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Estate and Gift Tax Valuations

Estate and Gift Tax Valuations

One of the most common tax purposes for a business valuation is to determine the value of a business interest for federal estate and/or gift tax purposes. The standard of value for closely-held businesses is fair market value.

For Estate Tax Purposes 


Valuation for estate tax planning and compliance purposes is critical because the estate tax value determines whether and the extent to which the estate owes federal estate taxes. The value of the business interest determined for the estate adds to the values of the other assets in the estate to determine the total estate value for federal estate tax purposes. The value of the business as determined for the estate also determines the tax basis of the business interest for the beneficiaries of the estate because the beneficiaries usually receive a stepped-up basis equal to the business interest fair market value on the valuation date.

In addition to general valuation principles, approaches, and methods, valuations for estate tax purposes are subject to a constantly shifting body of laws, regulations, and court decisions. The sources for specific guidelines for estate valuations include the following:

  • Internal Revenue Code (IRC)

  • Treasury Regulations

  • Revenue Rulings

  • IRS Positions (Technical Advice Memorandums and Private Letter Rulings) The valuation analyst preparing valuations for estate tax purposes must develop and maintain a basic working knowledge of the valuation-related laws, regulations, and court decisions and, ideally, work with the client estate’s attorney or other professional advisors

The valuation date of a business interest for estate tax purposes can be either the date of death or an alternate valuation date six months after the date of death (“Alternate Valuation Date”-IRC § 2032 (a)). The Alternate Valuation Date can be selected by the estate of the decedent under certain circumstances, one of which is that the total estate tax due will be less than if the date of death was used. Taxpayers are potentially subject to IRS penalties for the undervaluation of estate assets. The penalties under IRC § 6662 results from asset under-valuation and are calculated as a percentage of the resulting tax underpayment. The IRS may waive these penalties if the taxpayer had a reasonable basis for the claimed value. A competent appraisal prepared by a qualified appraiser may help the taxpayer demonstrate that a reasonable basis existed, thereby offsetting any penalty. Under IRC § 6701, valuation analysts could be subject to civil penalties for aiding and abetting a tax understatement, and, in some cases, the valuation analyst could be barred from working on future IRS tax proceedings.

In addition, the IRS Restructuring and Reform Act of 1998 added
IRC § 7491, which enables a taxpayer in certain circumstances to shift the burden of proof for a determined value or valuation issue to the IRS. This relief is generally available if a taxpayer provides credible evidence (as defined by the IRS) supporting his tax position or treatment.

For Gift Tax Purposes

Valuations are also necessary when making certain gifts. Valuations for gift tax purposes fall under most of the same regulations and requirements for estate tax purposes that were listed above. An independent valuation should usually be done contemporaneously with the gift.

The Taxpayer Relief Act of 1997 amended
IRC § 6501 (c) (9) to provide for a three-year statute of limitations that can bar the IRS from challenging certain gift tax valuations. The ability to start the statute of limitations running is dependent upon the taxpayer adequately disclosing the gift on a gift tax return. Absent the statute of limitations starting, gifts made by the taxpayer many years earlier are potentially subject to IRS adjustment as late as the filing of that taxpayer's estate tax return. The final regulations giving the specific requirements to start the statute running were issued in December 1999. The final regulations describe the attributes necessary for both the appraiser and the appraisal to enable the statute of limitations to start.

MRV Consulting applies valuation methodologies of closely-held businesses. These characteristics include:

  • Lack of marketability

  • Concentration of management and voting in a family group

  • Influence of shareholder’s personal circumstances on dividend policy

  • Lack of access to public markets for capital funds

  • Greater possibility of asset realization through merger, sale, or liquidation of the company

Valuations performed by MRV Consulting have been used in connection with ownership transfers and other tax planning strategies that range from the most basic to the most sophisticated in use today. We are retained by professionals at prominent law, accounting, and wealth management firms seeking the highest level of thought leadership and customer service.

Over the years, MRV Consulting has brought valuation expertise and institutional knowledge to closely-held operating companies, financial institutions, and asset holding companies (such as real estate investment partnerships, family limited partnerships, and real estate investment trusts (REITs).

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