Valuation

March 13, 2024

923 / How are Series E/EE and H/HH United States Savings Bonds valued for federal transfer tax purposes?

<div class="Section1">Apparently, they are valued at their redemption value on the applicable valuation date. In Revenue Ruling 55-278,<a href="#_ftn1" name="_ftnref1">1</a> A, in 1948, bought Series E bonds with his own funds and had them registered in the names of A and B in the alternative as co-owners. In 1953, A had the bonds reissued in the name of B alone in order to effect a gift to him of A’s co-ownership therein. The IRS held that the value of the gift made by A to B in 1953 was the redemption value of the bonds at the time they were reissued. The Service found that, “since Series E United States savings bonds are generally nonnegotiable and nontransferable, they are nonmarketable and, accordingly, have no particular ‘market’ value. Although ownership therein is transferable by death and by reissue in certain cases…, their only definitely indicated or ascertainable value is the amount at which they are redeemable by the United States Treasury.” Presumably, the same would be true of Series H/HH bonds, since they are likewise nonnegotiable and nontransferable.</div> <div class="refs"> <hr align="left" size="1" width="33%" /> <a href="#_ftnref1" name="_ftn1">1</a>. 1955-1 CB 471. </div>

March 13, 2024

920 / What effect does it have on valuation of shares of stock for federal transfer tax purposes if they are pledged as security?

<div class="Section1">The full value of securities pledged to secure an indebtedness of the decedent is included in the gross estate. If the decedent had a trading account with a broker, all securities belonging to the decedent and held by the broker at the date of death must be included at their fair market value as of the applicable valuation date. Securities purchased on margin for the decedent’s account and held by a broker must also be returned at their fair market value as of the applicable valuation date. The amount of the decedent’s indebtedness to a broker or other person with whom securities were pledged is allowed as a deduction from the gross estate.<a href="#_ftn1" name="_ftnref1">1</a> The deduction is taken under IRC Section 2053.</div> <div class="Section1"> If the shares of stock are pledged to secure a debt that was not the decedent’s debt at his death, the shares’ value that is includable in the gross estate is reduced to reflect the encumbrance. The amount of the reduction depends upon such factors as the decedent’s right to receive dividends, the size of the debt, and the outlook for timely repayment of the debt.<a href="#_ftn2" name="_ftnref2">2</a> </div> <div class="refs"> <hr align="left" size="1" width="33%" /> <a href="#_ftnref1" name="_ftn1">1</a>. Treas. Reg. § 20.2031-2(g). <a href="#_ftnref2" name="_ftn2">2</a>. Est. of Hall v. Comm., TC Memo 1983-355. </div>

March 13, 2024

926 / How are United States silver coins valued for federal estate tax purposes?

<div class="Section1">If they have a fair market value which exceeds their face value, they are valued at their fair market value.<a href="#_ftn1" name="_ftnref1">1</a> The applicable revenue ruling says that the same conclusion would apply to paper currency owned by the decedent and having a fair market value in excess of its face value.<a href="#_ftn2" name="_ftnref2">2</a></div> <div class="refs"> <hr align="left" size="1" width="33%" /> <a href="#_ftnref1" name="_ftn1">1</a>. Rev. Rul. 78-360, 1978-2 CB 228. <a href="#_ftnref2" name="_ftn2">2</a>. Rev. Rul. 78-360, supra. </div>

March 13, 2024

924 / How is a non-negotiable savings certificate issued without discount by a Federal Reserve member bank valued for federal estate tax purposes when death occurs between interest periods?

<div class="Section1">Federal regulations provide that a time deposit, or the portion thereof requested, must be paid before maturity without a forfeiture of interest, where requested, upon the death of any owner of the time deposit funds.<a href="#_ftn1" name="_ftnref1">1</a> Accordingly, the savings certificate is valued at the principal amount plus unpaid interest attributable to the period between the last interest payment date preceding death and the date of death.<a href="#_ftn2" name="_ftnref2">2</a></div> <div class="refs"> <hr align="left" size="1" width="33%" /> <a href="#_ftnref1" name="_ftn1">1</a>. 12 CFR § 204.2. <a href="#_ftnref2" name="_ftn2">2</a>. Rev. Rul. 79-340, 1979-2 CB 320. </div>

March 13, 2024

934 / What are the Chapter 14 special valuation rules?

