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Financial Valuation: Applications and Models, + Website, 3rd Edition by James R. Hitchner

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Chapter 12

Valuation of Pass-Through Entities

INTRODUCTION1

The appraisal profession has now continued a healthy discussion regarding the valuation of pass-through entities (PTE) for both controlling and minority interests for years, and it appears unlikely that the discussions will abate in the near future. There is now wide agreement that it is the avoidance of tax on dividends and capital gains, rather than solely an avoidance of tax on corporate income, that forms the main advantage of pass-through entities, with different views remaining about how best to measure that advantage. If there is any one thing that appraisers and analysts seem to agree on, it is that the facts and circumstances of each individual valuation need to be taken into consideration. At first this may seem noncommittal to the reader, but this simple statement is, in fact, the key to valuing these complex interests.

The topic of valuation of S corporations has produced a proliferation of writers and commentators, and these professionals have contributed great wisdom and insight to propel the discussion. Through the progression of these discussions and the many alternative scenarios and points of view presented, we see that a simple one-size-fits-all approach will simply not work in all situations. There are many issues that the analyst must consider when approaching the valuation of such an interest, and while we might prefer to have the answer, no such solution exists. While it is certain that it is not ...

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