Valuations Include Everything
The Tax Court upheld a stock valuation in a closely held business. The taxpayer transferred nearly 10,000 shares valued at roughly $220 per share into 20 irrevocable trusts. The IRS disagreed with the valuation and believed it should be about 17% higher than what it was valued at by the taxpayer. Initially, the Tax Court presumed the IRS’s valuation was correct. The court decided that the taxpayer’s expert undervalued the company because he did not adequately account for the value of a large note.
The taxpayer also used incorrect income measures and did not use all of the company’s guideline multiples.
On the other hand, the IRS’s valuation was also deficient, because it did not take into account a minority discount and did not have many performance measures or company comparisons. Because the taxpayer failed to meet his burden of proof that the statutory notices received by the IRS were incorrect, the value was found to be between the taxpayer’s and the IRS’s valuation.
When valuing a business, it is important that all items be included in the valuation. Leaving a material item out of a valuation can only lead to trouble and give the IRS ammunition to use against you. It is important that the taxpayer reach a reasonable conclusion based on the available facts and numbers.
From a defensive standpoint, it is always helpful to note the deficiencies in the IRS’s valuation. Everything has its weakness. The IRS opened itself to attack on its case by not including appropriate discounts and considering company comparisons.
Readers should be forewarned that all aspects of a valuation, including comparables should be considered in a valuation.
By: Basi & Basi at the Center for Financial, Legal and Tax Planning for Transworld M&A Advisors