It’s been a year and a half since the Tax Court heard a significant case related to S corp tax affecting, which is about the average time it takes for the court to render an opinion on a matter such as this. For the first time, one of the S corp models is being used—and by both the IRS and the taxpayer.
The case is Cecil et al. v. Commissioner of Internal Revenue, and it involves a gift of shares in the Biltmore Co., which operates the famous Biltmore estate, a Gilded Age mansion the Vanderbilts built that is now a tourist attraction. The Cecils (descendants of the Vanderbilts) valued the stock gift at $20.88 million, but the IRS said those shares are actually worth $95.29 million. One of the main issues in the case is the S corp matter.
The tax-affecting issue has been argued in a number of Tax Court cases (most notably the Gross case). In all of these cases, the IRS and the Tax Court have refuted the notion that shareholder-level taxes affect a firm's value, so the valuation conclusions in these cases were based on earnings not being tax affected. The valuation community disagrees, so a number of models were developed that are designed to reflect the impact of shareholder taxes on value. In the Cecil case, both sides made very similar adjustments using the S corporation economic adjustment model (SEAM) developed by Daniel Van Vleet (Stout Risius Ross). The case was heard in February 2016.
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