Special valuation rules are contained in IRC Chapter 14. Chapter 14 generally focuses on establishing the value of various interests transferred to family mem-bers at the time of the transfer when the transferor retains certain interests in the property being transferred or restrictions are placed on the property that allow the property to be acquired at less than fair market value (measured without the restrictions). Special rules apply to certain transfers of interests in corporations and partnerships (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="935">935</a>), to certain transfers of interests in trusts and even remainder and joint purchase transactions (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="938">938</a>), to certain agreements, op-tions, rights or restrictions exercisable at less than fair market value (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="943">943</a>), and to various lapsing rights and restrictions (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="944">944</a>).

March 13, 2024

917 / How does the executor’s election of the alternate valuation method affect the valuation of property for federal estate tax purposes?

<div class="Section1">The law permits the executor to elect an alternate valuation method if the election will decrease the value of the gross estate and the sum of the amount of the federal estate tax and generation-skipping transfer tax payable by reason of the decedent’s death with respect to the property includable in the decedent’s gross estate.<a href="#_ftn1" name="_ftnref1">1</a> If the alternate valuation method is elected, the property will be valued under the following rules:<div class="Section1"> Any property distributed, sold, exchanged or otherwise disposed of within six months after decedent’s death is valued as of the date of such distribution, sale, exchange, or other disposition. The phrase “distributed, sold, exchanged, or otherwise disposed of” includes all possible ways by which property ceases to form a part of the gross estate. For example, money on hand at the date of the decedent’s death which is thereafter used in the payment of funeral expenses, or which is thereafter invested, falls within the term “otherwise disposed of.” The term also includes the surrender of a stock certificate for corporate assets in complete or partial liquidation of a corporation pursuant to IRC Section 331. The term does not, however, extend to transactions which are mere changes in form. Thus, it does not include a transfer of assets to a corporation controlled by the transferor in exchange for its stock in a transaction with respect to which no gain or loss would be recognized for income tax purposes under IRC Section 351. Nor does it include an exchange of stock or securities in a corporation for stock or securities in the same corporation or another corporation in a transaction, such as a merger, recapitalization, reorganization, or other transaction described in IRC Section 368(a) or IRC Section 355, with respect to which no gain or loss is recognizable for income tax purposes under IRC Section 354 or IRC Section 355.<a href="#_ftn2" name="_ftnref2">2</a> In Estate of Smith v. Commissioner,<a href="#_ftn3" name="_ftnref3">3</a> the decedent’s stock in X corporation was exchanged for stock and warrants in Y corporation pursuant to a plan of merger. The court held that the warrants were received in exchange for the estate’s stock in X and were to be valued as of the date of the merger. The Commissioner conceded that the transaction should not be treated as an “exchange” with respect to the receipt of stock in Y, and that even though the value of the Y stock had declined substantially between the decedent’s date of death and the alternate valuation date, the stock should be valued as of the alternate valuation date. The court’s decision, however, was limited to the controverted issue as to the proper valuation date of the warrants. Apparently, the IRS soon changed its mind. In Revenue Ruling 77-221,<a href="#_ftn4" name="_ftnref4">4</a> on substantially similar facts, the Service concluded that the exchange of X stock for Y stock and warrants constitutes an “exchange” and held that the X stock given in exchange was to be valued as of the date of the exchange. If the property is listed stock and is sold in an arm’s length transaction, the stock is valued at the actual selling price.