, or perhaps run personal credit checks on them. PINs, signatures and security questions can help you confirm the identity of existing account holders.

3.      Mitigate and prevent theft. Red flags require appropriate and prompt responses, including contacting the customer, notifying law enforcement agencies or changing passwords.

4.      Update the program. New red flags will likely emerge and business models will change. So, as part of your annual “spring cleaning,” evaluate if you and your borrowers are doing all you can to protect personal information from identity theft.

 

Freed Maxick’s Asset Based Lending Team works with dozens of asset based lenders across the country. We can assist you in assessing your four steps to compliance. If you think you are not in compliance with the Red Flags Rule, contact us today.

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Canada Signs Tax Information Sharing Agreement with the U.S.

By Howard Epstein, CPA Director

Canada and the United States have signed a tax information sharing agreement, months ahead of implementation of a new U.S. law to help the IRS crack down on offshore tax avoidance.

The so called intergovernmental agreement (IGA) was made in an effort to address Canadian government concerns about the reach of Washington’s Foreign Account Tax Compliance Act (FATCA) that will go into effect in July 2014.

FATCA would have forced Canadian banks to provide the IRS information on accounts held mainly by U.S. citizens and residents with accounts in excess of $50,000.  Additionally, it would have automatically imposed a 30% U.S. withholding tax on non-compliant foreign businesses.  To date Washington has signed 21 other agreements with other individual countries, including Hungary this month and Italy and Mauritius in December.

Under the terms of the IGA, Canadian tax authorities will be allowed to collect information from the country’s banks and share it with the IRS under an existing bilateral tax treaty.  Government officials indicated that the IGA narrows the scope of information required to be collected from account holders in Canada.  Some smaller financial institutions will be exempt as well as certain registered savings vehicles such as Canadian Registered Retirement Savings Plans.

Recent estimates show that about 1 million U.S. citizens reside in Canada and many may be affected by the new agreement.  Canadian banks will start collecting information in July of this year and the Canada Revenue Service will begin reporting to the IRS in 2015.

FATCA provisions were originally scheduled to take effect on Jan. 1, 2013. In 2011, the start-date was postponed to Jan. 1, 2014 and then in the middle of last year the start date was pushed back again to July 1, 2014.  In the meantime, the U.S. Treasury and IRS are rushing to finish FATCA rules and associated forms that financial institutions need to avoid the law’s tax penalty.

With the implementation of FATCA and the government entering into these IGA’s, the IRS continues to tighten the net they are casting on US citizens residing in US and abroad that have ignored their Foreign Bank Account Report (FBAR) filling requirements. The penalties for willfully choosing to not file the Form 114 by June 30th each year can be devastating, but there are programs in place for taxpayers to come forward voluntarily and remediate or eliminate potential penalties.

If you are someone who has not been compliant with their FBAR filings you should contact a tax professional as soon as possible to discuss your options.

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Buffalo Competition Gets Buffalo Billion off the Ground Running

By: Don Warrant, CPA Director

On February 5th, 2014, Governor Andrew M. Cuomo announced the largest business competition in the United States; “43North”. The competition—named after the latitudinal line that runs through Western New York—features $5 million in cash prizes, with a top prize of $1 million.  The competition is part of Governor Cuomo’s Buffalo Billion initiative.

buffalo aerial view small

43North is designed to systematically generate new business ventures in Western New York while providing mentoring and other aid for aspiring entrepreneurs, supporting early-stage firm growth and attracting additional venture funding. The objective of this bold and proven approach is to position Upstate New York and the Greater Buffalo Niagara region squarely on the map of America’s newest innovation and entrepreneurship hotbeds.

In addition to the top cash prize of $1 million, 43North will award six $500,000 prizes and four $250,000 prizes. Winners also receive free incubator space for a year, guidance from mentors related to their field, and access to other exciting incentive programs, like Start-Up NY.

43North is open to applicants ages 18 and over from anywhere in the world in any industry, with the exception of retail and hospitality. Winners must agree to operate their business in Buffalo, New York for a minimum of one year.

The competition will be broken down into three rounds, with each round being judged independently of one another.

·       Round 1 (February 5 – May 31, 2014): applications from prospective businesses will be accepted via the competition’s website, 43North.org. The purpose of Round 1 is for applicants to provide a vision for their venture, including their business concept, target customers, industry overview, competitive landscape, and revenue potential. This submission is not intended to be as comprehensive as a detailed business plan, but should provide the judges with a summary of the major elements of the venture.

