Jan 1, 2012 12:00 PM

The Tax Court addressed important valuation issues last year, but its conclusions left many advisors hoping they'd wake up to the opposite result the next day

By Radd L. Riebe

When Superman was trapped in “Bizarro World,” he found everything was the opposite of its earthly counterpart. Or, as Jerry Seinfeld observed, for an inhabitant of Bizarro World, “Up is down, down is up, he says ‘hello’ when he leaves, ‘goodbye’ when he arrives.”¹ Several long-standing valuation issues were subject to a type of “up is down” treatment in 2011.

The Tax Court continues to say “no” to tax-affecting the value of S corporation earnings (that is, discounting the value of those earnings on the basis of assumed future tax burdens imposed on them) and the valuation community just as persistently says “yes” to tax-affecting the earnings. This conflict in approaches has existed for more than a decade. In the 1999 ruling Walter L. Gross, Jr. et al. v. Commissioner,² the court determined that a Cincinnati-based soft drink distributor was properly valued by not tax-affecting its S corporation earnings and applying a market-derived multiple. Since Gross was decided, valuation professionals have devoted considerable efforts to assessing the valuation impact of tax benefits derived by S corporation shareholders — avoiding a double layer of taxes on distributions received and getting a stock basis step up on earnings retained by the corporation. The general consensus among professionals is to value an S corporation by tax-affecting its earnings as if it were a C corporation and then make an upward adjustment to its shares by the incremental value associated with the specific tax benefits received by the S corporation shareholder.

Topics of Interest

Estate Tax	Donor Advised Funds
GSTs	Family Offices
Private Foundations	Life Insurance
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Topics of Interest

Estate Tax	Donor Advised Funds
GSTs	Family Offices
Private Foundations	Life Insurance
2010 Tax Act News	Industry Trends Surveys

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2011 Trust Glossary

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50 Years Ago This Month

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50 years ago, in May 1962, we featured articles such as: "Future of Canadian Trusteeship" by Arthur H. Mingay", "Training Trust Employees" by Ian M. Marr, "What is a Trust Officer?" by Eric J. Brown, and "Selling Services" by Donald I. Webb.

Conrad Teitell's Guide to Tax Benefits For Charitable Gifts

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