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Tax Court Rejects Doctors’ Donated Stock Valuations As Too High; Assesses 40% Accuracy Penalty For Not Acting In Good Faith

The Tax Court only allowed doctors who donated stock in their practice to a newly formed tax-exempt professional services corporation (PSC) a small portion of the charitable contribution deduction they had original claimed.  The Court found that the value of the donated stock to be too high and should not have been valued because it was going to be too high and should not have been valued because it was going to be consolidated into the PSC.

The Court also assessed a 40% accuracy penalty to each taxpayer because they did not act in good faith when valuing the stock.  While the taxpayers claimed that they relied on professional appraisers and advisors, the Court found that they were educated and should have known of problems in valuing the stock so high when the medical group was not likely to continue operating.

Editor’s Comment

This case demonstrates the expensive consequences of improperly valuing stock.  It is important to always act in good faith in disclosing information to the IRS.  While the taxpayers in this case were trying to save money by overstating a charitable contribution deduction, it ended up costing them more in the long run when they were ultimately assessed with a 40% penalty.

Remember, the valuation of stock in a private company should not be left to general predictions and/or individuals who are not independent of the operation.  It’s important to retain valuation professionals that are knowledgeable about the industry that the business is in.  Contact the valuation professionals at The Center for an analysis of your company’s worth.

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