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Industry Update: IRS publishes an internal document that reveals the agency’s most current thinking on the valuation of S Corps

The IRS S corp Job Aid says in the introductory section:

[A]bsent a compelling showing that unrelated parties dealing at arm’s-length would reduce the projected cash flows by a hypothetical entity level tax, no entity level tax should be applied in determining the cash flows of an electing S corporation. In the same vein, the personal income taxes paid by the holder of an interest in an electing S Corporation are not relevant in determining the fair market value of that interest. Click to read Job Aid

The valuation community agrees that, in reality, investors consider both implicit and explicit taxes when making investment decisions. Practitioners may differ on how these taxes should be quantified; however, empirical evidence supports that all taxes are integral to understanding the fair market value of an interest.

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