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LJN NewslettersNewsSectionsThe Matrimonial Strategist

Tax Discounts on Valuations of Pass-through Entities

BY Mary Cushing Doherty
August 26, 2009

The challenge of any attorney who addresses a wide-range of family law issues is to sound intelligent on almost every subject. The responsibility of every attorney is to identify when he/she is over his/her head and needs an expert on the team to avoid an unfair result for a client. In the area of business valuation, the experienced practitioner should know as much, if not more, of the lingo than the competition. The seasoned attorney will know enough to size up his/her expert so the court does not dismiss a valuation as inherently unfair.

Pass-through Entities

This interview addresses the valuation of pass-through entities. Attorneys are undoubtedly aware that there is a certain amount of discretion in business valuation, for example when determining discounts for lack of marketability or minority interests. Those discounts are not the subject of this article. Rather, this interview addresses the common and arguably flawed use of a “tax discount” in many valuations of pass-through entities, such as Subchapter S Corporations. The use of the tax discount is very common. One must challenge this discount when it is inappropriate in a particular valuation case. This article represents a collaboration between the lawyer, who is trying to phrase an intelligent question, and the expert, who is responding to such questions. In this case, the answers are supplied by Mark Luttrell, CPA/ABV, a business appraiser who believes such tax discounts for passthrough entities are generally incorrect for the reasons set forth below.

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