Navigating the IRS valuation requirements can be challenging. Tax laws define the taxes that are due when assets are transferred from one party to another. These transfers come in different sizes and shapes.
Estate Taxes. Taxes are paid on the transfer of the estate of a deceased party. Value must be reported to the IRS and taxes are paid on those values.
Gift Taxes. Taxes paid on the pre-death transfers in an estate that are the result of gifts that exceed the annual exemption amounts or that are designed to reduce the estate taxes that would be paid on a future date. Pursuant to Internal Revenue Service Code Section 6501(C)(9), parties who report defendable values to the IRS and meet the adequate disclosure rules as of the date of the gift, start the clock on a three year period after which the IRS is restricted in their ability to reassess the value of gifts.
Employee Benefits. Taxes that are paid on current versus future values or taxes that are deferred as part of employee benefit programs including stock options, stock grants, warrants, deferred compensation, and others. Value should be established at the time of the grant to avoid future disputes and often company auditors require a valuation of these shares prior to signing an audit.
Charitable Contributions. Charitable contributions are used to reduce taxes paid by the grantor. Value is required at the time of the gift in order to allow for the deduction on the grantors tax return.
Conversion to an S-Corporation. C-Corporation shareholders are subject to two levels of taxation (corporate income taxes and dividend taxes). Where the shareholder base meets the requirements of an S-Corporation, tax advisors will sometimes recommend a conversion from C-Corporation status to S-Corporation status. A value must be established for the corporation as of the conversion date because certain events can trigger taxes on the C-Corporation value at corporate rates as a tax recapture.
The best approach to protecting your position with any taxing authority is obtaining a professional valuation that meets the tax authority requirements (see our blogs on the Market Value standard and the different IRS Code Sections Impacting Valuation) while properly reflecting the benefits and risks associated to the valued interests. This requires a thorough and well documented analysis.
The IRS approach to valuation is based on a series of published Revenue Rulings, Technical Advice Memorandums, and Private Letter Rulings. The VFP team approaches each valuation with the intent to understand the underlying assets, value, and risk in order to develop defendable values.
Some of the recent tax engagements we have completed are listed below.
- Valuation of a multiple property real estate holding company with large built in gains for gifts
- Valuation of a minority interest in a private company that had two different classes of stock and more than 50 independent shareholders for estate tax purposes
- Valued executive stock options in public company for estate tax purposes
- Valuation of employee stock options for financial statement reporting purposes
- Valued the option value of the debt on a U.S. operation for an international holding company
- Valued a privately held company for C to S conversion
- Valued fractional interest in real estate holding companies for estate and gift tax purposes
- Valued family limited partnership holding companies for gift and estate tax purposes
If you would like to read more about VFP’s valuation services visit What is Valuation?; Fairness Opinions; Buying & Selling a Business; Shareholder Disputes and How is VFP Different? in the Valuation section.