Time is ripe for the Tax Court’s S corp tax affecting opinion

BVWireIssue #180-1
September 13, 2017

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.

Please let us know if you have any comments about this article or enhancements you would like to see.