Tax Court Rules S Corp May Use Lower Value Than Actual Selling Price To Calculate Built In Gains, Based On Qualified Business Valuation

An S Corporation was allowed to use a lower figure, rather than the sale price, when calculating the tax on built-in gains for the sale of a partnership interest.  The built-in gains tax is a tax on an S corporation’s gain on disposition of an asset where the gain was accrued while the S corporation was a C corporation.  In the first year after conversion from C corporation status to S corporation status, the taxpayer sold a partnership interest for $5.2 million.  The taxpayer reported the fair-market-value (FMV) of the partnership interest at $2.6 million, based on a valuation performed prior to the sale.  The Tax Court found the sale must be taken into account in the valuation.  The Tax Court reasoned the buyer was willing to pay a premium to avoid the exercise of rights of first refusal of the other partners.  The Tax Court held the FMV to be $3.7 million. Points of Interest

• …as of January 2011, the estate tax has been reenacted and changed.

• In response to the high dollar limit on the estate tax exclusion enacted by the federal government for this year, states have responded.  As of February 2011, several states have enacted estate taxes that carry lower exemption amounts.

• To best deal with these issues, individuals should have a complete estate plan including a will, living will, health care and property power of attorney, a marital trust, and a bypass trust.

By: Basi & Basi at the Center for Financial, Legal and Tax Planning for Transworld M&A Advisors