The IRS S Corp Job Aid, a newly released internal training document for IRS personnel who review valuations of these entities, has sparked some comments from the authors of a new book on this subject. “There is quite a lot that I agree with, in terms of general valuation concepts,” Nancy Fannon (Meyers, Harrison and Pia LLC) tells BVWire. “However, there are some substantive underlying assumptions made in the Job Aid that are not supported by academic research.” She points out that in the introductory section, the job aid says:

[A]bsent a compelling showing that unrelated parties dealing at arms-length would reduce the projected cash flows by a hypothetical entity level tax, no entity level tax should be applied in determining the cash flows of an electing S corporation. In the same vein, the personal income taxes paid by the holder of an interest in an electing S Corporation are not relevant in determining the fair market value of that interest. [emphasis added]

“While most CPAs would agree that it is a simple matter of common sense that investors take taxes into consideration when pricing investments, this simple common sense has not prevailed,” says Fannon. “What has been lacking in our discussions of this issue is the evidence that proves what common sense tells us. The academic research presented in our book presents very compelling evidence that personal-level taxes paid by the holder of an interest are very relevant to the prices paid in the marketplace.” She and Keith Sellers (University of Denver) are the authors of a new book, Taxes and Value: The Ongoing Research and Analysis Relating to the S Corporation Valuation Puzzle.

Learn more: Fannon and Sellers will give more comments on the job aid in the June issue of Business Valuation Update. They will also address it during their special four-hour workshop on May 20 that will reveal a new approach to PTE valuations. For an in-depth analysis of the IRS S Corp Job Aid, join Michael Gregory (Michael Gregory Consulting) for a webinar on June 16. Gregory, while working at the IRS, was a champion of the IRS internal team on valuing S corps.