The 2001 decision of Gross v. Commissioner (Gross v. Commissioner, T.C. Memo. 1999-254, affd. 272 F.3d 333 (6th Cir. 2001)) fundamentally changed the manner in which valuation experts and the Tax Court treat valuations of S corporations (S-Corps).` In this decision, the Tax Court accepted a valuation report proffered by the IRS that determined that S-Corp shares, are fundamentally more valuable than C corporation shares due to the unique tax characteristics of S-Corp.
Before Gross, business valuation experts for both the Internal Revenue Service and taxpayers typically valued S-Corp that tax affected earnings to measure income for valuation purposes. However, since Gross, the Tax Court has been consistent in its rejection of this valuation practice. Rather, the Tax Court has accepted valuations which remove the imputed corporate taxes from the valuation analysis, causing a significantly higher value indication of the S-Corp; sometimes by as much as 60 percent or more.
Emboldened by Gross and subsequent decisions on this issue, the IRS continues to challenge taxpayers submitting S-Corp valuation reports which fail to properly address the tax-affecting issue. With over 4 million S-Corp in existence, the impact of this development has significant consequences to taxpayers.
Just released, an internal IRS document reveals the agency’s most current thinking on the valuation of S-Corps. While the document was written to help IRS professionals who are examining S-Corp appraisals, it presents a wealth of information for appraisers, estate planners, and holders of S-Corp shares.
Entitled: “Valuation of Non-Controlling Interests in Business Entities Electing to be Treated as S Corporations for Federal Tax Purposes: A Job Aid for IRS Valuation Analysts,” we’ve provided a copy of it for your review. Just click here to obtain a copy.
And feel free to contact us at Advent Valuation Advisors to help you address this and other complex business valuation issues.