may2021 - 11

FEATURE
Gift & Estate Tax Valuation:
5 Things to Remember
HERE ARE FIVE things to remember when performing valuation
of shares of a closely held entity for gift and estate tax reporting.
Changes in political leadership,
such as those that have occurred at
the federal level over the last several
months, invariably lead to questions
about possible changes in tax law.
Although personal and corporate
income taxation tends to receive most
of the media attention, it's important
to remember that gift and estate taxes
can also have a profound impact on
an individual's long-range financial
planning. If an individual holds an
interest in a closely held entity, careful
consideration should be given to the
valuation of this entity for gift and
estate tax reporting purposes, and
how this valuation will affect their
tax burden.
When performing a valuation of
shares of a closely held entity for gift
and estate tax purposes, it's important
to keep the following five factors in
mind:
Valuations for
gift and estate
tax purposes
must follow the
tenets outlined
in IRS Revenue
Ruling 59-60.
First set forth in
1959,
Ruling
Revenue
59-60
outlines the approaches, methods,
and factors to consider when valuing
shares of a closely held entity where
market quotations are either unavailable
or based on scarce trades. The
factors to consider under Revenue
Ruling 59-60 are as follows:
* The nature of the business and the
history of the enterprise from its
inception.
* The economic outlook in general and
the condition and outlook of the specific
industry.
* The book value of the stock and the
financial condition of the business.
* The earning capacity of the company.
* The dividend-paying capacity.
* Whether or not the enterprise has
goodwill or other intangible value.
* Sales of the stock and the size of the
block of stock to be valued.
* The market price of stocks of corporations
engaged in the same or a similar
line of business having their stocks
actively traded in a free and open
market, either on an exchange or
over-the-counter.
With tax valuations,
a great
deal of emphasis
is
placed
the quality
the narrative
report. This
report should be
detailed as to the
approaches and assumptions utilized
and should discuss how each of the
Revenue Ruling 59-60 factors outlined
above were considered.
Valuations of
closely held
entities
should
consider various
approaches
to
value, which
could include an
income approach
analysis via discounted
cash flows, and the market
approach via guideline public company
and/or guideline transaction multiples.
MAY 2021 ■ www.CPAPracticeAdvisor.com
11
By Kevin Cannon
D i s c o u n t s
applied in estimating
the fair
market value of
the subject interest,
which could
represent a discount
for lack of
marketability or
discount for lack of control, should be
based on the facts and circumstances
of the entity being valued, as well as
the size of the block of shares being
valued. Such discounts should have a
basis in market-derived data.
The process
of valuing
closely held
businesses for
gift and estate
tax reporting
purposes
isn't
on
of
a cookie-cutter,
one-size-fits-all
exercise. Great care and consideration
should be given to the analysis, both
quantitatively
and
qualitatively.
Every business is different, and even
with each business, different classes
and blocks of shares have varying
characteristics.
As the potential for changes in
gift and estate tax law receives more
attention, so too will the valuations
of closely held businesses for gift
and estate tax reporting. Individuals
needing valuations for this purpose
should be prepared with defensible,
supportable analyses that can stand
up to IRS review. ■
Kevin Cannon is a Director
in Opportune LLP's Valuation
practice based in Houston.
He has 16 years of
experience performing
business and
asset valuations and
providing corporate
finance consulting.
His specific
experience includes
valuations of businesses
and intangible assets
for purchase price allocations,
impairment, tax planning, and
portfolio valuation purposes for
companies in a variety of industries,
including oil and gas,
oilfield services, and industrial
manufacturing.
http://www.CPAPracticeAdvisor.com
may2021

Table of Contents for the Digital Edition of may2021
