The definition is a Treasury regulation, the date is in the Code, and the most-cited document in the field states in its own text that no generally applicable formula can be devised.
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Readers arrive at this subject expecting a method, and the governing authority tells them there is not one. Rev. Rul. 59-60 states that a determination of fair market value, being a question of fact, will depend upon the circumstances in each case; that no formula can be devised that will be generally applicable to the multitude of different valuation issues arising in estate and gift tax cases; and that the analyst should maintain a reasonable attitude in recognition of the fact that valuation is not an exact science. Its eight factors are headings to be addressed, not weights to be applied. What is fixed instead is everything around the analysis — the definition, the date, the elections available, and the statutory consequence of a number that lands too far below the correct one.
Six things federal law settles before any judgment about the business is made, ordered from the definition outward.
Treas. Reg. §20.2031-1(b): the price at which property ‘would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts’. Section 25.2512-1 does the same for gifts. Neither party is a real person, which is why a buyer of a minority block would rationally pay less for it.
Rev. Rul. 59-60 §4.01: the nature and history of the business; the economic outlook generally and for the industry; book value and financial condition; earning capacity; dividend-paying capacity; goodwill or other intangible value; sales of the stock and the size of the block; and market prices of comparable listed companies in the same or a similar line. Factor (e) is dividend-paying CAPACITY, not dividends actually paid — a distinction experts routinely lose on cross.
That value is a question of fact turning on the circumstances of each case, that no generally applicable formula exists, and that valuation is not an exact science. Read together, those concessions are the answer to the widespread belief that the Service holds a formula and withholds it.
Estate value is fixed at death; gift value ‘at the date of the gift’ (IRC §2512(a)). IRC §2032 lets an executor elect a single alternate: property not disposed of within six months is valued six months after death, but property distributed, sold, exchanged or otherwise disposed of within that period is valued at the date of disposition. Section 2032(c) permits the election only if it decreases BOTH the gross estate and the combined estate and generation-skipping tax after credits; §2032(d) makes it irrevocable once made.
In Connelly v. United States, No. 23-146 (U.S. 6 June 2024), a unanimous Supreme Court held that a corporation’s contractual obligation to redeem shares is not necessarily a liability that reduces the corporation’s value for federal estate tax purposes, reasoning that no hypothetical buyer of the decedent’s shares would have treated an obligation to redeem them at fair market value as reducing their value. Corporate-owned life insurance funding the redemption therefore increased the value of the shares being redeemed. The Court observed that a cross-purchase structure would have avoided the problem, and did not hold that a redemption obligation can never reduce value.
Whether a pass-through entity’s earnings may be reduced by an entity-level tax it does not pay was rejected in Gross v. Commissioner, T.C. Memo. 1999-254, and began moving in 2019 — Kress v. United States (W.D. Wis.), where the government’s own expert had tax-affected, and Estate of Aaron Jones v. Commissioner, T.C. Memo. 2019-101. Estate of Cecil v. Commissioner, T.C. Memo. 2023-24, allowed it where all three experts had done so but expressly confined itself to ‘the unique setting at hand’. Gross has never been overruled.
How the analysis is built so that it survives an examination rather than merely producing a number.
The consequences here are statutory rather than reputational, which is unusual in expert work.
IRC §6662 imposes a 20% accuracy-related penalty. Under §6662(g)(1) there is a substantial estate or gift tax valuation understatement where the value claimed is 65% or less of the correct amount, subject to §6662(g)(2)’s $5,000 underpayment floor. Under §6662(h) a gross valuation misstatement substitutes 40% for 65% and raises the rate to 40%.
No, and its own guidance says so in terms. Rev. Rul. 59-60, 1959-1 C.B. 237, states that a determination of fair market value, being a question of fact, will depend upon the circumstances in each case; that no formula can be devised that will be generally applicable to the multitude of different valuation issues arising in estate and gift tax cases; and that in resolving differences the analyst should maintain a reasonable attitude in recognition of the fact that valuation is not an exact science. Its §4.01 factors are a list of what must be weighed, not a weighting. The practical consequence is that a report is judged on whether it addressed the eight factors on this company’s facts and explained the judgment, not on whether it reached a number some table would predict.
A single election, available to the executor, that moves the estate’s valuation date six months after death — with two qualifications that are frequently dropped. First, it is not uniformly six months out: IRC §2032(a) values property distributed, sold, exchanged or otherwise disposed of within the six-month period as of the date of that disposition. Second, §2032(c) permits the election only if it decreases both the value of the gross estate and the combined estate and generation-skipping transfer tax after credits, so it is unavailable simply because values fell. Section 2032(d) makes the election irrevocable once made and unavailable on a return filed more than a year after the due date including extensions. This Institute does not advise on whether to make it.
The honest answer is that it depends on the record and that the question is not closed. The Tax Court rejected tax-affecting in Gross v. Commissioner, T.C. Memo. 1999-254, and that position held for two decades. It moved in 2019: in Kress v. United States a federal district court in Wisconsin accepted tax-affecting in circumstances where the government’s own expert had applied it, and the Tax Court accepted a tax-affected valuation in Estate of Aaron Jones v. Commissioner, T.C. Memo. 2019-101, without overturning Gross. In Estate of Cecil v. Commissioner, T.C. Memo. 2023-24, the court again allowed it where all three experts had tax-affected but expressly limited the holding to ‘the unique setting at hand’, disclaiming any holding that tax affecting is always or even usually proper. Content asserting the question is settled is overstating it.
Two separate exposures, plus a limitations problem. IRC §6662 imposes a 20% accuracy-related penalty; §6662(g)(1) defines a substantial estate or gift tax valuation understatement as a claimed value that is 65% or less of the correct amount, and §6662(g)(2) bars the penalty unless the attributable underpayment exceeds $5,000. Section 6662(h) substitutes 40% for 65% and raises the rate to 40%. Note that §6662(e)’s more familiar 150% and 200% thresholds are the income-tax property rules and do not apply here. Separately, IRC §6695A reaches the appraiser. And under §6501(c)(9), gift tax on a gift required to be shown on the return and not shown may be assessed at any time — unless the item is disclosed on the return, or a statement attached to it, in a manner adequate to apprise the Secretary of its nature.
Describe what was transferred and when. The Institute will help you see what the Code has fixed and which judgments are genuinely open.