營養 under Section 6166 be returned to the 4 percent level, and that the 35 percent of gross estate/50 percent of taxable estate eligibility rule and the 50 percent of the total value of each of multiple businesses rule- be substantially relaxed or eliminated. An alternative might be provided whereby the entire estate tax could be paid in installments, as a matter of right, if a specified percentage of value of the gross or taxable estate was comprised of an interest in a closely-held business. Sufficient liberalization of Section 6166, together with a low interest rate on installment payments, might tend to make the use of Section 6166 a viable alternative to liquidation or merger. VALUATION OF SMALL BUSINESSES One of the weightiest tax-related problems which inevitably must face the small businessman who does not sell or terminate his business during his lifetime is valuation of the business at his death for estate tax purposes. Particularly troublesome is the valuation of stock in closely-held corporations for which there is no market. Usually the only potential buyer is another shareholder (if there are any). In most circumstances, however, what another shareholder might be willing to pay will probably not constitute a value usable for estate tax purposes. There are no truly objective standards for the aluation of the small, closely-held business. Further, he typical revenue agent is not an expert in business aluation nor does he have the time to spend in an exhaus ive investigation and analysis of a business. Accord ngly, a rule of thumb using some multiple of earnings veraged over the last few years prior to the death of he shareholder, or other mathematical approach based on alance sheets and income statements, is usually employed. he computed value using such rule of thumb methods may be ighly unrealistic simply because it ignores the intangible actors which play such a large part in the earnings apability of a small business. In many small businesses he going concern value is heavily dependent upon the competence, reputation and energy of the proprietor or prinipal partner or shareholder. Small businesses often have 10 depth in management. The death of the principal guiding orce of the business may reduce its value to a liquidation value overnight, even if there has been an impressive arnings record in the past. Further, even though there may be one or more competent adult shareholders or partners surviving, the ability of the business to generate earnings ay be greatly diminished because it now lacks the earning Dower of the services contributed by the decedent. Accordingly, because of these and other factors, the postdeath value of a small business cannot be determined solely by a formula approach. Even though the executor is provided with the option of valuing the decedent's property on the alternate valuation date (six months after death), the diminution in value caused by the death of a principal may not be fully manifested within such a short time. If the formula approach is used in conjunction with the alternate valuation date, the pre-death earnings will over-weight the formula. Another approach to valuation endorsed by the Treasury Regulations is to assess the small business on the basis of comparisons with publicly-held companies for which published financial data is available. Again, this approach ignores the subjective and personal factors which figure so importantly in the worth of a small business. Further, it is unrealistic to assume that an investor will pay as high a multiple of earnings for unmarketable stock in a small, closely-held business as for stock in a larger business which is publicly traded. The fact that there is at present no real solution to the valuation issue for many small businesses is undoubtedly a factor contributing to liquidations and mergers during the lifetime of the principal owner. One possible solutio or businesses organized in a corporate form might be to or such stock rather than being subject to a formal etermination of fair market value at death. Upon the ubsequent sale of the stock, a capital gain or loss would e realized. Thus, an estate tax could be traded for an ncome tax. Since in some cases the estate tax rate ould be higher than the capital gains tax rate, proviion would have to be made to achieve some approximate easure of equity. e to add the stockholder's prorata share of the corporaion's accumulated earnings and profits (roughly, his share f retained earnings) to his tax basis to arrive at a figure hich would be used both for estate tax valuation purposes nd for computing gain or loss on a subsequent sale of the tock. There are some practical difficulties with this One way this could be accomplished would This approach would probably pose too many complications f applied to unincorporated businesses, particularly if ractional interests or multiple beneficiaries were involved. */ This would cause the stock to be valued in the deeased shareholder's estate at its tax basis, i.e., its asis for determining the amount of taxable gain or loss pon the sale by the shareholder during his lifetime. This ould be the cost of the stock in most cases. 62-209 - 76 - 39 approach, however, and substantial revisions of the Internal Revenue Code would be required. Another possible solution might be establish ment of special valuation teams composed of independent skilled appraisers in the various Internal Revenue Service Regions. The members of these teams (who would be independent consultants rather than civil servants) would make a detailed and subjective investigation of interests in closely-held businesses when a dispute arose between an estate and the examining revenue agent. Such valuation teams might also be established under the aegis of the United States Tax Court if the valuation dispute ended in Unfortunately, the chilling effect of potential litigation on valuation after the death of a small businessman is with us at present as a factor encouraging pre-death liquidations and mergers. litigation. The fact that a fair valuation might be arrived at if the Tax Court were to utilize a valuation task force composed of independent skilled appraisers often might not outweigh the delay, inconvenience and considerable expense of resorting to litigation. Another variation would be to allow some type of binding arbitration by a valuation board composed of members selected by the Revenue Service and the estate. This would seem to be a costly and somewhat cumbersome approach, however. |
