The Tax Court in Estate of Aaron U. Jones upheld the use of tax-affecting in the valuation of gifts made of S corporation and limited partnership interests. The business involved timber, and the income method is typically used to value an ongoing timber business. Tax-affecting is adjusting the value to reflect an after tax value as if the business was a C corporation. Tax-affecting for S corporations was in the IRS manual twenty years ago, but was removed after the IRS won a victory against its use in Gross v Commissioner.
It is unclear at this point how broad the Tax Court’s acceptance of tax-affecting will go, but it is certainly a welcome result for the taxpayer.
It is important to point out that the facts were good. This was no death bed case, and the taxpayer retained a very qualified appraiser in the area of timber. The IRS appraiser had little or no experience in the area. This is a great lesson to take away. Always have the better appraiser when you head into litigation with the IRS.