Business Valuation - Transactions Governed by Federal Tax Laws

Between statutory law, Internal Revenue Service regulations, and a long history of precedential case law, there is more business valuation / Business Appraisal guidance available for transactions governed by federal tax laws than for any other category of transactions. The Service tends to favor the market approach to business valuation / Business Appraisal.

The Service and the courts have accepted other approaches on Estate, Gift, Inheritance, and Income Taxes The universal standard of value for estate, gift, and inheritance taxes is fair market value. Guidelines for federal estate and gift taxes are found in Revenue Ruling 59-60. Revenue Ruling 68-609, which basically is the "excess earnings" ruling, contains important language broadening the application of Revenue Ruling 59-60: The general approach, methods, and factors, outlined in Revenue Ruling 59-60 . . . are equally applicable to business valuation / Business Appraisals of corporate stocks for income and other tax purposes as well as for estate and gift tax purposes. They apply also to problems involving the determination of the fair market value of business interests of any type, including partnerships and proprietorships, and of intangible assets for all tax purposes.3 business valuation / Business Appraisal guidelines for state inheritance taxes are generally consistent with federal estate and gift tax guidelines.

Although the standard of value for estate, gift, and inheritance taxes is fair market value, there can be differences between a business valuation / Business Appraisal for tax purposes and a business valuation / Business Appraisal for the sale of a business or for other pur- poses. For example, estate and gift tax business valuation / Business Appraisals are based on the value of a business to a hypothetical buyer, who would have no special synergy with—or relationship to—the seller. In a normal tax business valuation / Business Appraisal, the fact that the seller might be able to command a higher price because of some feature that might be uniquely valuable to a particular buyer would not be considered. Another distinction between estate and gift tax business valuation / Business Appraisals and valua- tions for the sale of a business is how much each relies on the historical record, as opposed to projections. Some buyers may be willing to pay for the opportunity for future profits that they envision. However, such pro- jections may not exist or may be considered too speculative to be relied on as a basis of value in a legal context, such as an estate or gift tax business valuation / Business Appraisal. Revenue Ruling 59-60 specifically recognizes that "business valuation / Business Appraisal of se- curities is, in essence, a prophecy as to the future. . . . "4

Nevertheless, as a practical matter, business valuation / Business Appraisals for tax purposes rely relatively more heavily on a company's historical record than do business valuation / Business Appraisals for sales, which are more prone to rely on projections. This difference is a matter of emphasis rather than of concept. If the claimed value of securities donated is more than 810,000, the Tax Reform Act of 1984 makes it mandatory that the value be supported by a "qualified appraisal" attached to the income tax return. The ap- praisal must be made by a "qualified appraiser" and must be received by the donor before the due date (including extensions) of the return on which the deduction is claimed. The 1993 Omnibus Budget Reconciliation Act added considerable documentation and substantiation requirements with regard to the charitable contribution of property.

Internal Revenue Service Form 8283 must be completed by all donors if the aggregate claimed or reported value of such property—and all similar items of property for which charitable deductions are claimed or reported by the same donor for the same tax year (whether or not do- nated to the same donee)—is more than 85,000. The term similar types of property means property of the same generic category or type, such as stamps, books, land, buildings, or nonpublicly traded stock. In cases where the noncash charitable contributions deduction in- cludes items with a value in excess of $5,000, Form 8283 must include an acknowledgment of receipt signed by the donee charity and a signed ap- praiser's certification of appraisal, per Regulation Section 1.170A-13(c)(3).