Over the past few years, U.S. judges have substantially increased their knowledge of valuation methodology and application. This is especially true of Tax Court judges. In 2005, the Honorable David Laro, a U.S. Tax Court judge, co-authored a book with the "father of business valuation, " the highly respected Dr. Shannon Pratt, on the subject of business valuation and taxes. More frequently, Tax Court judges are applying their valuation knowledge to better scrutinize taxpayer testimony for, among other things, lack of a professionally prepared appraisal, misapplication of valuation theory, lack of a credible expert witness and lack of expert independence.

To understand Tax Court decisions, insight on the process of federal tax litigation and value determination is useful. The U.S. Tax Court has national jurisdiction over income, estate, gift, generation-skipping transfer taxes, and other federal taxation issues. It has 19 judges who are appointed by the President and the Senate. The Internal Revenue Service is a bureau of the Department of the Treasury (the Treasury), and conducts an examination of (audits) all taxpayer returns.

Upon the death of a taxpayer, estate, gift and other taxes may be imposed on the decedent’s taxable estate. The audit determines if the estate tax return undervalues the decedent’s property, which includes ownership of a business and results in an underpayment of taxes due. If the Service determines an underpayment exists and a resolution with the taxpayer cannot be reached, the Commissioner of the IRS (the Commissioner) issues a "Notice of Deficiency." In a word, this is BAD: if a notice is issued, it means the Commissioner intends to proceed to court and the taxpayer bears the burden of proving the IRS is wrong. In Tax Court, the Commissioner is always the defendant and the plaintiff is the taxpayer who must petition the court to re-determine the IRS’ presumption of deficiency.

Fair Market Value is the exclusive determination of value for federal tax purposes. Other standards of value may be applied for nontax purposes, including: investment value, intrinsic value, synergistic value, market value, transactional value, etc.
The Internal Revenue Code (the Code) is the primary source of tax law and contains code sections that are created by Congress. Although there are approximately 240 sections within the Code that require a determination of fair market value to assess tax liability, it does not define it. Fair market value is defined within the Treasury Regulations (the Regs), which like statutes enacted by Congress, have the full force of the law. Regulation section 20.2031-1(b) defines fair market value as:

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.

The Treasury issues Revenue Rulings and Revenue Procedures, which are announced positions of the IRS. Revenue Ruling 59-60 is a widely recognized ruling and provides eight "rules" on valuing stock

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