Responding to the attention the Kress case has received (at BVR and elsewhere), Harry Fuhrman, financial analyst with the Internal Revenue Service, gave us the following comments. (Note that this represents his opinion and not that of the IRS).

“In the excitement surrounding the Kress case (tried in the Eastern District of Wisconsin, not in tax court), let us not forget the many other tax court cases which address the issue of whether or not to tax affect a pass-through entities’ earnings:

• “Gross v. Commissioner;
• “Wall v. Commissioner;
• “Adams v. Commissioner;
• “Heck v. Commissioner;
• “Dallas v. Commissioner; and
• “Gallagher v. Commissioner.

“The last decision included the following statement: ‘[T]he principal benefit enjoyed by S corporation shareholders is the reduction in their total tax burden, a benefit that should be considered when valuing an S corporation,’ which addresses the pass-through taxation directly, whereas the court in the Kress decision, on the other hand, did not even directly address the tax-affecting issue.

“If the government and taxpayer’s appraisers hadn’t tax affected earnings, I suspect the decision would not be receiving the level of attention you (and other valuation organizations and individuals) have been devoting to it.”