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Gift Tax Valuation

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    Gift Tax Valuation

    Mr. & Mrs. Trucker formed an S Corp in 1994, with 1000 shares of capital stock, established value $1/share, and transferred assets (and related debt) into the corporation worth some $40,000 net. $1000 was credited to capital stock, and $40,000 into excess paid-in capital, as I believe to be totally proper. Immediately, Mr. Trucker was issued 510 shares (51%), Momma Trucker 190 shares, Son Trucker 200 shares, and Daughter Trucker 100 shares.

    Over the years the S Corp has grown incredibly. Corporation is now valued at $4 million on 01/01/05, and thus FMV of all these shares has grown exponentially. However, because assets are valued at historical value and have grown, and zero value recorded for goodwill, the "Equity" on the balance sheet is only $300,000.

    Also over the years, Daughter Trucker has worked just as hard in the company as anyone else, and the initial issue of only 10% has become a sore spot in various family feuds, because Son Trucker was initially issued 20%. The Son worked fulltime for the corporation, and it was the Daughter's intent to work only part-time, thus that is reason she received only 10%. However, almost immediately Daughter began working full time and has done so ever since.

    Daddy and Momma Trucker know virtually nothing about estate planning, and just to create peace and harmony in the family, Momma decides to relinquish 10% of her part, and give it to Daughter Trucker, so Daughter and Son would have same share, 20% each.

    At time of giving away these 100 shares to her daughter, FMV of the company is some $4 million, but "book value" is only $300,000. Tax basis of all shares is some $250,000 due to various differences, and Mommas tax basis prior to the gift was $38,000. For purposes of gift tax, is the value of the gift:

    a)$30,000? (10% of Book Value)
    b)$400,000? (10% of FMV)
    c)$25,000 (10% of Tax Basis)
    d)$20,000 (10/19 of Momma's tax basis)

    Most of the gift taxation I've seen has been at FMV, but I'm wondering if there are exceptions. The situation above is an actual case with one of my customers, except the numbers are conveniently rounded for simplicity. And yes, of course, the family did not consult me before doing this.

    Thanks in advance for your help,

    Ron Jordan


    It is indeed FMV. Has an official business valuation been prepared? Just wondered how that value was derived. Keep in mind there may be some opportunities for discounting the value (i.e. lack of marketability, etc.) depending on how the company is structured, etc.

    Hope that helps. Best of luck.


      I agree with "Hope that helps" post as it is FMV for gift tax purposes and Momma's basis is daughters basis. Marketability of minority interest could be as much as ± 20% of FMV and other discounts could be appropriate also for gift tax purposes. You need to look at difference valuation methods and valuation court cases to find one that fits your case.



        Late 90s the discounts mentioned may have been settled with the IRS at the standard 35%, but welcome back to the attorney's world in 2005. A lack of marketability and minority discount is back to 50% to 70%. There are national "experts" who have been there (tax court) done that and are being used by the valuation network. I sat through a meeting a couple of months ago where I could not believe how they were going to make an estate essentially go away. Everything goes in cycles-taxing authorities will try again.

        We have created a new market for employment-valuations. We may not be able to manufacture in the US of A, but we are able to produce more and more paper pushing jobs than anywhere else.