<a href="#_ftn5" name="_ftnref5">5</a> An exercise of stock rights is a “disposition” thereof; their value is equal to the excess, if any, of the fair market value of the stock acquired by such rights at the time the rights are exercised over the subscription price.<a href="#_ftn6" name="_ftnref6">6</a> Any property not distributed, sold, exchanged, or otherwise disposed of within six months after a decedent’s death is valued as of the date six months after death. When shares of stock in the estate are sold at a discount between the date of death and the alternate valuation date, such sales and the number of shares sold cannot be taken into account in determining whether the shares remaining in the estate at the alternate valuation date are eligible for “blockage” valuation (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="919">919</a>).<a href="#_ftn7" name="_ftnref7">7</a> Any property interest whose value is affected by mere lapse of time is valued as of the date of the decedent’s death. Despite this, an adjustment is made for any change in value during the six-month period (or during the period between death and distribution, sale, or exchange) which is not due to mere lapse of time.<a href="#_ftn8" name="_ftnref8">8</a> The phrase “affected by mere lapse of time” has no reference to obligations for the payment of money, whether or not interest bearing, the value of which changes with the passage of time.<a href="#_ftn9" name="_ftnref9">9</a> Proposed regulations would provide that the election to value property includable in the gross estate on the alternate valuation date applies only to the extent that the change in value is a result of market conditions.<a href="#_ftn10" name="_ftnref10">10</a> If the alternate valuation method is elected, it must be applied to all the property included in the gross estate, and cannot be applied to only a portion of the property.<a href="#_ftn11" name="_ftnref11">11</a> The election to value property using the alternate valuation method must be made by the executor on the Form 706, and no later than one year after the due date (including extensions) for filing the estate tax return. The election is irrevocable, unless it is revoked no later than the due date (including extensions) for filing the estate tax return. If use of the alternate valuation method would not result in a decrease in both the value of the gross estate and the amount of estate tax and generation-skipping transfer tax on a filed return, a protective election can be made to use the alternate valuation method if it is later determined that such a decrease would occur. A request for an extension of time to make the election or protective election may be made if the estate tax return was filed no later than one year after the due date (including extensions) for filing the estate tax return but an election or protective election was not made on the return.<a href="#_ftn12" name="_ftnref12">12</a> </div><div class="refs"> <hr align="left" size="1" width="33%"> <a href="#_ftnref1" name="_ftn1">1</a>.    IRC § 2032; Treas. Reg. § 20.2032-1(b)(1). <a href="#_ftnref2" name="_ftn2">2</a>.    Treas. Reg. § 20.2032-1(c)(1). <a href="#_ftnref3" name="_ftn3">3</a>.    63 TC 722 (1975). <a href="#_ftnref4" name="_ftn4">4</a>.    1977-1 CB 271. <a href="#_ftnref5" name="_ftn5">5</a>.    Rev. Rul. 70-512, 1970-2 CB 192; Est. of Van Horne v. Comm., 720 F.2d 1114, 83-2 USTC ¶ 13,548 (9th Cir. 1983), aff’g 78 TC 728 (1982). <a href="#_ftnref6" name="_ftn6">6</a>.      Rev. Rul. 58-576, 1958-2 CB 256. <a href="#_ftnref7" name="_ftn7">7</a>.      Est. of Van Horne v. Comm., 720 F.2d 1114, 83-2 USTC ¶ 13,548 (9th Cir. 1983), aff’g 78 TC 728 (1982). <a href="#_ftnref8" name="_ftn8">8</a>.      IRC § 2032(a). <a href="#_ftnref9" name="_ftn9">9</a>.      Treas. Reg. § 20.2032-1(f). <a href="#_ftnref10" name="_ftn10">10</a>.    Prop. Treas. Reg. § 20. 2032-1(f). <a href="#_ftnref11" name="_ftn11">11</a>.    Treas. Reg. § 20.2032-1(b)(2). <a href="#_ftnref12" name="_ftn12">12</a>.  IRC § 2032(d); Treas. Reg. § 20.2032-1(b). </div></div>

March 13, 2024

919 / How are stocks and bonds listed on an exchange or in an over-the-counter market valued for federal transfer tax purposes?

