5 Tips on How to Avoid Under-Valuation Penalties on your Florida Holding Company

Do you or your family in Florida own all or part of a holding company? One of the most complex issues in anyFlorida estate that owns a holding company is the valuation of its assets upon death of the owner.
The valuation is for IRS tax-reporting purposes and it is extremely important to be accuratewhen reporting these figures. Why? If not, the IRS could hit your Florida Estate with a penalty up to 20% of the actual valuation of company. We saw this happen in the recent case of Estate of Richmond v. Commissioner, T.C. Memo 2014-26, the IRS issued a $1,141,892 penalty due to under-valuation.
Here are 5 tips to help you avoid under-valuation penatlies on your Florida estate:
- Choosing the correct valuation method is crucial. The correct choice depends upon whether the asset produces a predictable income stream or if it is difficult to value the assets. There are three methods that may be used for valuation of stock for Florida estate taxes:
- Income Capitalization Valuation Method. If the asset produces a predictable income stream then the income capitalization valuation method may be appropriate. Income capitalization valuation method is usually used for a closely held operating company where the stock is not publicly traded.
- Capitalization-of-Dividend Method. On the other hand, if a company is difficult to value then the capitalization-of-dividend method, which is based entirely on the future general economy, performance, and dividend, may be acceptable.
- Net-Asset-Value Method. Of the three valuation methods, the more widely method used in estate valuations by US Tax Court is the net-asset-value (NAV) method. Net-asset-value method is used for holding companies with marketable stock such as used in the recent Estate of Richmond v. Commissioner United States Tax Court case.
- If you are unsure about your valuation, or which valuation method to choose for your Florida estate’s holding company, then use a CERTIFIED Florida Appraiser. Use of a certified Florida estate appraiser enables you to take advantage of the “reasonable cause” defense which will help waive any penalty by showing you reasonably relied on the valuation of a certified appraisor, and thus acted in good faith when submittig your tax documents. If a non-certified appraisor is used, this defense is gone! That was the issue in the Estate of Richmond case above.
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