A court opinion tells only one side of the valuation story (and sometimes it’s incomplete, or skewed by the “winning” attorney’s findings of fact). Dallas v. Commissioner is no exception (see BVWire #49-1). In its comments on tax-affecting, the Tax Court makes no distinction between the time of the valuation—which was 1999/2000, just a few months after its decision in Gross v. Commissioner—and the current evolution of economic principles that form the fair market valuation framework for analyzing S Corp interests.
“This economic framework begins with an understanding of the differences between the expectations of investors in the public markets and investors in S corporations,” says Nancy Fannon (Fannon Valuation Group), writing in the current issue of Financial Valuation and Litigation Expert (www.valuationproducts.com). Not understanding these differences and how they impact the application of rates of return from public markets to private S Corps “has a high likelihood of misstating the value of an S corporation—something that simply ‘not tax-affecting’ can’t adjust for.”
The current challenge: “Valuation analysts must learn the proper economic reasons for the proper application of this theory,” Fannon says. Look for her continued analysis in a forthcoming issue of Business Valuation Update™; and be sure to catch her session on S Corp valuations at the December AICPA conference in Austin. For more conference information, click here.