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Tax Court Holds Valuation of Interest in Privately Held Corporation May Be Properly Discounted for Lack of Control, Lack of Marketability and Built In Capital Gains

The Tax Court held that the value of a decedent’s interest in a closely-held corporation was properly calculated by using discounts to reflect lack of control, marketability, and built in capital gains.  The decedent owned a very small minority interest in a well established corporation with very large potential for capital gains.  When the decedent passed away, the estate valued the interest.  The IRS argued the value was too low and discounts were unreasonable as calculated.  In Court, the Tax Court agreed that the discounts were too deep, but allowed the control and marketability discounts along with a reduction in value for capital gains.

Points of Interest

  • Those holding industrial stocks, financial stocks, transportation, and energy stocks are reporting their portfolio values have been cut essentially in half.
  • A stock that has been battered in value or has become worthless still contains value for those holding the stock. The value comes in the form of a tax deduction.
  • Timing capital losses against gains is critical, otherwise you could potentially have unused losses for the rest of your life.

By: Basi & Basi at the Center for Financial, Legal and Tax Planning for Transworld M&A Advisors