Closely Held Company Valuations for Tax Purposes

By: Larry Van Kirk

Closely Held Company Valuations for Tax Purposes

[Transcription]

Hello, this is John Bintz. I’m here with Larry Van Kirk and we are both managing directors at Valuation Research Corporation. Larry has been valuing closely held businesses for over 20 years now. And, I understand, Larry, there’s been a pretty marketable increase in the inquiries regarding valuing closely held businesses. What do you think is driving this?

Larry VanKirk: Based on conversations with closely held company owners and their tax and legal advisors, it appears as that the increased interest is due to three drivers. Number one, expected changes to certain rules regarding gift tax exclusions. Number two, the belief that built-in gains tax rates may be increasing. And, lastly, there have been recent legislative efforts to remove the fair market value adjustments or discounts for a popular estate planning tool, family limited partnerships.

John Bintz: And what are the valuation requirements for assets that are gifted?

Larry VanKirk: While we are not tax experts, we consult with closely held interest donors and their advisors regularly as part of preparing the appropriate gift tax returns. The IRS requires that the valuation meet adequate disclosure rules in which the analysis and report must be two things. Number one, documented such that the method and financial data used to determine the value of the interest transferred are fully described. And, number two, that the fair market value adjustments such as lack of control, liquidity and marketability are depicted in detail. To potentially avoid IRS scrutiny we recommend engaging a valuation professional to provide the necessary valuations.

John Bintz: So why would a taxpayer typically request a valuation of an interest in a family limited partnership?

Larry VanKirk: A family limited partnership is an entity like a corporation. It’s used to protect assets and keep them in the family. In addition to adhering to the adequate disclosure rules we’ve discussed, the valuation professional may be asked to determine the appropriate fair market value adjustments due to such interest characteristics as non-controlling ownership positions, and/or restrictions on transferability. This valuation exercise becomes difficult because for years valuation experts had used dated benchmark related studies. In today’s environment, the valuation professional must access sources of adjustments that are specific to the nature of the underlying assets being considered and ultimately balance quantitative and qualitative information to derive a fair market value conclusion.

John Bintz: Larry, thank you very much for your comments and your remarks regarding this topic.