<div class="Section1"> In general, their value is the fair market value per share or bond on the applicable valuation date (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="916">916</a>). If there is a market for stocks or bonds, on a stock exchange, in an over-the-counter market, or otherwise, the mean between the highest and lowest quoted selling prices on the valuation date is the fair market value per share or bond. (Listed securities and Treasury bonds must be reported and valued in dollar fractions smaller than eighths or 30-seconds, respectively, if the mean selling price on the applicable valuation date results in a smaller fraction.)<a href="#_ftn1" name="_ftnref1">1</a> Restricted securities (sometimes referred to as “unregistered securities,” “investment letter stock,” “control stock,” or “private placement stock”) are securities that cannot lawfully be distributed to the general public until a registration statement relating to the corporation underlying the securities has been filed and made effective by the SEC. Information and guidance in the valuation of these securities is contained in Revenue Ruling 77-287.<a href="#_ftn2" name="_ftnref2">2</a> If there were no sales on the valuation date but there were sales on dates within a reasonable period both before and after the valuation date, the fair market value is determined by taking a weighted average of the means between the highest and lowest sales on the nearest date before and the nearest date after the valuation date. The average is to be weighted inversely by the respective numbers of trading days between the selling dates and the valuation date. If the stocks or bonds are listed on more than one exchange, the records of the exchange where the stocks or bonds are principally dealt in should be employed if such records are available in a generally available listing or publication of general circulation. In the event that such records are not so available and such stocks or bonds are listed on a composite listing of combined exchanges in a generally available listing or publication of general circulation, the records of such combined exchanges should be employed.<a href="#_ftn3" name="_ftnref3">3</a> If it is established with respect to bonds for which there is a market on a stock exchange, that the highest and lowest selling prices are not available for the valuation date in a generally available listing or publication of general circulation, but that closing selling prices are so available, the fair market value per bond is the mean between the quoted closing selling price on the valuation date and the quoted closing selling price on the trading day before the valuation date. If there were no sales on the trading day before the valuation date but there were sales on a date within a reasonable period before the valuation date, the fair market value is determined by taking a weighted average of the quoted closing selling price on the valuation date and the quoted closing selling price on the nearest date before the valuation date. The closing selling price for the valuation date is to be weighted by the number of trading days between the previous selling date and the valuation dates. If there were no sales within a reasonable period before the valuation date but there were sales on the valuation date, the fair market value is the closing selling price on such valuation date. If there were no sales on the valuation date but there were sales on dates within a reasonable period both before and after the valuation date, the fair market value is determined by taking a weighted average of the quoted closing selling prices on the nearest date before and the nearest date after the valuation date. The average is to be weighted inversely by the respective numbers of trading days between the selling dates and the valuation date. If the bonds are listed on more than one exchange, the records of the exchange where the bonds are principally dealt in should be employed.<a href="#_ftn4" name="_ftnref4">4</a> If the above measures are inapplicable because actual sales are not available during a reasonable period beginning before and ending after the valuation date, the fair market value may be determined by taking the mean between the bona fide bid and asked prices on the valuation date, or if none, by taking a weighted average of the means between the bona fide bid and asked prices on the nearest trading date before and the nearest trading date after the valuation date, if both such nearest dates are within a reasonable period. The average is to be determined in the manner described above.