Academic journal article Journal of Accountancy

Effect of Built-In Gain on Value of Closely Held Stock

Academic journal article Journal of Accountancy

Effect of Built-In Gain on Value of Closely Held Stock

Article excerpt

The valuation of stock in a closely held corporation is a difficult issue frequently argued before the courts. Since no independent valuations, such as market quotations, are available, a stock's fair value may be difficult to determine. Treasury regulations section 20.2031-2(f) and revenue ruling 59-60, 1959-1 CB 237, provide factors CPAs can consider in valuing closely held stock for estate tax purposes. Generally, the value is what a willing buyer would pay a willing seller to receive the economic benefits attached to a stock. However, in any given case, it's not always easy to determine what factors the buyer and seller would consider.

Helen Jameson owned stock in a family-owned company at the time of her death. The corporation, Johnco, owned and operated timber property. It earned the majority of its income by receiving fees from companies that harvested timber on the property. The income the property generated was considered low in relation to its underlying value. The estate's appraisers argued the valuation should be based on an immediate sale of the company's assets and liquidation of the corporation. This would permit the estate to reduce the value by the amount of the capital gains taxes it would pay on the sale of the assets.

The Tax Court rejected the expert valuations and formulated its own method to value the stock: It took the underlying value of the timber property the corporation owned and reduced it by the net present value of the capital gains tax liability the company would incur as the timber was cut. This valuation method was based on the assumption that a willing buyer would operate the timber property as a going concern. The estate disputed this valuation and appealed.

Result. For the taxpayer. The Fifth Circuit Court of Appeals vacated the decision and remanded the case to the Tax Court for further consideration. …

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