Key Person Value Adjustments for Closely Held Corporations

Review and Analysis of Discounts for Estate and Gift Tax Purposes

Karen J. Pierce, DBA, CPA, and Ted D. Englebrecht, PhD

Valuing closely held corporations for estate and gift tax purposes is frequently a very contentious issue. IRC section 2031(a) notes that the value of the estate shall be determined at the time of decedent's death, and section 2512(a) states that a gift of property should be valued on the date of the gift. By its very nature, however, stock of closely held corporations can be difficult to value due to the relatively small number of stockholders and limited trading of shares. Furthermore, the IRS does not provide a specific formula to assess the appropriate value of the company's stock. Revenue Ruling 59-60 (1959-1 CB 237) stipulates: “In valuing the stock of closely held corporations, or the stock of corporations where market quotations are not available, all other available financial data, as well as all relevant factors affecting the fair market value must be considered for estate tax and gift tax purposes.” Because there are several million closely held corporations in the United States (E. P. Smith, P. J. Harmelink, and J. R. Hasselback, 2011 CCH Federal Taxation: Comprehensive Topics, CCH, 2010), the topic is an important one.