Business owners seldom think about a valuation strategy for dealing with the IRS on gift and estate tax matters. Many owners ignore the importance of estate tax planning, which can also be called lifetime planning. Lack of vision or short-sightedness on planning can be damaging to family wealth and succession.

Things to Consider

There is a demographic bubble involving ownership of closely held business interests held by baby boomers. This will bring a huge amount of wealth into the estate tax pipeline over the next two decades. Business owners should contemplate three things:

  1. The IRS is aware of the potential revenue from this demographic bubble.
  2. If a business owner engages in the gifting of closely held stock during his/her lifetime, the need for an “IRS strategy” will be important.
  3. The need for an “IRS strategy” will be critical for executors and heirs at the time of death.

The old strategy goes like this: “Let’s try to value things as low as possible and with as little documentation as possible, thereby saving money. If questions are raised, we’ll try to negotiate a reasonable settlement.”

IRS Strategy

This strategy often results in loggerhead positions that lead to protracted negotiations, Tax Court, or unreasonable settlements. At the very least, dealing with the IRS in this fashion is quite disruptive to families and businesses. A different strategy seems more appropriate in today’s environment. Recognize first that if you own a successful closely held business, you, your heirs, and/or your advisors will be dealing with the IRS regarding estate tax matters. Therefore, your “IRS strategy” might be composed of the following:

  • Obtaining a business valuation from a qualified independent appraiser as the basis for making substantial gifts, or for estate tax returns. Court cases have cited the importance of specific business valuation experience, credentials and training in the court’s evaluation of the credibility of expert witnesses.
  • Insuring that your business appraiser prepares a well-written, fully documented valuation report that explains the rationale for important valuation assumptions, or for the use of valuation premiums or discounts.
  • Submitting the valuation report as an attachment to the gift or estate tax return. By doing so, you will increase the probability that your gift or estate tax matter is settled timely and fairly.

If your business appraiser’s valuation report is well-supported and reasonable in its conclusion, you have little reason to negotiate with the IRS until credible evidence calling for a different conclusion is provided. An estate tax return for a substantial estate which is submitted without a supporting appraisal is an invitation for the IRS to negotiate for higher taxes.

Absent the business valuation, you will have little basis to argue your original position. If you and the IRS reach an impasse and both sides then are required to obtain an appraisal, your appraiser’s independence can be called in question, particularly if the conclusion is supportive of your original position. If the conclusion is not supportive, you have an entirely different set of problems. Further, rest assured that valuations prepared under the threat of immediate litigation tend to be more expensive than those prepared in the ordinary course of business. Finally, know with certainty that the negotiation process with the IRS is costly in terms of business time, personal time, and mental energy, not to mention valuation, legal, and accounting fees.

Remember the old adage, “It is always better to do things right the first time.” Add to that, “It is always more expensive in terms of time, energy, and resources to fix what could have been done right the first time.”


If you own a business or serve as a professional advisor to business owners, engage a competent business appraiser when the need arises. Mercer Capital is one of the largest and most respected business valuation firms in the nation. Give us a call at 901.685.2120 to discuss your valuation issues in confidence.