AICPA Comments on Proposal Dealing with Fair Market Value of Partial Ownership Interests

The American Institute of CPAs (AICPA) has submitted comments to Congressional leadership from the Senate Finance Committee and the House Ways & Means Committee on a proposal in the Treasury Greenbook, General Explanations of the Administration’s Fiscal Year 2022 Revenue Proposals, issued May 2021 as part of the American Families Plan (AFP).

While the AICPA believes that there are many provisions of the proposal that need clarification, are overly broad or need further thought or discussion, the letter focuses on the proposal requiring a partial interest owner to provide a value that represents a proportional share of the fair market value (FMV) of the entire entity, which assumes that every shareholder, even those lacking control over the property, has equal access to adequate information to determine the FMV of the entire property.

“This assumption is contrary to reality for many minority interest holders, who often are not privy to the same scope of data available to controlling shareholders,” says the letter. “Although the issues around access to information by holders of partial interests, especially minority interests, has been, and continues to be, a valuation issue, we are concerned that the proposal requires that the valuation must be based on the full value of the whole asset. This would be a new requirement, and in light of difficulties getting information to value the whole asset, we think it is not reasonable,” it continues.

Specific recommendations in the letter include:

Discount for lack of controls

The AICPA recommends Congress incorporate the concepts articulated in Rev. Rul. 93-12 into the requirements to which taxpayers will need to adhere when computing taxes on appreciated assets transferred by gift or through an estate.

Discount for lack of marketability (DLOM)

The AICPA recommends that Congress also consider the widely recognized concepts of DLOM when drafting any requirements that involve the valuation of non-liquid assets.

Administrative burden

The proposal will create a significant administrative burden on the taxpayer, who would have an asset with two different values and two different basis amounts to track. There will also be additional burdens on taxpayers needing to file adequate disclosure statements, indicating gift tax returns are being filed with contrary positions.

The AICPA also expressed concern that there will be two different regimes for valuation: one for transfers or “deemed sales” subject to a capital gains tax (e.g., on normal business transactions, income tax reporting, and charitable gifts, etc.), and a second for gift and estate taxes. This complexity would create confusion regarding post-transfer basis and perhaps even an opportunity for taxpayers to create artificial transactions in order to “game” the basis rules to exploit the lowest tax result.

The focus of these comments is on valuation-related issues from business appraisers’ perspectives, including concerns with how the proposal:

Assumes taxpayers have a level of access to information that may not exist; and
Could significantly affect fundamental valuation principles that are core concepts within the valuation profession.

The comments also mention other issues with the taxation of capital assets proposal, such as liquidity for family-owned businesses triggering gain, multiple taxes (estate and capital gain), and issues in determining basis with recordkeeping.

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