I helped out two clients this week with some information you may find helpful. The first deals with the Built In Capital Gains Tax sometimes referred to as the BIG Tax and the other deals with how the IRS approaches Discounts for Lack of Marketability (DLOM), reasonable compensation and valuing non-controlling interests in S-Corps.
Regarding the BIG tax I want to share an excellent article on the internet from Willamette. This article by Robert P. Schweihs introduces the topic, presents judicial precedent, and provides an illustrative example with several interesting twists. In addition, I want to bring to your attention two pertinent court cases that were directly on point for the case I was called into assist on this week. These are the Estate of Richmond T.C. Memo. 2014-26 and the Estate of Jensen T.C. Memo. 2010-182. Understanding how the U.S. Tax Court looks at federal cases can be very insightful for business appraisers and these cases offer several good insights.
The IRS has three job aids available on Discounts for Lack Marketability, reasonable compensation and valuing non-controlling interests in S-Corps. These are available at this web site.
The web site offers:
“This page provides links to useful job aids, articles and white papers on various valuation topics. The items contained herein are offered for reference purposes only and do not represent or suggest official IRS positions. They may not be used or cited as authority for setting any legal position.
Discount for Lack of Marketability - Job Aid for IRS Valuation Professionals - (pdf 389KB)
Reasonable Compensation - Job Aid for IRS Valuation Professionals - (pdf 222KB) - This guides IRS professionals on how the Federal courts treat this issue and how the IRS determines reasonable compensation.
Appendix to Reasonable Compensation - Job Aid for IRS Valuation Professionals - (pdf 190KB) - These are the appendices that should be used in conjunction with the Reasonable Compensation Job Aid.
S Corporation Valuation – Job Aid for IRS Valuation Professionals - (pdf 162KB) - This job aid is a guide on the application of Rev. Rule 59-60 in determining the FMV of an S Corp non-controlling interest.”
I was the champion of the original work at the IRS on these initiatives and have since updated the DLOM Job Aid by having spoken to modelers and incorporated their updates in a book I wrote entitled Discount of Lack of Marketability. When at the IRS our team was prevented from doing so for fear from counsel that the private sector may infer the IRS was recommending some modelers and not others. After two years in the private sector I was able to do so and incorporate their comments in my book. I also offer comments on the other two job aids in two new books. They are all available under books at my web site www.mikegreg.com. My purpose in writing the books is to help practitioners with these issues and with issue resolution with the IRS. Even without the books, you can gain real insight into these topics from the job aids.
About the author
Mike Gregory is a professional speaker, an author, and a mediator. You may contact Mike directly at firstname.lastname@example.org and at (651) 633-5311. Mike has written 12 books (and co-authored two others) including his latest book, The Collaboration Effect: Overcoming Your Conflicts, and The Servant Manager, Business Valuations and the IRS, and Peaceful Resolutions that you may find helpful. [Michael Gregory, ASA, CVA, NSA, MBA, Qualified Mediator with the Minnesota Supreme Court]