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TAX SERVICES – Trusted, independent valuation services.

Tax strategies are complex and highly scrutinized by regulatory authorities worldwide.

Quist has specialized in independent tax valuation services for over 30 years. Quist’s team of analysts help our clients to navigate an environment of changing tax law and shifting regulations by offering skilled expertise for forming strategy and defending valuation positions. Quist offers the following tax valuation services:

Undivided Interests in Real Estate

Purpose: To establish the fair market value of real estate interests transferred during life and at death for federal tax purposes.

An undivided real estate interest is a tenancy in common, meaning that the interest holder is entitled to possession of the property according to his proportionate share. Unlike joint tenants, there is no right of survivorship. Thus, the interest of a tenant in common does not terminate at death. Instead, each undivided interest holder’s interest passes to his heirs, rather than to other interest holders in the property.

Undivided interest holders do not enjoy rights and powers comparable to the owner of a fee simple estate. A fee simple estate reflects the largest bundle of rights possible, including the rights to possess, use, enjoy, control and dispose of the property at will. The undivided interest holder’s right to possess, use and enjoy the property is limited “according to his proportionate share.” Moreover, the undivided interest holder cannot control or unilaterally dispose of the property. Since there is no established market for undivided interests and since such interests cannot readily be pledged as security for financing, they have limited liquidity. Accordingly, discounts to reflect the lack of control and lack of marketability are warranted.

Undivided interests are commonly contributed to individuals, Qualified Personal Residence Trusts, FLPs, or LLCs. They may also be among the assets includable in a decedent’s estate.

While real estate appraisers are adept at establishing the fee simple value of the underlying real estate, they frequently do not have the background or experience to determine the discounts applicable to undivided interests for minority and marketability considerations.

Carried Interest

Purpose: To establish the fair market value of a carried interest in a private equity or hedge fund for gift and tax purposes.

A carried interest in a private equity fund or hedge fund represents the fund manager’s stake in the profits of the fund. This method of compensation seeks to motivate the fund manager to work toward improving the fund’s performance. While historically the carried interest in funds saw reduced regulation, less transparency, and low liquidity, they have increasingly gone under the microscope of taxing authorities in recent years.

Placing a value on carried interest is difficult, but a thorough valuation is needed for tax purposes if the carry has been transferred as part of an estate-planning strategy. Because carried interest can increase dramatically in value in a short time, it can be viewed as a leveraged asset with significant potential for gifting.

Any carried interest valuation must take into account future profit potential. When a fund is young, profits are often just projected and have substantially lower values than after the managers have proved their abilities to grow the fund.

S-corporation Elections

Purpose: To establish the tax basis in corporate assets as of the date the company is converted from “C” to “S” tax status, to ensure that any taxes payable resulting from the sale of corporate assets during the subsequent ten year period can be properly determined.

Business valuations are usually done at the time the owners of a C corporation elect S corporation tax status. S corporations are corporations that elect to pass corporate income, losses, deductions and credit through to their shareholders for federal tax purposes. Shareholders of S corporations report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates. This allows S corporations to avoid double taxation on the corporate income. S corporations are responsible for tax on certain built-in gains and passive income. Therefore, it is advisable for many companies to elect S corporation tax status.

Following a conversion from a C to an S corporation, the shareholders have a ten-year period in which the double taxation provision remains in effect. A sale of any company asset during this ten year period will generally result in double taxation to the extent of the asset’s built-in gain at the time of the conversion. The built-in gain is the amount by which the fair market value of an asset exceeds its adjusted tax basis as of the conversion date. The amount of the sales price in excess of the built-in gain amount is subject to taxation at only one level.

As a result of these provisions, it is important that business valuations be prepared at the time the S election is made. The value of the entity must be allocated to each of the company’s assets. Preparation of a timely valuation by a qualified appraiser ensures that necessary information is available in the event of a subsequent sale. In addition, it provides the taxpayer with independent evidence of the value of the business as of the date of the S election.

Restricted Stock

Purpose: To establish the fair market value of restricted stock for gift, estate or income tax purposes.

Rule 144 of The Securities Act of 1933 defines restricted stock as “securities acquired directly or indirectly from the issuer thereof, or from an affiliate of such issuer, in a transaction or series of transactions not involving any public offering.” Restricted stock can be awarded to employees as compensation or it can be acquired through a private transaction (such as a merger or acquisition).

Stock that is not registered with the Securities and Exchange Commission (“SEC”) may be sold to the public, subject to limitations imposed by Rule 144. Generally, a person not affiliated with the company can sell when the following conditions are met:

  • The issuer has registered shares outstanding and is current with its SEC filings;
  • The seller files a Form 144, providing a Notice of Intention To Sell, with the SEC at or prior to the sale date;
  • The seller has held the securities, fully paid, for one year; and
  • The maximum sale under each Form 144 filing is the GREATER of one percent (1%) of the outstanding shares of the company or the weekly average trading volume during the four weeks preceding the filing of the Form 144. This is called the “dribble out” rule.

Persons affiliated with the company do not face a one-year holding period, but are always subject to the “dribble out” rules.

