Caracci and Valuation in a Tax Status Conversion

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American Society of Appraisers Business Valuation Review™
Winter 2007 Volume 26, Issue 4 pp. 121-126
Allen D. Hahn, ASA, CFA

Summary

Caracci versus Commissioner was the first case to consider how the Internal Revenue Service (IRS) could levy intermediate sanctions pursuant to Internal Revenue Code (IRC) Section 4958, regarding “excess benefit transactions” with charitable organizations. The central issue before the Tax Court was the fair market value of unprofitable assets contained in a tax exempt home nursing care agency in rural Mississippi. The Tax Court's valuation methodology determined that the shareholders of the newly formed nonexempt organizations received assets in excess of liabilities assumed of $5.1 million and, therefore, were subject to Section 4958 taxes and penalties. Upon review, the Fifth Circuit reversed and rendered the final decision in the dispute, sighting clearly erroneous factual findings in applying the valuation method by the Tax Court, including failure to consider many of the key elements of fair market value outlined in Revenue Ruling 59–60. The Fifth Circuit's decision is a sharply worded reminder to appraisers of the importance of using the appropriate valuation framework for the property being appraised.
Caracci and Valuation in a Tax Status Conversion
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