Academic journal article Journal of Accountancy

Valuing Closely Held Stock

Academic journal article Journal of Accountancy

Valuing Closely Held Stock

Article excerpt

Valuing stock in a closely held corporation is always difficult for CPAs. If the owner sells the stock shortly after the valuation date, questions frequently arise as to the impact that sale has on the stock's value.

Eric Saltzman transferred closely held stock he owned to an irrevocable trust. Saltzman served as co-trustee of the trust and was also a director of the company whose stock he transferred. After the transfer, the corporation recapitalized and exchanged the trust's common stock for preferred stock. The IRS argued that the preferred stock was worth less than the common stock, resulting in a gift. The IRS valued the gift based on a sale that occurred 7 months after the recapitalization. Saltzman claimed no gift had occurred and that, if one had taken place, the IRS valued the stock incorrectly by referring to the subsequent sale.

Result: For the taxpayer. The Second Circuit Court of Appeals decided the Tax Court erred in finding a gift because, under New York law, the trustee could claim the proceeds. The court also ruled that, even if there was a gift, the valuation was wrong. The general rule is that property is to be valued at the time of the gift or transfer, without reference to subsequent events. An exception allows reference to subsequent events only if nothing occurs between the valuation date and the subsequent event to affect the value. For this exception to apply, the subsequent event must be reasonably foreseeable at the time the stock is valued. …

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