Sunglasses 20111Thank You, Tax Court

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, over the years the IRS and the courts fair didn't understand basic economics in the real world, (and how to reply the on question).
Now they do. Here's the anecdote.
Second, let's set up the scenario namely namely repeated almost every time business employers want to sell their businesses. If you are a potential customer, generally you are willing to pay more for the individual assets owned along the enterprise than the corporation's stock. Why?... You do this for two reasons: (1) to get a higher tax foundation for the low-basis assets owned along the corporation and (2) to dodge hidden and contingent corporate liabilities. Now, let's look by the seller's side of the coin: After the procured company sells its assets, it ambition owe corporate proceeds tax (remember, corporations do no enjoy the elegance of cheap capital gains rates) on anyone gain. On the other hand, if the shareholders sell their stock, they ambition disburse less tax (bless those low 15% capital gains rates). But the low-tax root of the assets stays with the enterprise. Sorry, when the buyer (actually your acquired corporation) sells these assets [link widoczny dla zalogowanych], the corporation ambition be socked with those lofty corporate tax rates on the gain.
Despite this reality, up until immediately the IRS and the tribunals have never allowed a rebate in the amount of corporate stock for potential taxes due aboard a future wealth sale or corporate liquidation. Sound the victory peal -- two 1998 cases allowed such a discount for the 1st time. Best of all [link widoczny dla zalogowanych], the well-reasoned decisions are still the law today.
Case #1. Estate of Artemus Davis, (110 TC 530-1998). Davis, one of the founders of the Winn-Dixie grocery necklace created a holding enterprise to own some of his publicly traded Winn-Dixie shares. Davis gave approximately a 26 percentage amuse in the holding company to every of his two sons. At the time of the gift, the holding company owned $70 million of Winn-Dixie stock and $10 million of other assets.
You'll adore this portion. Davis demanded 3 discounts on his gift tax returns to report the transfers: (1) lack of marketability, (2) minority interest; and (3) for the corporate taxes due if the Winn-Dixie stock were to be sold. The total of these discounts reduced the value of the brilliant stock by more than 60 percent when compared to the real USD value of the holding company's assets.
The IRS rejected the valuation and assessed annexed gift taxes of $5.2 million. Ouch! Davis fought the IRS and when he died, his estate persisted the fight. Thumbs up, the Tax Court held that a discount for taxes have to be allowed. The court saw no access the holding company could avoid the taxes and allowed discounts totaling 50 percent of the value of the assets.
Post this article on the walls. When you want to transfer your business for tax purposes, reread it. Hey, that's about $500 [link widoczny dla zalogowanych],000 off of every $1 million your business is value. (A mini side note to blow our CPA's tight horn, the valuation department of our office has been successfully taking convenience of the same three-discount strategy for 20 annuals.)
Case #2 Irene Eisenberg, (155 F3d 50 1998). In this case, the corporation owned real estate that it rented to third parties. The Second Circuit concluded that a alike discount (like the Davis circumstance) for taxes was proper in valuing stock of a holding company.
And here's two more reasons to reserve this article handy: (1) We often use a kin limited partnership (FLIP) "to hammer up the IRS legally" when a consumer owns real estate and/or marketable securities and ambitions to convey (taking deduct in the 35% to 40% range) them during life for a gift alternatively as possession tariff intentions. So whether you have a significant sum of investment attribute, look into a FLIP.
(2) When a client owns a family business and wants to transfer it to younger family members, a mighty tax tactics we use is to combine a valuation discount with an intentionally retarded trust (IDT). The little-known tax outcome of an IDT is that the owner of the family b