<a href="#_ftn5" name="_ftnref5">5</a> If the foregoing measures are inapplicable because no actual sale prices or bona fide bid and asked prices are available on a date within a reasonable period before the valuation date, but such prices are available on a date within a reasonable period after the valuation date, or vice versa, then the mean between the highest and lowest available sale prices or bid and asked prices may be taken as the value.<a href="#_ftn6" name="_ftnref6">6</a> If it is established that the value of any bond or share of stock determined on the basis of selling or bid and asked prices as provided above does not reflect the fair market value thereof, then some reasonable modification of that basis or other relevant facts and elements of value are considered in determining the fair market value. To quote the Tax Court: “In general, property is valued as of the valuation date on the basis of market conditions and facts available on that date without regard to hindsight…The rule that has developed, and which we accept, is that subsequent events are not considered in fixing fair market value, except to the extent that they were reasonably foreseeable at the date of valuation.”<a href="#_ftn7" name="_ftnref7">7</a> Generally, post-valuation date events should be ignored when valuing property for gift tax or estate tax purposes. Where sales at or near the date of death or gift are few or of a sporadic nature, such sales alone may not indicate fair market value. In certain exceptional cases, the size of the block of stock to be valued in relation to the number of shares changing hands in sales may be relevant in determining whether selling prices reflect the fair market value of the block of stock to be valued. If the executor or donor can show that the block of stock to be valued is so large in relation to the actual sales on the existing market that it could not be liquidated in a reasonable time without depressing the market, the price at which the block could be sold as such outside the usual market, as through an underwriter, may be a more accurate indication of value than market quotations.<a href="#_ftn8" name="_ftnref8">8</a> “[W]here a security is actively traded on the market and the block in question represents, let’s say, less than three months’ average market trading, any blockage claim should be given careful examination before a discount is approved.”<a href="#_ftn9" name="_ftnref9">9</a> The IRS has held that, in the estate tax setting, underwriting fees that are necessarily incurred in marketing a large block of stock are deductible as administration expenses under IRC Section 2053(a)(2), and are not considered in determining the blockage discount to be accorded in valuing the stock under IRC Section 2031 (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="847">847</a>). Where a blockage discount is allowed, says the Service, the relevant valuation figure is the price that the public would pay to the underwriter for the stock, not the price the underwriter would pay to the estate.<a href="#_ftn10" name="_ftnref10">10</a> For a discussion of the blockage discount issue, see Est. of Sawade v. Comm.<a href="#_ftn11" name="_ftnref11">11</a> If actual sale prices and bona fide bid and asked prices are lacking, then the fair market value is to be determined by taking the following factors into consideration: (1)     In the case of corporate or other bonds, the soundness of the security, the interest yield, the date of maturity, and other relevant factors; and (2)     In the case of shares of stock, the company’s net worth, prospective earning power and dividend-paying capacity, and other relevant factors. Some of the “other relevant factors” referred to in (1) and (2) above are the following: the goodwill of the business, the economic outlook in the particular industry, the company’s position in the industry and its management, the degree of control of the business represented by the block of stock to be valued, and the values of securities of corporations engaged in the same or similar lines of business which are listed on a stock exchange. However, the weight to be accorded such comparisons or any other evidentiary factors considered in the determination of a value depends upon the facts of each case.