There are many reasons to value a business. Here are some of the most common:
- To establish a purchase price in a buy-sell agreement.
- To determine the size of the gross estate for death tax purposes.*
- To determine if the estate qualifies for tax relief provisions, including IRC Sec. 303 stock redemption; Installment payments of death taxes (IRC Sec. 6166); IRC Sec. 2032A current use valuation of business-owned real estate; and IRC Sec. 2057 qualified family-owned business interest (QFOBI) deduction.**
- To plan for an equitable disposition of the estate among children where some are active in the business and some are not.
- To determine the value of lifetime gifts of the business. Other reasons include private annuities, installment sales, recapitalizations, mergers, divorce settlements, charitable contributions, etc.
Fair Market Value
Treasury regulations set forth the following definition for fair market value:
". . . the net amount which a willing purchaser . . . would pay for the
interest to a willing seller, neither being under any compulsion to buy or
to sell and both having reasonable knowledge of relevant facts." See
Reg. Sec. 20.2031-3.
* Under the Tax Act of 2001, the federal estate tax is gradually phased out until its final repeal in the year 2010. If Congress does not act at that time to repeal it for the years following, it will automatically revert back to the rates in effect during the year 2001, with an exemption for the first $1 million of assets.
**Under the provisions of The Economic Growth and Tax Relief Reconciliation Act of 2001, The QFOBI deduction will not be available to the estates of decedents dying in 2004-2010.
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