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Valuation of business interests: 9th Circuit rules in estate case

Questions of valuation often arise in tax law. After all, before property can be properly taxed, a proper value has to be placed on it.

In this post, we will discuss a recent decision by a federal appeals court in a case involving the valuation of interests in a timber-cutting business.

There are of course many different contexts in which valuation questions can occur. In our October 2 post in 2013, for example, we discussed the valuation of works of art. Placing an accurate value on such objects is important for many high-income taxpayers when taking a tax deduction after donating art for charitable purposes.

Business owners also often face valuation issues when transferring shares in the business. In a recent case, the U.S. Court of Appeals for the Ninth Circuit reversed a decision of the Tax Court regarding the proper method to be used in the valuation of shares in a partnership whose business activity centered on cutting timber.

A key issue in the case was which accounting method should be used in assigning a valuation. One possible method was the Cashflow Method. Another was the Asset Method. Both methods are based on certain assumptions about whether a partner'€™s heirs will sell their interests back to the partnership.

We won't get into the technical accounting definitions of these methods in this post. Suffice it to say that deciding on the proper accounting method for valuation was an issue upon which the Ninth Circuit disagreed with the Tax Court.

The Tax Court had tried to use a combination of the two methods for the valuation. The Ninth Circuit said the Tax Court had engaged in overly speculative scenarios regarding the likelihood of dissolution of the partnership. And so the Ninth Circuit sent the case back to the Tax Court for a more straightforward calculation based on the business as a going concern.

Source: Bloomberg BNA, "€œNinth Circuit Chops Down The Tax Court in Estate of Gustina,"€ Joseph J. Ecuyer, Jan. 29, 2015

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