We don’t often see impactful court cases dealing with valuation issues, but we have one now: Kress versus the United States.
In the Kress decision, a federal district court weighed in on several questions. Two of the most significant are the treatment of corporate level taxes in valuing S Corporations, and the consideration of interfamily transfer restrictions on marketability discounts.
I would note that this was a U.S. district court case, not a tax court case. Nevertheless, I’m sure it will set precedent for valuation experts and possibly future court decisions.
The court ruled that an S Corp should be valued using the same methodology as an otherwise identical C Corp, and that the valuations should reflect C corporation level taxes.
Regarding the transfer restrictions, the court found that the Kress family failed to prove that the family transfer restrictions were comparable to similar arrangements entered into by persons in arms’ length transaction and therefore should not be considered when determining discounts for lack of marketability.
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