While non-restricted, publicly traded stock typically can be sold in public markets and converted into cash in a matter of a few days, restricted stock must be sold in private transactions, “dribbled out” or held for a certain period. The limited liquidity of the shares adversely affects their value, and suggests that discount from the publicly traded price should be applied to establish their fair market value. The magnitude of the discount is determined by evaluating the relevant facts in each case, including the expected holding period, the availability of a market following the holding period, the financial characteristics of the company, and economic conditions, among others. IRS Revenue Rulings 59-60 and 77-287 provide specific guidance on the factors to consider in valuing restricted stock.

Gift and Estate Tax

Purpose: To establish the fair market value of business interests transferred during life and at death for federal tax purposes.

When the owners of privately held companies or investment entities transfer equity interests in those entities to family members or others, they must disclose to the Internal Revenue Service the fair market value of the transferred interests. Transfers that fall within the annual exclusion (currently $14,000 per donee) or single lifetime exclusion ($5,340,000 per donor in 2014) are non-taxable, while amounts in excess of the exclusions are subject to tax. In all cases, the taxpayer is responsible for properly documenting the value of the transferred interests. In many cases, this will require a valuation by an independent party.

Final regulations on adequate disclosure of gifts became effective as of December 3, 1999. Under IRC §6501(c)(9), the period of limitations on the assessment of gift tax with respect to a gift will commence to run only if the gift is adequately disclosed on the gift tax return. Under the final regulations “…the taxpayer must either meet certain disclosure requirements in the return submitted or, alternatively, submit a properly completed appraisal.”

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Employee Stock Ownership Plan (ESOPs)

Purpose: For tax purposes, to provide an independent determination of the fair market value of the capital stock in privately held companies in which a portion or all of the capital stock is owned by an Employee Stock Ownership Trust (“ESOP”).

An ESOP is a tax-qualified, defined contribution plan of deferred compensation under Section 401(a), Title 26, Subtitle A, chapter 1, subchapter D/P, subpart A/Section 401of the Internal Revenue Code. The primary objective of an ESOP is to provide stock ownership interests to employees so that they have a vested interest in the successful operations of their companies. A qualified ESOP receives tax-favored treatment under the Internal Revenue Code, including:

  • Employers can deduct stock or cash contributions to an ESOP;
  • Employers can deduct dividends paid on ESOP-held stock;
  • An owner of a closely held C corporation can defer capital gains taxation on stock he or she sells to an ESOP;
  • An S corporation ESOP is not taxable on its share of corporate earnings; and
  • Employees pay no tax on stock allocated to their ESOP account until they receive distributions.

Because of these tax benefits, whenever an ESOP acquires employer’s stock from the corporation or from certain shareholders, the acquisition price must be less than or equal to “adequate consideration.” For employer securities that are not regularly traded, the Department of Labor defines adequate consideration as the fair market value determined by an appraiser independent of all parties to the transaction.

According to the Internal Revenue Service and the Department of Labor, valuations are required at least annually for annual contributions, determination of the plan account balance, or repurchase of small blocks of terminated participants’ shares. In addition, a separate valuation, as of the date of the transaction, is required for the purchase of a non-participant’s shares or the purchase of significant blocks of stock.

Discount Analyses for FLPs and LLCs

Purpose: To establish the fair market value of controlling or non-controlling interests in FLPs and LLCs.

An FLP is a limited partnership among family members that is used for various business and estate planning purposes. The FLP is a popular tax-planning vehicle for several reasons:

  • FLPs provide for centralized management and creditor protection for family assets.
  • FLPs can hold diverse assets (operating businesses, real estate, oil & gas investments, marketable securities, cash, etc).
  • The senior generation has the ability to transfer partnership interests to family members without losing management control over the entity and its assets.
  • The senior generation may control the reinvestment or distribution of cash flows generated by the partnership.
  • Transfers of non-controlling limited partnership interests in the FLP can be made at substantial discounts from the corresponding pro rata share of the value of the partnership.
  • Restrictions may be imposed upon the transfer of partnership interests.

LLCs have similar characteristics/benefits, but are owned by “members” rather than partners. The management of LLCs is defined by their operating documents and may be either 1) the members themselves, 2) by one or more managers chosen by the members, or 3) by the members in conjunction with managers.

FLPs and LLCs have increasingly been used following the IRS decision in 1993 to issue Rev. Rul. 93-12. In Rev. Rul. 93-12, the Service announced that it would no longer follow its prior position of aggregating family ownership interests for valuation purposes. This provided taxpayers and their advisors with the assurance that minority and lack of marketability discounts would be allowable when properly documented.

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Charitable Gifts

Purpose: To establish the fair market value of closely-held securities donated to a public charity or private foundation

Owners of closely held businesses in the U.S. control over $3.0 trillion in wealth. For business security holders with charitable intentions, donations of their stock to tax-qualified public charities or private foundations can result in tax savings large enough so that, when combined with insurance programs, the value of the gifts can be recaptured. In most cases, to benefit from the tax deductions associated with charitable gifts, owners must submit a qualified appraisal.

For gifts of closely held securities (e.g. non-publicly traded stock) valued over $5,000, an appraisal performed by a “qualified appraiser” must be submitted with the income tax return. The valuation date must be no more than 60 days before the date of the contribution.