40. Valuation of a Business Interest

A business interest, like any other property, is assessed at a hypothetical fair market value for estate tax purposes. This is the theoretical price which a willing buyer would pay and for which a willing seller would sell when both have knowledge of all relevant facts and neither is under any compulsion.

There are no hard and fast rules to arrive at that fair market value. Consideration must be given to a number of factors, including: net asset value, earnings, owner's compensation, history of the business and future
prospects, general and business economic conditions, and comparison with publicly held businesses.

It is dangerous to leave the valuation question open since there may well be a large difference of opinion between your executor and the IRS which can result in lengthy litigation delays and expenses and additional
taxes. A binding buy-sell agreement, if appropriate, can peg the value and avoid the problem.

Methods of valuation include:

1. The net worth or book value of the firm or the market value of the
assets less liabilities.

2. Capitalization of the earnings of the firm.

3. A combination of methods 1 and 2.

4. A fixed price agreed upon by the owner's as an "arm's-length"
agreement.

5. A purchase price determined by appraisal.

6. A purchase price determined by an agreed upon formula.

Tax reference verification 1-800-829-1040

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