Fundamentals of gift and inheritance tax assessment


While personal and corporate income taxes tend to get the most media attention, it is important to remember that gift and inheritance taxes can also have a profound impact on an individual’s long-term financial planning.

When valuing shares of a closely managed entity for gift and inheritance tax purposes, accountants should consider the following factors:

1. IRS Guide

Ratings for gift and inheritance tax purposes must follow the principles of IRS Revenue Ruling 59-60. First published in 1959, Revenue Ruling 59-60 outlines the approaches, methods, and factors to consider when valuing stocks of a closely held company when market quotes are either unavailable or based on tight trades. The factors to consider under Revenue Ruling 59-60 are as follows:

  1. The nature of the company and the history of the company since its inception.
  2. The economic outlook in general and the situation and prospects of the specific industry.
  3. The book value of the stock and the company’s financial condition.
  4. The profitability of the company.
  5. The ability to pay dividends.
  6. Regardless of whether the company has goodwill or some other intangible asset.
  7. Sale of the inventory and the size of the inventory block to be valued.

The market price of shares of companies that are active in the same or a similar line of business and whose shares are actively traded on a free and open market, either on a stock exchange or over the counter.

2. Narrative report

In tax assessments, great importance is attached to the quality of the narrative report. This report should detail the approaches and assumptions used and discuss how each of the Revenue Ruling 59-60 factors described above has been addressed. The report should also elaborate on the considerations mentioned in # 2 and # 3 below.

3. Different valuations

Various valuation approaches should be considered when valuing closely held stocks, including an earnings analysis using discounted cash flows and the market approach using guidelines for public companies and / or guidelines for transaction multipliers. The results of these two approaches should be compared to the underlying book value of the company to assess appropriateness.

In addition, great care should be taken with either approach to ensure that the financial projections used are appropriately reviewed and revised and that they reflect current company, market and industry conditions. When selecting guideline market transactions and / or guideline stock corporations for use in the market approach, the guideline selection process, selecting the multiple to be used (e.g. lower quartile, median or upper quartile of the comps, etc.), weights applied between the various approaches, should be adequately documented.

4. Valuation discounts

In many cases, additional discounts may need to be applied to the estimated value. These discounts, which have been enumerated in a variety of legal proceedings over the years, are responsible for two possible factors. The first discount, an out-of-control discount, reflects the view that a shareholder of a single share or small block of shares does not have the ability to influence the company’s operations and make important decisions as a controlling shareholder would.

The second discount, a marketability discount, reflects the view that a shareholder in a closely held company cannot sell their stake as easily as a shareholder in a publicly traded company. Both haircuts require a great deal of research, as well as qualitative and quantitative analyzes, and should be based on the facts and circumstances of the company being valued and the size of the block of shares being valued.

For example, a discount due to a lack of control may not be appropriate in cases where a controlling interest in an enterprise is valued. Likewise, a discount may not be appropriate due to a lack of marketability if the liquidation of the company is imminent and the estimated holding period is a very short period of time. Such discounts should be based on market data.

5. No one size fits all

The process of valuing closely held companies for gift and inheritance tax reporting purposes is not a cookie cutter, a one-size-fits-all exercise. Great care and attention should be given to quantitative and qualitative analysis. Discuss its history, ongoing operations and prospects with the company’s management team.

Every company is different, and even within every company, different classes of shares and blocks of shares have different characteristics. Revenue Ruling 59-60 explicitly states that “no formula can be developed that is generally applicable to the multitude of different assessments in inheritance and gift tax cases” and that “a solid assessment will be based on all relevant facts”. , but the elements of common sense, sound judgment and reasonableness must be incorporated into the process. “


As the possibility of changes in gift and inheritance tax law is receiving increasing attention, the valuations of closely related companies are also being given more attention for gift and inheritance tax reporting. Sometimes disputes can arise between the IRS and taxpayers due to incomplete, poorly defended, or documented assessments. Individuals in need of assessments for this purpose should be prepared with reasonable, supportive analysis that can stand up to scrutiny by the IRS.


Leave A Reply