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In Cecil v. Commissioner (TC Memo 2023-24), the US Tax Court upheld the use of ‘tax affecting’ to determine the value of S corporation shares for Federal gift tax purposes. ‘Tax affecting’ is a valuation approach that applies a hypothetical entity-level tax to a pass-through entity’s taxable income, which reduces the value of the business. 

Although the outcome in Cecil (if followed in other cases) should be welcome news to taxpayers, questions still remain. In reaching its decision, the Tax Court emphasized that tax affecting was only appropriate in this case “given the unique setting at hand.”