Page 26 - Business Valuation for Estates & Gift Taxes

as evidence of the fair market value of Seminole stock on April 14, 1994. The sales took place
close to the valuation date. The sellers were under no compulsion to sell. There was no reason
for them to doubt [the valuation analyst’s] report of the Merrill Lynch valuation. That the final
report was delivered only in July did not undercut the weight of the formal opinion letter written
in March. The sellers had no obligation to hire another investment firm to duplicate Merrill
Lynch's work.

The court went on to say that the value of the transferred stock "at the moment [the decedent] transferred
it by death cannot be determined by imagining a special kind of purchaser for her stock, one positioning
himself to gain eventual control or force the family to buy him out."

The definition of fair market value and its interpretations are clear in that it supposes a transaction be-
tween an assumed willing buyer and assumed willing seller. It also suggests that actual transactions of
the stock, if at arm’s length, can be used as an indication of value. The 9th Circuit was very clear that the
Tax Court did not consider the correct definition of fair market value when it rendered its decision,
which is why it reversed the Tax Court’s decision.

Subsequent Events

Subsequent events are simply events that happen after the valuation date. While the definition is self-
explanatory, how this concept gets applied to valuations used in estate and gift tax engagements can be
complicated. Prior to the issuance of Statement on Standards for Valuation Services (SSVS) No. 1, Val-
uation of a Business, Business Ownership Interest, Security, or Intangible Asset (now codified in
AICPA Professional Standards as VS section 100), valuation analysts had the latitude to include events
occurring after the valuation date in their determination of fair market value, even if they had no prior
knowledge of the event. When SSVS No. 1 was issued in 2007, the standard required valuation analysts
to consider only elements of a valuation that were known or knowable on the valuation date. fn 3 This, of
course, may include events or transactions that occur after the valuation date provided the "known or
knowable" criterion is met. Events and circumstances that do not meet this criterion must be precluded
from the valuation. VS section 100 does permit disclosure of subsequent events when the valuation ana-
lyst determines the events are meaningful to the user of the report; however, they must be included in a
separate section of the report and must clearly state the disclosures are for "informational purposes only
and do not affect the determination of value as of the specified valuation date." fn 4 While SSVS No. 1
establishes relatively well defined guidance for including or excluding subsequent events, the eviden-
tiary rules courts follow when deciding on issues of fair market value allow for a wider spectrum of
permissible facts and circumstances.

In the Estate of Helen M. Noble, v. Commissioner (Noble), fn 5 there were three transactions in dece-
dent’s shares of closely held stock that were reviewed to help value shares of the same company in the
decedent’s estate on the valuation date. The petitioner (Estate of H. Noble) took the position that only
transactions in the stock that occur prior to the valuation date should be considered when determining

fn 3 VS section 100, Valuation of a Business, Business Ownership Interest, Security, or Intangible Asset (AICPA, Professional Stand-
ards), paragraph 43.

fn 4 VS section 100 paragraph 43.

fn 5
See Estate of Helen M. Noble v. Commissioner, T.C. Memo 2005-2 (January 6, 2005).

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