 ·       Round 2 (September 15 – September 20, 2014): the semifinalists will present further detail on their plan, along with a 10-minute online presentation to 43North’s judging panel, followed by 10 minutes of questions. The plans put forward in Round 2 will include the venture’s business concept, value proposition, competitive analysis, communication and distribution channels, client relationships, key stakeholders, resources and activities, cost structure, revenue streams, and financial considerations.

·       Round 3 (October 27 – October 31, 2014): the final stage of the competition is for finalist teams to pitch their business in person to a panel of judges in Buffalo. Each team will have 10 minutes to sell their business idea, followed by 10 minutes of questions. Teams will be assessed on overall organization of the presentation; the team’s ability to “sell’ the idea and need for the company; the team’s ability to defend the plan and be responsive to questions; and the quality of the overall plan. The competition concludes with the selection of winners and celebrations.

Deadline for submissions is May 31st, 2014.

If you have questions regarding the 43 North Global Business Plan Competition please visit their website here: http://www.43north.org/43north-hits-the-road-to-promote-business-plan-competition

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Breaching the Walls of Unsecured Patient Data

By: Shawn M. Frier, CPA, CFE, CMPE Director

 

The focus of protected health information (PHI) privacy has increased a great deal due to the rise in data breaches. In the last two years at least one case of PHI data breach has been noticed in almost 94% of healthcare practices. The magnitude and frequency of the breaches has increased to such an alarming rate that if this trend continues, the average annual cost to healthcare industries could reach $7 billion dollars.

patient security breach

PHI breaches can happen easily if you’re not aware of the risks that exist, both inside and outside of the practice. Encrypting data helps protect patient data and can help you avoid costly breaches. These breaches, while costly, are usually due to simple human error. For example, an employee might walk away briefly to fetch paperwork, mistakenly leaving a laptop with patient data open. It only takes a glance or a second to download or retrieve that data. Smartphone’s are another high concentrated area for data breaches. Unfortunately, multi-tasking is a necessity and many physicians and staff use Smartphone’s to conduct business due to their easy accessibility. But smartphones are just as easily accessible to a data breach. A report published 2012 by a South Florida Institute; found that 50% of breaches in 2011 were from laptops or mobile devices. 80% of organizations surveyed stated that they allowed employees to use their own mobile device, and had not taken steps to ensure data security for personal devices.

Determine what needs to be encrypted

Assess which technology poses the highest risk of being stolen or accessed by an unauthorized user.  The most popular devices usually include phones, laptops, tablets and any portable hard or flash drive. You should put both physical and technical safeguards in place to minimize the amount of confidential data stored on encrypted devices. Steps healthcare providers can take to physically safeguard devices are:

  • Keeping an inventory of personal mobile devices used by healthcare professionals to access and transmit PHI,
  • Storing mobile devices in locked offices or lockers,
  • Installing radio frequency identification (“RFID”) tags on mobile devices to help locate a lost or stolen mobile device and,
  • Using remote shutdown tools to prevent data breaches by remotely locking mobile devices.

You can use technical safeguards such as accessing data on servers using remote access connection rather than downloading the data to a device. Other safeguards include:

  • Installing and regularly updating anti-malicious software (also called malware) on mobile devices,
  • Installing firewalls where appropriate,
  • Applying encryption to PHI,
  • Installing IT backup capabilities, such as off-site data centers and/or private clouds, to provide redundancy,
  • Putting into place biometric authentication tools to verify the person using the mobile device is authorized to access the PHI and,
  • Ensuring mobile devices use secure, encrypted Hypertext Transfer Protocol Secure (“HTTP”) similar to those used in banking and financial transactions.

Administrative safeguards are another reasonable approach when putting a plan together to secure data on mobile devices. For example, conducting periodic risk assessments of mobile device use, including an assessment of whether personal mobile devices are being used to exchange PHI and whether proper authentication, encryption and physical protections are in place to secure the exchange of PHI. Also establish an electronic process to ensure the PHI is not destroyed or altered by an unauthorized third party. These are just a few steps that administrators can take to help prevent or reduce data breaches within their practice.

If you have questions or concerns contact us here or give us a call at 716-847-2651.