<a href="#_ftn12" name="_ftnref12">12</a> In addition to the relevant factors described above, consideration is also given to nonoperating assets, including the proceeds of life insurance policies payable to or for the benefit of the company, to the extent such nonoperating assets have not been taken into account in the determination of net worth, prospective earning power and dividend-earning capacity.<a href="#_ftn13" name="_ftnref13">13</a> Another person may hold an option or a contract to purchase securities owned by a decedent at the time of his death. The effect, if any, that is given to the option or contract price in determining the value of the securities for estate tax purposes depends upon the circumstances of the particular case. Little weight will be accorded a price contained in an option or contract under which the decedent is free to dispose of the underlying securities at any price he chooses during his lifetime. Such is the effect, for example, of an agreement on the part of a shareholder to purchase whatever shares of stock the decedent may own at the time of his death. Even if the decedent is not free to dispose of the underlying securities at other than the option or contract price, such price will be disregarded in determining the value of the securities unless it is determined under the circumstances of the particular case that the agreement represents a bona fide business arrangement and not a device to pass the decedent’s shares to the natural objects of his bounty for less than an adequate and full consideration in money or money’s worth.<a href="#_ftn14" name="_ftnref14">14</a> For a case applying this regulation, see Dorn v. the United States.<a href="#_ftn15" name="_ftnref15">15</a> In any event, an option or a contract to purchase securities which fails to meet the Chapter 14 valuation rules test for such options or agreements (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="943">943</a>) will be disregarded.<a href="#_ftn16" name="_ftnref16">16</a> In any case where a dividend is declared on a share of stock before the decedent’s death but payable to stockholders of record on a date after his death and the stock is selling “ex-dividend” on the date of the decedent’s death, the amount of the dividend is added to the ex-dividend quotation in determining the fair market value of the stock as of the date of the decedent’s death.<a href="#_ftn17" name="_ftnref17">17</a> <div class="refs"> <hr align="left" size="1" width="33%"> <a href="#_ftnref1" name="_ftn1">1</a>.      Rev. Rul. 68-272, 1968-1 CB 394. <a href="#_ftnref2" name="_ftn2">2</a>.      1977-2 CB 319. See Est. of Stratton v. Comm., TC Memo 1982-744; Est. of Sullivan v. Comm., TC Memo 1983-185; Est. of Gilford v. Comm., 88 TC 38 (1987). <a href="#_ftnref3" name="_ftn3">3</a>.      Treas. Reg. §§ 20.2031-2(a), 20.2031-2(b)(1), 25.2512-2(a), 25.2512-2(b)(1). <a href="#_ftnref4" name="_ftn4">4</a>.      Treas. Reg. §§ 20.2031-2(b)(2); 25.2512-2(b)(2). <a href="#_ftnref5" name="_ftn5">5</a>.      Treas. Reg. §§ 20.2031-2(c); 25.2512-2(c). <a href="#_ftnref6" name="_ftn6">6</a>.      Treas. Reg. §§ 20.2031-2(d); 25.2512-2(d). <a href="#_ftnref7" name="_ftn7">7</a>.      Est. of Gilford v. Comm., 88 TC 38 (1987). <a href="#_ftnref8" name="_ftn8">8</a>.      Treas. Reg. §§ 20.2031-2(e); 25.2512-2(e). <a href="#_ftnref9" name="_ftn9">9</a>.      IRS Valuation Guide for Income, Estate and Gift Taxes, page 194 (published by Commerce Clearing House on May 11, 1982). <a href="#_ftnref10" name="_ftn10">10</a>.    Rev. Rul. 83-30, 1983-1 CB 224. <a href="#_ftnref11" name="_ftn11">11</a>.    TC Memo 1984-626, aff’d, 86-2 USTC ¶ 13,672 (8th Cir. 1986). <a href="#_ftnref12" name="_ftn12">12</a>.    See, e.g., Est. of Cook v. U.S., 86-2 USTC ¶ 13,678 (W.D. Mo. 1986). <a href="#_ftnref13" name="_ftn13">13</a>.    Treas. Reg. §§ 20.2031-2(f); 25.2512-2(f). <a href="#_ftnref14" name="_ftn14">14</a>.    Treas. Reg. § 20.2031-2(h). <a href="#_ftnref15" name="_ftn15">15</a>.    828 F.2d 177, 87-2 USTC ¶ 13,732 (3d Cir. 1987), reversing 86-2 USTC ¶ 13,701 (W.D. Pa. 1986). <a href="#_ftnref16" name="_ftn16">16</a>.    IRC § 2703. <a href="#_ftnref17" name="_ftn17">17</a>.  Treas. Reg. § 20.2031-2(i); Rev. Rul. 54-399, 1954-2 CB 279. </div></div>

