Valuing Pass-Through Entities

Chapter 9Fair Market Value Court Decisions

Business appraisers wisely seek guidance from the courts and other authoritative sources when addressing the PTE conundrum. However, the courts have issued what appears to be conflicting opinions when addressing the issue of tax-affecting PTEs. Further confusing the issue, the IRS has a nonauthoritative guide that accepts tax affecting, yet it has also litigated for not tax affecting. What are the lessons to be learned from court decisions and the IRS?

I believe that the starting point for relying on any decision of the court is gaining a proper interpretation of the facts and circumstances impacting the case and the court's reasoning and conclusions in each situation. Let's analyze the IRS's position and the courts' decisions with respect to several cases involving the fair market value standard of value.

Each year, the television networks endlessly promote the NCAA basketball tournament's buildup to the Sweet Sixteen, the Elite Eight, and the Final Four. The IRS is also a promoter, although in the tax arena instead of the basketball arena; it promotes and has often referred to six cases in which the courts have applied a 0 percent tax rate when valuing an ownership interest in a PTE. The six cases are Gross v. Commissioner,¹ Estate of Heck v. Commissioner,² Wall v. Commissioner,³ Estate of Adams v. Commissioner,⁴ Robert Dallas v. Commissioner,⁵ and Gallagher v. Commissioner.⁶ These six cases represent a limited subset of the many ...