Valuing an S corporation – Should you tax-affect or not?

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Abstract: The issue of whether valuators should “tax-affect” an S corporation’s earnings — that is, reduce earnings by an assumed corporate tax rate — continues to be controversial. The U.S. Tax Court rejected the practice in 1999, claiming that tax-affecting was inappropriate in valuing an S corporation. But in recent years several courts have embraced the concept, choosing a middle ground that better reflects an S corporation’s value. This article looks at a couple of recent cases, while a sidebar indicates that the Tax Court might revisit tax-affecting if the right case comes along.