 

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How can you ensure divorce cases are equitable?

By Ron Soluri, Jr. CPA Director

In typical divorce cases, courts will try to split assets equitably between both spouses. But, at times, the parties can make the court’s job quite difficult by hiding assets or performing their own valuations. The key to a fair settlement is hiring an experienced financial expert to accurately appraise the assets.

Inadequate Discovery

A common roadblock to an equitable asset split in a divorce is inadequate discovery. When the divorcing spouses own a business, it can be their biggest and most illiquid asset. But a spouse who controls a business can often be reluctant to release certain information, such as tax returns, financial statements, contracts, business plans and marketing materials.

Divorcing spouses may also resort to unscrupulous behavior and actually hide income or assets. Others may argue that giving an appraiser access to such information will breach the company’s security and interrupt its business operations.

When valuing a company, an appraiser must have access to information that’s usually known only to insiders. Make sure you involve your financial expert early on in the process to help improve the scope of discovery. And be sure to ask him or her for a complete list of documents and procedures that’s needed to complete the job.

Digging Out Fraud

At times, spouses might try to hide assets in anticipation of an impending divorce. Or a business owner might delay reporting his or her income or even overstate expenses until the divorce is settled.

Let’s look at an example of such behavior. Mrs. Moneybags opened a bank account under her adult son’s name and set aside $200,000 over three years. She suspected that her husband was being unfaithful, and she wanted to tuck away some funds, just in case he left her. Trouble is, the $200,000 legitimately belongs in the Moneybags’ joint marital estate — regardless of which spouse is in the wrong.

If you or a client thinks the other spouse is concealing income or assets, the actual scope of an assignment may need to be expanded to investigate any asset misappropriation or financial misstatement. Financial experts in such divorce proceedings often have a background in forensic accounting, so make sure you tap into their fraud expertise.

Solving the problem of subjectivity

As you know, divorce cases can be fraught with subjective issues. For instance, it may be unclear whether discounts for lack of control and marketability (common in Tax Court cases) apply in divorces. There are other relevant issues that might apply when appraising a business. They may include the appraisal date, the appropriate standard of value, and the local courts’ treatment of goodwill and buy-sell agreements.

Although it’s quite necessary to look at applicable case law in the appropriate state, having an understanding of legal precedent in other jurisdictions can be helpful, as well. For example, family courts sometimes consider cases in other states, especially if the state hasn’t ruled on a similar case or if state case law is contradictory.

The parties might also argue whether it’s appropriate to subtract built-in capital gains tax liabilities when the joint marital estate includes C corporation stock. If the economy is volatile, the parties might argue over whether the court date or the filing date is actually the more appropriate “as of” date for valuing retirement accounts, stock and other marital assets.

Points of contention like those expressed above can slow down a divorce case and even add an element of uncertainty to court-imposed settlements and judges may have different interpretations of these issues. Sometimes, the parties are simply better off negotiating their own out-of-court settlements.

Avoiding the DIY scenario

If a client brings up the idea of a do-it-yourself (DIY) assessment of assets as a way to save money, don’t let him or her do it. Professional appraisers use highly sophisticated methods to help value assets, particularly businesses. Such methods often include the adjusted book value, merger and acquisition, guideline public company, capitalization of earnings and discounted cash flow methods. Such techniques are preferred by the courts.

Shortcuts, such as net book value, industry rules of thumb, or buy-sell formulas, will likely be inadequate. And any attempts to fraudulently hide or misrepresent assets could lead to even more legal trouble that will make the original divorce action seem like a walk in the park.

It is wise to consult with valuation analysts and CPA’s who can provide solid litigation support in these cases and provide adequate comparables, as well as analyzing financial results that ultimately lead to an accurate determination of value assets.

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The 101 on Patent Infringement Damages

By: Joseph Aquino, CPA Director

 

 

Calculating damages in patent infringement cases still poses a challenge in today’s world. In addition, expert testimony on the matter typically comes under heavy Daubert scrutiny. In the case of Brandeis University, et al, v. Keebler Co., et al, Judge Posner of the Seventh Circuit Court of Appeals (sitting by designation in a federal district court) pretty much excluded most of an expert’s proposed damages testimony — despite finding her to be “highly qualified” and quite competent to estimate reasonable royalties.

