The Ongoing Rage Over Tax Affecting Pass Through Entities

As many of you know, for years there has been an ongoing dialogue over whether pass-through entities should be tax-affected for valuation purposes.  At a recent ASA (American Society of Appraisers)-IRS Symposium, Miles Friedman , Associate Area Counsel in the IRS Office of Chief Counsel, stated definitively that courts and the IRS say no to tax-affecting.  This statement was certain to launch at least a thousand rebuttals.

Intelligent and well-qualified valuation experts hold positions on both sides of this argument.  Personally, I generally tax-affect pass-throughs for valuation purposes.  Many proponents of not tax-affecting point to Gross v. Commissioner as justification.  Like any precedent, care should be taken in applying it.  In Gross, the Court did not reject tax-affecting, it merely said that given a choice between 40% and 0%, 0% was a better choice under the circumstances at hand.  It remains incumbent on the valuation analyst to support his/her position and persuade the Court to accept that tax affecting is justified.

Good data, appropriate analysis, well-reasoned application, and effective communication will generally carry the day.