March 13, 2024

921 / How are notes, mortgages, and mortgage participation certificates valued for federal transfer tax purposes?

<div class="Section1">The fair market value of notes, secured or unsecured, is presumed to be the amount of unpaid principal, plus interest accrued to the date of death or gift, unless the executor or the donor establishes that the value is lower or that the notes are worthless. If not returned at face value, plus accrued interest, satisfactory evidence must be submitted that the note is worth less than the unpaid amount (because of the interest rate, date of maturity, or other cause), or that the note is uncollectible, either in whole or in part (by reason of the insolvency of the party or parties liable, or for other cause), and that any property pledged or mortgaged as security is insufficient to satisfy the obligation.<a href="#_ftn1" name="_ftnref1">1</a></div> <div class="Section1"> Mortgages and mortgage participation certificates are treated similarly. The presumption that their face value is their true value governs unless the representative of the estate submits convincing evidence to the contrary. If it is contended that the actual value of mortgages or mortgage participation certificates is less than their face value, pertinent factors to be taken into consideration in fixing the correct value include the valuation of real estate and any collateral covered by the mortgages, arrears in taxes and interest, gross and net rentals, foreclosure proceedings, assignment of rents, prior liens or encumbrances, present interest yield, over-the-counter sales, bid and asked quotations, etc. The existence of an over-the-counter market for such securities and the quotations and opinions of value furnished by brokers and real estate appraisers cannot be accepted as conclusive evidence of the value of such securities. Such sales and bid and asked quotations are merely items to be considered with other evidence in fixing values. In valuing unit mortgages, consideration will be given first to the value of the property securing the mortgages, applying the same factors as are used in fixing the valuation of real estate owned in fee. Where the mortgage is amply secured, the value will be determined to be its face value plus accrued interest to the date of death. Where the security is insufficient, the mortgage will be valued upon the basis of the fair market value of the property less back taxes, estimated foreclosure expenses, and, where justified, the expense of rehabilitation. If the mortgage is not affected by moratorium laws, the mortgagee’s recourse against the mortgagor personally will be taken into consideration. <hr /> Planning Point: The valuation of such assets is a question of fact and the IRS contends that the burden of proof is upon the estate to overcome the presumption that the face value is the true value where a lower value is sought to be established.<a href="#_ftn2" name="_ftnref2">2</a> </div> <div class="refs"> <hr /> <hr align="left" size="1" width="33%" /> <a href="#_ftnref1" name="_ftn1">1</a>. Treas. Reg. §§ 20.2031-4; 25.2512-4. <a href="#_ftnref2" name="_ftn2">2</a>. Rev. Rul. 67-276, 1967-2 CB 321. </div>

March 13, 2024

927 / How are interests in a closely-held business valued for federal transfer tax purposes?

