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Tax Court Partially Upholds Business Valuation Discounts for Estate Tax

The Tax Court has partially upheld the discounts applied in the valuation of two closely held companies for estate tax purposes.  In the case, when the decedent died she held a 43% interest and 23% interest in two closely held corporations.  The estate tax return claimed a 68% discount for the decedent’s interest in one company and a 65% discount for the other.  However, the IRS found that these discounts should have been closer to 30% and 23%.  The Court disagreed with the IRS, holding that the materials submitted by the estate supported the previously claimed discounts.  Overall, the Court found that the IRS’s expert did not take into consideration appreciation in some assets and the fact that the decedent had a smaller ownership interest in one company, providing less control.  But the Court did conclude that the estate discount for lack of marketability was too high.  Therefore, the Court upheld the majority of the discount applied by the estate, resulting in a savings in estate tax.

Points of Interest

  • Obtaining credit or finding a buyer for your business becomes impossible to achieve when you are using documents prepared with the specific purpose of reducing tax liability.
  • Banks will lend a borrower money with adverse information only in limited situations.
  • The recasted statement will give a bank or investor a better idea as to what is actually owned and owed by the company and what its true market value is.

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