Standard of Value

We all understand that the valuation of a closely held business is not an exact science. Positions taken by government agencies that review our work should be somewhat consistent, however, especially within the same agency.

This makes sense: The standard of value for ESOP valuations pursuant to proposed Department of Labor regulations (effectively accepted by the entire ESOP valuation community) is Fair Market Value (“FMV”), and the standard of value for all tax valuations pursuant to Internal Revenue Service Revenue Ruling 59-60 is FMV. So for the U.S. government, the standard of value when valuing closely held businesses is the same.

This does NOT make sense: There exist significant differences in value when valuing closely held businesses for these two different purposes for the U.S. government, when the standard of value is the same.

Why is that the Case?

I will be presenting a series of articles explaining why, what the specific differences are, and the potential impact those differences could have on the valuation of a closely held business under the supposedly same standard of value. The first such issue is addressed in the following article by, Nancy Fannon, on the topic of valuing a pass-through entity (“PTE”). Nancy recently testified in the tax court case involving the Estate of Michael Jackson, on behalf of the estate, on this very issue. She has also written two books on the subject and is considered a subject matter expert by her peers.

Learn more about Nancy Fannon’s book on the valuation of pass-through entities, Taxes and Value: The Ongoing Research and Analysis Relating to the S Corporation Valuation Puzzle, published in April 2015.

Click here for a past article on the Estate of Michael Jackson v. Commissioner of Internal Revenue, authored by James Ashe, Partner-in-Charge, Advisory Services, Stephen Lassar, Tax & Business Services Partner and Daniel Roche, “Valuing Publicity Rights and Other Intangible Assets of Authors,” featured in New York Law Journal.