<div class="Section1">The fair market value of any interest in an unmarketable business, whether a partnership, corporation, limited liability company, or a proprietorship, is the net amount which a willing purchaser, whether an individual or a corporation, would pay for the interest to a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of the relevant facts. The net value is determined on the basis of all relevant factors, including the following:<div class="Section1"> (1)     The value of all the assets of the business, tangible and intangible, including goodwill; (2)     The demonstrated earning capacity of the business; and (3)     The other factors set forth in the regulations<a href="#_ftn1" name="_ftnref1">1</a> relating to the valuation of corporate stock, to the extent applicable (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="929">929</a>). Special attention should be given to determining an adequate value of the goodwill of the business. Complete financial and other data upon which the valuation is based should be submitted with the return, including copies of reports of examinations of the business made by accountants, engineers, or any technical experts as of or near the applicable valuation date.<a href="#_ftn2" name="_ftnref2">2</a> For additional special valuation rules contained in IRC Chapter 14, see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="934">934</a> to Q <a href="javascript:void(0)" class="accordion-cross-reference" id="944">944</a>. Approach of the Courts The appraisal community, courts, taxpayers, and the IRS generally follow the principles laid out in Revenue Ruling 59-60 when valuing the stock of a closely-held corporation or the stock of corporations where market quotations are not available. Revenue Ruling 59-60 can also apply to value interests in closely-held partnerships or LLCs for gift tax or estate tax purposes. However, Revenue Ruling 59-60 does not discuss in detail valuation discounts for lack of control or lack of marketability. Thus, other sources must be relied upon for these critical components of valuation. Historically, in valuation cases, the courts have tended to strike a compromise between the values asserted by the contending parties. But in many cases, courts are more willing to adopt one party’s value. The credit for this “winner take all” approach must be given to former Chief Judge of the Tax Court, Theodore Tannenwald. After years of experience, Judge Tannenwald found that the “compromise the difference” approach of the courts merely encouraged the parties to assert extreme values. In a 1980 valuation decision, Buffalo Tool & Die Manufacturing Company, Inc. v. Commissioner,<a href="#_ftn3" name="_ftnref3">3</a> Judge Tannenwald took the occasion to admonish the parties thus: “We are convinced that the valuation issue is capable of resolution by the parties themselves through an agreement which will reflect a compromise Solomon-like adjustment, thereby saving the expenditure of time, effort, and money by the parties and the court–a process not likely to produce a better result. Indeed, each of the parties should keep in mind that, in the final analysis, the court may find the evidence of valuation by one of the parties sufficiently more convincing than that of the other party, so that the final result will produce a significant financial defeat for one or the other, rather than a middle-of-the-road compromise which we suspect each of the parties expects the court to reach.” (At page 452). This approach is reflected in a number of valuation decisions.<a href="#_ftn4" name="_ftnref4">4</a> </div><div class="refs"> <hr align="left" size="1" width="33%"> <a href="#_ftnref1" name="_ftn1">1</a>.    See Treas. Reg. §§ 20.2031-2(f), 20.2031-2(h), 25.2512-2(f). <a href="#_ftnref2" name="_ftn2">2</a>.    Treas. Reg. §§ 20.2031-3, 25.2512-3. <a href="#_ftnref3" name="_ftn3">3</a>.    74 TC 441. <a href="#_ftnref4" name="_ftn4">4</a>.    Est. of McGill v. Comm., TC Memo 1984-292 (voting trust certificates); Est. of Gallo v. Comm., TC Memo 1985-363 (closely held stock); Est. of Gillet v. Comm., TC Memo 1985-394 (closely held stock); Est. of Rubish v. Comm., TC Memo 1985-406 (ranch); Est. of Watts v. Comm., TC Memo 1985-595 (partnership interest). </div></div>

March 13, 2024

925 / How are mutual fund shares valued for federal transfer tax purposes?

<div class="Section1">The fair market value of a share in an open-end investment company (commonly known as a “mutual fund”) is the public redemption price of a share. In the absence of an affirmative showing of the public redemption price in effect at the time of death or gift, the last public redemption price quoted by the company for the date of death or gift shall be presumed to be the applicable public redemption price. If the estate tax alternate valuation method under IRC Section 2032 is elected, the last public redemption price quoted by the company for the alternate valuation date is the applicable redemption price. If there is no public redemption price quoted by the company for the applicable valuation date (e.g., the valuation date is a Saturday, Sunday, or holiday), the fair market value of the mutual fund share is the last public redemption price quoted by the company for the first day preceding the applicable valuation date for which there is a quotation.</div> <div class="Section1"> In any case where a dividend is declared on a share in an open-end investment company before the decedent’s death but payable to shareholders of record on a date after his death and the share is quoted “ex-dividend” on the date of the decedent’s death, the amount of the dividend is added to the ex-dividend quotation in determining the fair market value of the share as of the date of the decedent’s death. As used in this section, the term “open-end investment company” includes only a company that, on the applicable valuation date, was engaged in offering its shares to the public in the capacity of an open-end investment company.<a href="#_ftn1" name="_ftnref1">1</a> Participating agreement shares in mutual funds are valued at the liquidation value and not at the public offering price on the date of death (following Cartwright).<a href="#_ftn2" name="_ftnref2">2</a> </div> <div class="refs"> <hr align="left" size="1" width="33%" /> <a href="#_ftnref1" name="_ftn1">1</a>. Treas. Reg. §§ 20.2031-8(b); 25.2512-6(b); U.S. v. Cartwright, 411 U.S. 546 (1973). <a href="#_ftnref2" name="_ftn2">2</a>. Est. of Sparling v. Comm., 60 TC 330 (1973), nonacq. 1978-2 CB 4. </div>