FVC2424. A Deep Dive into Cecil v. Commissioner – Shedding Light on the Selection of Valuation Approaches and Tax Affecting S Corporations

In Cecil v. Commissioner (TC Memo 2023-24), the US Tax Court upheld the use of ‘tax affecting’ to determine the value of S corporation shares for Federal gift tax purposes and shed light on factors influencing the weighting and selection of alternative valuation approaches. In 2010, taxpayers William Cecil and Mary Cecil transferred shares in The Biltmore Company (TBC), a Delaware S corporation, to their children and grandchildren. TBC’s primary asset is the Biltmore House, and TBC operates primarily as a travel, tourism, and historic hospitality company. The valuation expert from the IRS determined TBC’s value by the asset approach assuming a liquidation of the underlying assets, whereas the taxpayer’s valuation expert focused on the cash flow from TBC’s operating business. The Tax Court rejected the IRS expert’s asset-based approach, arguing that the liquidation of TBC was “most unlikely” given that TBC has been a family business since 1932, and there was no indication that its shareholders would vote for liquidation.

Learning Objectives:

• Evaluate the impact of operating history and a family’s intent on valuation approaches
• Analyze the importance of adequate disclosure of gifts
• Assess the Tax Court’s acceptance of tax affecting S Corporation income
• Evaluate other areas of dispute between taxpayer and IRS experts
• Apply concepts from this ruling to other valuation assignments