The Effect of Latent Tax Liabilities on Stock Values by Avram Salkin
The IRS has consistently taken the position that potential tax liabilities of C corporations, S Corporations, and individuals should not be considered when valuing stock or other assets. For example, should the stock of an S Corporation’s stock be reduced if the corporation holds assets that are worth far more than their tax basis? If the appreciated assets are depreciable or amortizable, should the loss of future depreciation or amortization diminish value? If inventory has appreciated, will a hypothetical buyer consider the taxes payable on sale of the inventory when determining price?
Interestingly, the Department of Justice has just taken the position that taxes count in its fraudulent conveyance complaint filed against Deutsche Bank in the Southern District of New York. Included among the allegations in the Complaint are:
“First, a Deutsche Bank entity sold the corporation holding the appreciated stock to BMY for a price that did not represent fair value of it in light of, at a minimum, the tens of millions of dollars of tax liabilities on the built-in-gains.”
“The economic value of the stock to the shareholders of the company owning the appreciated stock is less than the market price of the stock. Other factors being equal, the economic value of the stock is the market price less the taxes that will be due when the stock is sold.”
“The approximately $150 million purchase price paid by Deutsche Bank for the Charter stock was significantly greater than the economic value of the Charter stock if the built-in-gains associated with the BMY shares owned by Charter are taken into account.”
“At a minimum, the sales price did not account for the tax liabilities associated with the built-in-gain on the BMY shares owned by Charter.”
If the Department of Justice is willing to make such allegations, it is difficult to understand how the National Office of the Internal Revenue Service can take the position that tax liabilities based on built in gains or reduced benefits available from depreciation on undervalued assets do not affect the value of stock. It is inconsistent for the Government to make the foregoing allegations in a fraudulent conveyance case while constantly claiming that transfer taxes are underpaid when appraisers consider tax liabilities as part of their valuation process. They have it right in the Deutsche Bank case -potential tax liabilities affect value. They have backed off to some extent in C corporation cases, but should get it right in S corporation, partnership and individual cases where taxpayers’ valuations reflect built-in-tax burdens.
AVRAM SALKIN – For more information please contact Avram Salkin at AS@taxlitigator.com. Mr. Salkin represents clients throughout the United States and elsewhere involving federal and state, civil and criminal tax controversies and tax litigation. Additional information is available at www.taxlitigator.com
 See U.S.. v. Deutsche Bank (Tax Case) 14 Civ 9669 (SDNY, 12/08/14). A copy of the Complaint is available at http://www.justice.gov/usao/nys/pressreleases/December14/DeutscheBankTaxCasePR/Deutsche%20Bank%20(Tax%20Case)%2014%20Civ%209669%20Complaint.pdf