The Tax Court in Estate of Aaron U. Jones upheld the use of tax-affecting in the valuation of gifts made of S corporation and limited partnership interests.  The business involved timber, and the income method is typically used to value an ongoing timber business.  Tax-affecting is adjusting the value to reflect an after tax value as if the business was a C corporation.  Tax-affecting for S corporations was in the IRS manual twenty years ago, but was removed after the IRS won a victory against its use in Gross v Commissioner.

It is unclear at this point how broad the Tax Court’s acceptance of tax-affecting will go, but it is certainly a welcome result for the taxpayer.

It is important to point out that the facts were good.  This was no death bed case, and the taxpayer retained a very qualified appraiser in the area of timber.  The IRS appraiser had little or no experience in the area.   This is a great lesson to take away.  Always have the better appraiser when you head into litigation with the IRS.