Infringing a patent

This case involved patents for a certain type of margarine that doesn’t contain any trans-fats. The plaintiffs alleged that the Keebler Company’s reduced-fat biscuit, cookie, cookie dough and crescent roll products infringed the patents. What was at issue here? The reasonable royalty that Keebler would have paid the licensor if it had just negotiated a license before it started using the infringing product rather than risk being sued.

Judge Posner stated that Keebler wouldn’t have paid a royalty that’s higher than the cost of switching to a noninfringing substitute for the plaintiffs’ margarine . . . or otherwise reworking its manufacturing process to help avoid making the infringing margarine. Posner rejected the plaintiffs’ expert’s conclusion on the basis that no noninfringing alternatives to the patented margarine could be found. (See the sidebar “Why you shouldn’t go it alone.”) But he also explained that just the lack of a perfect substitute by itself wouldn’t allow the estimation of a reasonable royalty. That royalty would depend on the costs of higher production expenses and loss of business to competitors to create the best imperfect substitute. The expert offered no evidence on either cost.

Instead, the expert based the calculation of a maximum reasonable royalty on the business’s maximum profits that she deemed to be at risk if Keebler didn’t get a license. So, she relied on three “comparable” licenses in order to project the maximum amount of profits that Keebler put at risk by simply failing to obtain a license.

Understanding the licensing issue

The court actually rejected the expert’s reliance on two of the licenses out of hand. One license resulted from the settlement of a patent infringement suit. Judge Posner found that licensee to be “wholly dissimilar to Keebler.”

As to the second license, it was also granted in settlement of litigation. The stated payment for the license was just a one-time payment, but it seemed to have been returned to the licensee as consulting fees over the next several months. Moreover, the settlement allowed for changing a strategic partnership between the licensee and a subsidiary of the licensor. And, in return for those benefits, the licensor agreed to dismiss the lawsuit and grant a license.

Judge Posner postulated that the expert had made no attempt to value any individual component of the settlement agreement that produced the second license. Therefore, she really couldn’t “responsibly” value the patent license itself.

Only the third license came even close to providing a reasonable comparable. Like the Keebler company, the licensee was a large food conglomerate that creates baked goods alleged to infringe, thus allowing an inference that Keebler would have paid just as much as the licensee. Changes occurring since that license was negotiated in 2005 would thus drive the licensor to insist on a higher royalty.

Using reasonable methodology

In the end, Judge Posner found that the plaintiffs’ expert had truly failed to use a reasonable methodology when calculating the damages by reference to two of the licenses. He also noted that the expert had failed to calculate the profits at risk or even assess the cost of noninfringing alternatives. But, he did allow her to testify on the third license, which remained a “possible basis” for estimating a reasonable royalty, and on the general principles of patent damages.

Sidebar: Why you shouldn’t go it alone

The plaintiffs’ expert in Brandeis University, et al, v. Keebler Co., et al (see the main article) got into a lot of trouble because she simply didn’t make proper use of input from other types of experts. The damages expert testified that there was simply no cheap and satisfactory substitute to the patented margarine. The expert also testified that, in order to avoid both trans-fats and use of an infringing margarine, Keebler would have had to consider all the possible effects of substituting a noninfringing margarine (which would likely cause sogginess) on consumer demand.

But the expert was an economist, and not an expert on consumer demand for cookies, and she didn’t consult with a sales or marketing expert. She did, indeed, consult with a biochemist specializing in food, but he wasn’t a food scientist. Judge Posner also faulted the expert for not consulting with an industrial baker on the cookie’s sogginess issue. He ruled that the damages expert couldn’t rely on the biochemist’s conclusion that no noninfringing alternatives were available that would cost Keebler less than a “hefty royalty to the plaintiffs.”

In conclusion, it is critical in cases such as these to make sure that input from qualified experts are chosen to verify the information utilized in each particular case.  Valuation analysts and CPA’s can provide solid litigation support in these cases by researching and providing adequate comparables as well as analyzing financial results that ultimately lead to an accurate determination of value or calculation of damages.

 

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Three Tax Credits You Should Know About

NY State Tax CreditsWith the new release of income tax credits, three New York State business tax credits have been extended or created to help reduce New York State income tax liability. These credits include potential claims for refundable credits even if you do not owe any income tax and may benefit employers.

For a full explaination of these credits please see our client alert here.

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