Masonry Magazine August 1979 Page. 24
ESTATE PLANNING
continued from page 23
Why Is Valuation Of Your Corporation Important?
A controversy over valuation of stock in a closely-held corporation can present more obstacles to the speedy settlement of an estate than any other consideration. Your desire to determine a reasonable valuation of your business interest should stem from the fact that a lifetime of effort has been invested in building a business, and the business may represent a major asset in your estate for your family. As part of your estate, the business at the time of your death will be taxed based on its fair market value at the date of your death. But what value would be regarded as "fair" for stock in a closely-held corporation? Such stock is not traded on exchanges or over-the-counter. You may never have sold a share of the company's stock.
The question of such valuation has come to be a major battleground between the IRS and the estates of taxpayers. Such controversy often leads to lengthy litigation which may tie up the estate for years, substantially increase legal fees and other costs, while leaving the families of the business owner "high and dry."
The IRS uses no consistent formula to value stock in a closely-held company, and in fact, the methods used for valuation vary considerably from one industry to another. This is why it is most important that you consult an accountant who is familiar with valuation principles in the construction industry. Bear in mind that "book value" of a business is usually a misleading indicator which generally bears no close relationship to full fair market value. Specifically, "book value" is relevant as one consideration, but the IRS will use several other factors.
Some Broad Considerations
There are several broad considerations to be taken into account when valuing your interest. These include:
1. The earning capacity of your business. The level of net earnings and/or your salary and bonus, if any:
2. The value of good will and other intangibles such as leases which are usually not reflected on the books;
3. The true market value of fixed assets such as real estate, equipment, etc., which is on the books at original cost less depreciation;
4. Careful evaluation must be made of your accounts receivable if this represents a significant portion of your current assets. Inventories should also be appraised according to your particular accounting method;
5. The impact of liabilities not reflected on the books, such as contingent suits, should be considered;
6. Any agreements in effect which could restrict your ability to transfer your stock freely will reduce their value;
7. One would assume that the effect on a business at the death of an essential executive or key officer would reduce the value of the stock. Unfortunately, tax authorities use the value just prior to death in making their valuation.
The IRS has outlined in Revenue Ruling 59-60 specific elements which must be considered in valuing closely-held stock. These specifics, along with a review of the financial statements of your firm for the last five years, will serve as an outline for the elements which should be included in your valuation process:
1. The nature of the business and the history of the enterprise from its inception.
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24 MASONRY/AUGUST, 1979