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Unformatted text preview: The Federal Transfer Taxes Solutions to Tax Research Problems 24-44 Reg. 20.2031-1(b) provides that valuation of property includible in the gross estate is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts. In the case of shares of stock in a corporation, such a price is easily determinable if the stock is actively traded on the open market. However, in the case of closely held corporations (such as W Corporation), little, if any, trading of the shares may occur. In such situations, valuation of the shares must be based upon all relevant facts and circumstances. In Revenue Ruling 59-60, 1959-1 C.B. 237, the Internal Revenue Service discussed a number of factors that should be considered in the valuation process. Such factors include (a) the nature of the business and the history of the enterprise from its inception, (b) the economic outlook in general and the condition and outlook of the specific industry in particular, (c) the book value of the stock and the financial condition of the business, (d) the earning and dividend-paying capacity of the company, (e) whether or not the enterprise has goodwill or other intangible value, (f) sales of the stock and the size of the block of stock to be valued, and (g) the market price of stocks of corporations engaged in the same or a similar line of business. 5- The ruling also discusses the role in the valuation process of restrictive agreements concerning the disposition of corporate stock: Where the buy and sell agreement is the result of voluntary action by the stockholders and is binding during the life as well as at the death of the stockholders, such agreement may or may not , depending upon the circumstance of each case, fix the value for estate tax purposes. However, if the decedent stockholder was free to dispose of the shares during his life, so that the buy-sell agreement only became operative at death, the price determined under the agreement will not affect the valuation of the stock in the decedent s gross estate. 5- In the case of Estate of Littick , 31 T.C. 181 (1958), acq. 1959-2 C.B. 4, the Tax Court enumerated several factors that indicated that the selling price stipulated in a buy-sell agreement among the shareholders in a family corporation should control the valuation of the stock for estate tax purposes. The agreement in question restricted transfer of the stock during the decedent s life as well as at his death. It was binding on all of the corporate shareholders. The agreement was arrived at among the shareholders as a result of arm s- length negotiation, and served the business purpose of preserving the family management and ownership of the business. The agreement obligated the corporation to purchase the stock at the stipulated price. Note that all of these factors are present in the case involving the valuation of decedent JW...
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- Spring '11