Gift & Estate Tax Valuations

Gift Tax Valuation and Estate Tax Appraisal

A gift tax valuation sets IRS fair market value of the closely held interest that actually transferred, as of the gift date, for Form 709. An estate tax appraisal does the same at death for Form 706. We write those reports for counsel and CPAs. Principals Blake J. Runckel, ASA, CFA, and Cary M. Carruthers. Call 503-235-7777.

Form 709, Form 706, and adequate disclosure

The IRS needs a date, an interest, and a method it can follow.

A lifetime gift of a closely held interest is reported on Form 709. A decedent’s interest is reported on Form 706, generally as of the date of death, or the alternate valuation date six months later when that election is properly made. In both cases the standard is fair market value: the price at which the property would change hands between a willing buyer and a willing seller, neither under compulsion, both having reasonable knowledge of relevant facts.

For gift tax, Treas. Reg. § 301.6501(c)-1(f) is the rule return preparers care about. If the gift is not adequately disclosed, the limitations period on that transfer does not start. Adequate disclosure requires either a qualified appraisal or a detailed description of the method used to determine fair market value, together with the other items the regulation lists (the property, the interest, restrictions, discounts claimed, and the identity of the parties). A book-value letter or a broker rule of thumb is not that disclosure.

Gift-tax disclosure is not the charitable “qualified appraisal” rule. Treas. Reg. § 1.170A-17 and the Form 8283 substantiation rules apply to charitable contribution deductions. Form 709 adequate disclosure is a different regulation. We write the report so it can be attached to the return that is actually being filed.

The appraisal has to be of the interest that moved, as of the date it moved. A gift report is not an estate number. An estate report is not last year’s gift. Reusing an appraisal prepared for another purpose, or one that is months off the transfer date, is how a reported gift gets attacked.

If the closely held business interest is more than 35 percent of the adjusted gross estate, IRC § 6166 may allow the estate to defer tax on that interest. That election is counsel’s. The appraisal has to identify the interest and the value the election would rest on.

If the IRS later examines the value, the report is the work product we defend. Testimony is a separate engagement if the exam becomes a dispute. Engagement fees depend on the entity and the interest; current ranges are on our fees page. Call 503-235-7777.

Form 709 adequate disclosure checklist

For a closely held interest on Form 709, adequate disclosure is what starts the three-year assessment period under Treas. Reg. § 301.6501(c)-1(f). Without it, the IRS may revisit that transfer indefinitely. Counsel and the return preparer own the return. The appraisal is the valuation piece that return usually attaches.

Before the Form 709 goes out, confirm the filing package can show:

• A specific description of the interest transferred (units, shares, or percentage) and any consideration received.
• The donor and each donee, with the relationship stated.
• If the gift is in trust: the trust EIN and the instrument (or a clear description of its terms).
• How fair market value was determined: method, financial data used, restrictions considered, and each discount claimed (including lack of control and lack of marketability when those apply).
• A qualified appraisal under Treas. Reg. § 301.6501(c)-1(f)(3), or a detailed method description that meets the regulation on its own.
• Any position on the return that is contrary to a regulation or revenue ruling, stated expressly.

That checklist is for gift tax disclosure on Form 709. It is not the charitable Form 8283 / Treas. Reg. § 1.170A-17 substantiation rule. For Form 706, the same fair market value standard applies as of the date of death or the alternate valuation date when that election is properly made; the appraisal still has to be of the interest that is actually in the estate.

We write gift tax valuation reports so counsel can attach them to the Form 709 that is being filed — for the interest that moved, as of the gift date.

Valuation approaches for a closely held interest on Form 709

A gift tax valuation is an opinion of the fair market value of the interest that transferred as of the gift date—not a generic enterprise value and not a report written for another purpose. Counsel and the return preparer need a method another competent person can follow, which is the same “replicable” idea behind adequate disclosure under Treas. Reg. § 301.6501(c)-1(f).

Most closely held gifts are supported with one or more of the standard approaches, reconciled in the report:

• Income approach. Capitalized earnings or a discounted cash flow when earning power drives the value of the business interest.
• Market approach. Guideline public companies or guideline transactions, adjusted for size, risk, liquidity, and the block actually transferred.
• Asset approach. When the facts are asset-heavy, or as a reasonableness floor; balance-sheet and inventory items are reflected under gift-tax valuation norms rather than book value alone.

Those indications are weighed against the Revenue Ruling 59-60 factors already discussed on this page (history, economic outlook, book value, earning capacity, dividend capacity, goodwill, prior sales of the interest, and comparable sales). Discounts for lack of control and lack of marketability are analyzed on the interest after the enterprise indication—see Discount Analysis below. Engagement fees depend on scope; current ranges are on our fees page.

Discount Analysis

Discount analysis is often the most examined part of an estate tax valuation or gift tax appraisal. When a family transfers a minority interest in a closely held business, or when interests are restricted as to marketability or control, those interests are worth less than a pro rata share of enterprise value. The discounts have to be supported. The IRS scrutinizes them; see our discussion of IRS challenges to minority discounts on family gifts and the special valuation rules in IRC Chapter 14.

Discount for Lack of Control (DLOC)

A DLOC reflects that a minority interest holder cannot unilaterally control business decisions, management composition, dividend policy, or exit strategy. This lack of control makes the minority interest less attractive to potential buyers and therefore worth less than a controlling interest. We analyze comparable transaction data and publicly-traded company analysis to support a defensible DLOC.

Discount for Lack of Marketability (DLOM)

A DLOM reflects that closely-held business interests cannot be readily sold in an active, efficient market. Unlike publicly-traded securities, selling a closely-held interest requires finding a buyer, conducting due diligence, and negotiating terms. We analyze each business’s specific characteristics—size, profitability, industry competition, buyer availability—to determine an appropriate DLOM.

Other Discounts & Adjustments

Depending on circumstances, we may analyze swing-vote discounts, key person discounts, and other situation-specific factors. Each discount is carefully documented with supporting analysis and comparable data.

IRS Audit Defense & Valuation Support

The IRS actively audits estate tax returns, particularly those with significant valuation discounts or complex structures. Our valuations are designed to withstand IRS examination with comprehensive documentation, clear methodology, and detailed support for all conclusions.

Detailed Documentation & Methodology

We provide comprehensive valuation reports documenting business history, financial analysis, methodology, comparable company research, and detailed calculations. This documentation allows the IRS appraiser to understand our reasoning and supports the estate’s counsel in defending the valuation. Clear documentation often prevents extended disputes and supports settlements.

Expert Testimony & Defense Support

If a valuation is challenged, we provide detailed expert testimony supporting our conclusions. Our principals have significant experience testifying in depositions, administrative proceedings, and federal court. We work with the estate’s counsel to mount a vigorous defense and negotiate resolutions when appropriate.

40+ Years of IRS Relationships

Over 40 years of practice, Corporate Valuations, Inc. has built strong professional relationships with IRS agents, attorneys, and other professionals involved in estate tax matters. This experience gives us deep insight into IRS valuation standards, common audit focus areas, and effective defense strategies.