In an important case litigated seven years ago, the Tax Court has issued a memo decision that accepts tax affecting—but noted that it did so because of the “unique setting at hand” in the case. The court emphasized that, although it allowed tax affecting here, it is “not necessarily holding that tax affecting is always, or even more often than not, a proper consideration for valuing an S corporation.”

All experts agree: The case involved a minority interest in the Biltmore estate tourist attraction in North Carolina, which was the family home of the Vanderbilts that became a museum and hotel. All of the experts in the case tax agreed that the income approach should be tax affected. Both the IRS expert and an expert for the taxpayer used the S corporation economic adjustment model (SEAM), developed by Daniel Van Vleet of the Griffing Group, in their analysis and agreed that a 17.6% factor applied. The court accepted the experts’ opinion, noting that, in the Michael Jackson estate case, the court observed that there “is not a total bar against the use of tax affecting when the circumstances call for it” (although the court rejected it in the Jackson case).

The case had other valuation matters, and the ruling was a mixed bag in terms of which experts prevailed. The taxpayer’s expert prevailed with his DCF valuation and 20% discount for lack of control. The court accepted the IRS’ expert’s discounts for lack of marketability. Experts on both sides included a discount for lack of voting rights, but the court rejected that.

Key point: Tax Court memos are not precedent, so the final chapter on tax affecting has yet to be written.

The case is Estate of Cecil v. Comm’r, T.C. Memo 2023-24, and a case analysis and full court opinion are available on the BVLaw platform.