“When analysts use a public market cost of equity capital to value an S corporation, they apply the S Corp valuation models to account for the different returns that a public market investor realizes compared to an S corporation investor,” says Nancy Fannon, author of Fannon’s Guide to the Valuation of Subchapter S Corporations (BVResources, 2007). “They do this primarily by measuring the dividend and capital gains taxes that the S corporation investor avoids.” But just when you might have thought that the S corporation debate was about to settle down around these simple concepts, Fannon says, “we have more to talk about than ever.”
In her new article, “The Real S Corp Debate: Impact of Embedded Tax Rates from Public Markets” (Business Valuation Update™, March 2008), Fannon explains the problem:
Typically, analysts have measured the benefit to the S corporation shareholder, relative to the public C corporation shareholder, at the current statutory dividend and capital gains tax rates. Thus far, the [S Corp valuation] models have been silent as to the distinction between the current dividend and capital gains tax rates, and the rates embedded in the public market equity return which analysts use to value the S corporation. The distinction is notable. This article examines the most recent and relevant academic studies that have researched the impact of personal taxes (dividend and capital gains) on value.
Those who’ve already subscribed to Fannon’s Guide will automatically receive a free copy of the new article, plus a Telephone Conference Pack that includes the transcript, audio file, presentation, and ancillary reading materials from Fannon’s recent BVR teleconference (Nov. 13, 2007) on “S Corporations” (a $249 value). New subscribers to her Guide will also receive the article and the TC pack; to order, click here.
Please let us know
if you have any comments about this article or enhancements you would like to see.