Gift Tax Valuation Update
Transfers between relatives in a closely held corporation
Huber v. Commissioner, TC Memo 2006-96 (May 9, 2006)
Owners of the J.M. Huber Corp. made gifts of stock to various family members between
1997 and 2000. The prices used in these transactions were based on an
independent valuation that contained a substantial discount for lack of marketability.
The IRS challenged the valuation stating that the company was undervalued and presented
significantly lower marketability discounts.
The IRS’ argument was that the taxpayer did not offer the shares for sale to the
public and thus failed to obtain the optimum price. The Court rejected the
notion that Huber must offer the shares to the public in order to receive a fair
price, noting that, “Courts have long recognized the rights of shareholders in closely
held companies to remain private…Further, respondent's assumption that offering
a stock to the public would have garnered a higher price is purely hypothetical.”
Another aspect of the IRS’ attack was the lack of negotiations between buyers and
sellers suggesting that there was a lack of intent to realize the best price for
the shares. The Court also rejected this, saying, “Respondent fails to cite
any case law that holds that negotiation is a necessary element of an arm's-length
transaction. In fact, the weight of authority is to the contrary.”
Although this case appears to be a clear victory for clients wishing to make gifts
based on independent valuations, it is important to point out here that the valuations
in this case were also used for other transactions involving non-profit organizations
and redemptions by the company. Due to the fact that multiple transactions
used the price determined in the independent reports, rather than just for gift
tax purposes, it appeared unlikely, according to the Courts, that the other parties
who used the valuation would “accept an artificially low valuation of the Huber
stock so that a few people who may or may not be related to them can pay less estate
tax.” Therefore, even though the Court solidified the rights of shareholders
in private companies, it remains critical that the results of a valuation for gift
tax purposes be fair for not only the shareholders making the gifts but for other
types of transactions as well.
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