Page 27 - Business Valuation for Estates & Gift Taxes

fair market value. The court disagreed. The judge in Noble allowed a transaction that was 14 months
past the valuation date to assist in determining fair market value and stated:

[W]e disagree with petitioners that only sales of stock that predate a valuation date may be used
to determine fair market value as of that valuation date. The Court of Appeals for the 8th Circuit,
the court to which an appeal of this case most likely lies, has held specifically that ‘In determin-
ing the value of unlisted stocks, actual sales made in reasonable amounts at arm's length, in the
normal course of business, within a reasonable time before or after the basic date, are the best
criterion of market value’ (citations omitted). fn 6

The opinion went on to note that events occurring after the valuation date—even those deemed to be un-
foreseeable—may still be relevant in determining fair market value at an earlier date if the evidence is
probative of the earlier valuation and helps establish a transaction amount between a hypothetical will-
ing buyer and willing seller for the subject property on the valuation date. Federal Rules of Evidence,
which the federal courts are required to follow, define evidence as being "relevant" if it has "any tenden-
cy to make the existence of any fact that is of consequence to the determination of the action more prob-
able or less probable than it would be without that evidence." fn 7

Whether evidence relating to subsequent events is admissible by the courts in determining the fair mar-
ket value on an earlier date is an issue of relevance. Most subsequent events are not relevant because the
"measure of tax must be determined according to the situation as it existed on the date [in question], and
not according to subsequent events." But subsequent events that shed light on what a willing buyer
would have paid on the date in question are admissible, such as "evidence of actual sales prices received
for property after the date [in question], so long as the sale occurred within a reasonable time... and no
intervening events drastically changed the value of the property." fn 8

When evaluating subsequent events, valuation analysts need to consider what was known or knowable
but should also do their best to determine if there were any transactions or events that would have been
unknowable on the valuation date and be viewed by the courts to offer probative value to the conclusion
of value on the valuation date. In situations where this type of information might exist, valuation ana-
lysts must be prepared to support why (or why not) certain information or events should (or should not)
be included (or excluded) as known or knowable facts at the valuation date.

Discounts and Premiums

There are numerous cases used by valuation analysts in their valuation reports that deal with issues such
as control premiums, discounts for lack of control (DLOC), discounts for lack of marketability (DLOM),
blockage discounts, fractional interest discounts, as well as miscellaneous other discounts. As noted

fn 6 The 8th Circuit case referred to was the Estate of Fitts v. Commissioner, 237 F.2d 729 (October 30, 1956). In this case, the peti-
tioner valued the closely held stock at $150 per share while the Commissioner valued it at $600 per share. The court determined the
fair market value was $375 per share. It is not clear from the opinion if the judge reviewed subsequent transaction in the company’s
closely held stock (in fact, the dissenting opinion suggests the court just split the difference between the two values to arrive at its final
fair market value). The court did, however, cite treasury regulations found in Section 20.2031-2 as support for considering post-
valuation date transactions when assessing fair market value.

fn 7 See Fed. R. Evid. 401.

fn 8
See Estate of Helen M. Noble v. Commissioner, T.C. Memo 2005-2 (January 6, 2005).

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