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Judge Invalidates Tax-Affecting in Estate Business Valuation

July 31, 2011 by Admin

Estate of Gallagher V. Commissioner

A recent decision from the U.S. Tax court tackles a myriad of issues pertaining to private company appraisal, most notably the issue of tax-affecting. The case involves the business valuation of a decedent’s minority interest in a privately held newspaper publishing company. The taxpayer’s expert made tax affected adjustments by assuming a 39-percent income tax rate in calculating the company’s future cash flows before discounting the company’s future earnings to their present value. He also assumed a 40 percent marginal tax rate in calculating the applicable discount rate.

Tax affecting “is the discounting of estimated future corporate earnings on the basis of assumed future tax burdens imposed on those earnings” .Dallas v. Commissioner, T.C. Memo 2006-212. 

The Judge rejected the taxpayer’s expert tax affecting adjustments stating that they “impose an unjustified fictitious corporate tax rate burden on [the company’s] future earnings.” Other issues addressed in this case include minority discounts, marketability discounts, and DCF (Discounted Cash Flow) analysis.  To view the entire case, click the link below: Estate of Gallagher v. Commissioner

Filed Under: Business Valuations, Business Valuations, ESTATE, TRUST, GUARDIANSHIP, LITIGATION SUPPORT Tagged With: Business Valuations, Estate Taxes

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