Sub S Valuation: To Tax Effect, or Not to Tax Effect, Is Not Really the Question

The valuation of Subchapter S corporations is an important tax related issue for small corporations. For the 2008 tax year, Service data indicates that approximately 4 million Subchapter S corporations, with almost 7 million shareholders and total receipts of over $6.1 trillion, filed tax returns. This represents approximately 69% of the nearly 5.85 million tax returns filed by all corporations. Every year, some Subchapter S shareholders die, some get divorced, and some have disputes with other shareholders. After any of these events, valuation of S corporation shares is necessary to determine estate and gift taxes, divorce settlements, and equitable division of corporate ownership interests, as well as for a variety of other purposes. In Gross v. Commissioner, the Tax Court agreed with the testimony of an expert testifying for the Service regarding the valuation of an estate as of 1992. Here, the expert testified that tax effecting at normal corporate rates was inappropriate.