The effect of subsequent events on hard-to-value assets.

Fair market value (FMV) is generally defined as the price at which an item would change hands between a willing buyer and wiring seDer, assuming neither party was compelled to enter into the transaction, and both parties have reasonable knowledge of all relevant facts. Generally, future events not known or reasonably anticipated as of the valuation date cannot be attributed to a wiring buyer and wiring seller and should not affect value. However, in the estate and gift tax area, the courts have increasingly considered subsequent events in the determination of value.

A commonly used argument to allow for the consideration of subsequent sales of the property valued is that the subsequent sale does not affect the value on the earlier valuation date; rather, it is evidence as to that value (Est. of Jung, 101 TC 412 (1993)). For instance, one court held that a sale 16 months after the valuation date was relevant to show that the initial appraisal of FMV was incorrect when there was no evidence that the discrepancy between the appraisal value and sale price was the result of any material change in the property or the market; see Gettysburg National Bank, DC Pa., 1992.

This concept has also been used to allow the amount of the subsequent settlement of a claim to be considered in the determination of the date of death value of the claim, even though a lawsuit had not even been filed at the time of death; see Rubenstein, 826 F Supp 448 (S.D. Fla. 1993).

The Tax Court has expanded this theory even further in Est. of Scull, TC Memo 1994-211. In this case, the court held that a post-mortem sale is the best indicator of FMV notwithstanding intervening market changes. Rather, the court discounted the sale price by 15% to reflect the appreciation in the market since death. While this case dealt with the value of artwork, the principle can be applied to the valuation of closely held business interests as well.

A second theory used to allow for the consideration of subsequent events involves the issue of whether a hypothetical willing buyer and willing seller should have reasonably known of a subsequently discovered fact. For instance, one court found that the value of a publishing contract under negotiation at the time of death could be determined after consideration of facts determined after death. These facts were reasonably foreseeable at the time of death; therefore, an informed wiring buyer and wiring seller would have considered them in determining value. An extreme example of this theory is Est. of Necastro, TC Memo 1994-352. In this case, the estate filed a refund claim because the value of certain real property was said to be overstated on the original return. The estate revalued the property after consideration of environmental contamination not discovered until five years after the date of death. The court allowed a reduction of over one-third of the originally reported value, even though it was not clear when the contamination occurred or if it could: reasonably have been discovered at the date of death.

In conclusion, business valuation and estate planning professionals must consider the potential issues these cases raise. Subsequent sales or other major events that occur after the valuation date should be addressed in the valuation report. Further, sales or events occurring after the issuance of a report should be reviewed and discussed to determine if an amended report and estate or gift tax return are advisable.

From Frank L. Washelesky, CPA, J.D., P.F.S., Ostrow Reisin Berk & Abrams, Ltd., Chicago, Ill.