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Certified Public Accountants
(805) 306-7890

Litigation Consulting


Forensic Accounting - Fraud - Business Valuation

August 2015

Recent Case:

Valuation for Portion of Business Ownership to be Donated

Type of Matter:

A non-control owner of a privately-held business wanted to donate a portion of her shares to a charitable organization. Time was short since there were several potential buyers approaching the business and it appeared that the business might sell pretty quickly.


Depending on the size of the donation, the IRS requires a qualified appraisal of the common stock to substantiate the deduction. Large donations require that the valuation report be submitted with the tax return. The standard of value for tax valuations is "Fair Market Value." IRS Revenue Ruling 59-60, Section 2.02 defines Fair Market Value as follows:

The price at which the property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts. Court decisions frequently state in addition that the hypothetical buyer and seller are assumed to be able, as well as willing, to trade and to be well informed about the property and concerning the market for such property.

Arxis Financial work:

Two issues had to be addressed as the project developed. One was the premise of value. In most FMV valuations, the premise is "going concern" meaning that the business is assumed to continue in its present form in perpetuity. However, as the work progressed it became obvious that the business was likely to sell pretty quickly. Therefore, the valuation of the enterprise (a necessary first step) was prepared on the going concern premise and the non-control interest being donated was valued using a liquidation premise since the owner was going to be bought out and the interest would no longer exist. The practical implication of this was there were no discounts taken for lack of control and the consideration of marketability discounts was very slight. Both decisions are unusual when valuing a small minority interest in a closely-held business but perfectly appropriate given the circumstances.

The second issue was also posed by the imminent sale. There were several written letters of interest from potential buyers that included details of proposed terms and consideration. To the extent the offers are arms-length and serious they are a reasonable and even persuasive estimate of the Fair Market Value of a business. Here, because of the probability of a transaction very soon after the donation there was almost no choice but to use them to value the enterprise. The complexity arose due to IRS case law and regulations that state that personal goodwill cannot be donated. To the extent that consideration for the sale included covenants not to compete, earnouts, and compensation contracts for existing shareholders the prices considered to value the business must be allocated between personal and business goodwill. Using the assumption that the sale would take place and that the letters of interest reflected what the terms of the deal would eventually be, analysis and allocations of selling price to compensation for personal goodwill were excluded from the value conclusion.


After determining the above fundamentals for the valuation of the enterprise, Arxis Financial completed the valuation on a timely basis and within budget. The report was accepted without change and financial and tax reporting of the transaction was prepared based on the Arxis Financial valuation report.


Upcoming Speaking Engagements for Chris Hamilton

Chris Hamilton's upcoming presentations include:


  • "Corporate Fraud - The Madoff Case" presented for Rotary in Simi Valley, CA
  • "Market Approach" presented for NACVA in Las Vegas, NV
  • "Special Purpose Valuations" presented for NACVA in Las Vegas, NV
  • "Valuation Fundamentals, Techniques, and Theory" presented for NACVA in Houston, TX
  • "Income and Asset Approaches to Valuation" presented for NACVA in Houston, TX


  • "Valuation Fundamentals, Techniques, and Theory" presented to NACVA in San Diego, CA
  • "Income and Asset Approaches to Valuation" presented to NACVA in San Diego, CA

If you are interested in asking Mr. Hamilton to speak at your organization's upcoming meeting, please feel free to contact him.

Practice Profile:

Business Valuation Services for Estate Planning and Gifting Programs

According to the Small Business Administration, about 90 percent of American businesses are family-owned or controlled. For many of these families, the business is the most significant asset - it comprises the majority of the family's wealth - and yet is often given little consideration in estate planning. Attorneys who counsel business owners (or their family members) in virtually any capacity should be aware of the importance of valuing the business. Business valuations for the purposes of estate planning (or gifting programs) are useful in many situations, from determining value so that ownership interests can be established to tax minimization strategies to protection from potential IRS conflicts.

Arxis Financial's valuation specialists provide clients with a comprehensible valuation that aids attorneys, business owners, management, and financial planners in decision-making. We also have extensive experience in presenting and defending our findings in the context of litigation. Our clients benefit from having valuation professionals who understand the realities of market valuations, resulting in very defensible valuations. Our experts are well-known in the industry and highly respected for their depth of knowledge and resources.

The Business Valuation practice is headed by partner Chris L. Hamilton, CPA, CFE, CVA. Mr. Hamilton is a Certified Public Accountant, Certified Fraud Examiner, and Certified Valuation Analyst. Mr. Hamilton has published articles in several publications, and has made presentations at national conferences, training institutes and seminars on topics including forensic accounting, fraud and business appraisal.


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Copyright 2015 Arxis Financial. Articles may not be reprinted without permission.

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Chris Hamilton, CPA CFE, CVA
(805) 306-7890
@ArxisChris on Twitter

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Litigation Consulting

Forensic Accounting - Fraud - Business Valuation


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