For estate tax purposes, value is determined as of a specific moment in time on the decedent’s date of death (or an alternate valuation date, if elected). As laid out in Bright,
“…estate tax is an excise tax on the transfer of property at death, and that the property to be valued is the property which is actually transferred, as contrasted with the interest held by the decedent before death or the interest held by the legatee after death.”1
This concept is straightforward in theory but often complex in practice. A valuation must reflect the conditions that existed at that exact point in time, based on what market participants knew or could reasonably have known. This is further underscored in the IRS Revenue Ruling 59-60:
“Valuation of securities is, in essence, a prophesy as to the future and must be based on facts available at the required date of appraisal”2
Because valuation inherently involves expectations about the future, it must rely on facts and circumstances that were available or reasonably foreseeable at the valuation date.
Accordingly, the relevant question is: What would a hypothetical buyer and seller have agreed upon at that moment, given the information available to them?
Known or Knowable
In practice, valuation professionals distinguish between information that is:
- Known: facts that were clearly available as of the date of death, or
- Knowable: facts that could have been discovered or reasonably anticipated
This framework is designed to prevent hindsight bias. Significant events that occur after the valuation date should not be blindly ignored, nor are they automatically relevant. Certain subsequent events may need to be considered, but only to the extent that they might provide evidence to the value that existed at the time.
Judicial Treatment of Subsequent Events
Courts have wrestled with whether and to what extent subsequent events should be considered in a valuation.
In Polack3, the Tax Court declined to consider financial statements prepared after the valuation date where those statements contradicted reasonable contemporaneous expectations. The Eighth Circuit affirmed, emphasizing that a valuation must be judged based on the knowledge available at the time and not in light of later outcomes.
Similarly, in Okerlund4, the court rejected reliance on post-valuation developments where those events did not reflect conditions reasonably foreseeable at the relevant date.
These cases bring up the importance of consideration two factors when considering subsequent event importance.
- How close in time is the subsequent event to the valuation date?
- Did material developments occur that would have altered the expectations of a hypothetical buyer or seller?
However, courts have allowed subsequent events in certain cases where they provide evidence of value that existed at the valuation date.
In Estate of Scanlan5, the Tax Court acknowledged that arm’s-length transactions, even those occurring several years after death, may be relevant if they reflect underlying value rather than new conditions. In Estate of Noble6, the Tax Court relied on a stock sale that occurred approximately 14 months after death, adjusting the price to account for the passage of time.
Illustrative Applications
In reality, several circumstances, events, and environmental factors can complicate what is known or knowable.
Pending Transactions
If a company was actively negotiating a sale or other transaction at the valuation date, a later closing may be highly relevant. The key issue is whether the material terms of the deal were sufficiently developed and knowable at that time.
Changes in Operating Performance
Post-death changes in financial performance must be carefully evaluated. If the underlying risk factors, such as customer concentration or contract expirations, were already present, subsequent results may confirm what was already anticipated. If not, those results may represent new information that should not influence the valuation.
Market Movements
Changes in interest rates, industry conditions, or capital markets after the valuation date generally do not affect value unless those changes were already foreseeable or reflected in market participant expectations.
External Factors and Uncertainty
External developments can further complicate valuation:
- Tax and regulatory changes may materially affect expected cash flows if they were enacted or reasonably expected as of the valuation date.
- COVID-19 illustrated how conditions and value can dramatically shift value within a short period depending on what was known at the time.
- Natural disasters, such as Hurricane Helene in Western North Carolina, may have significant economic consequences that last for years, but only to the extent their impact was foreseeable at the valuation date.
These examples highlight how sensitive valuation conclusions can be to timing, particularly in periods of rapid change or uncertainty.
Valuation of closely held business entities can be highly sensitive to timing, especially in volatile, rapidly changing environments. Documentation is especially important during periods of uncertainty, and contemporaneous information such as market data, forecasts, and internal communications can be critical in establishing what was knowable. Risk expectations and perceptions matter, and the focus is on what a market participant would have priced into a transaction at that time. Consistency remains key, and valuation conclusions should align with how the broader facts and circumstances were understood and communicated at the valuation date.
- Estate of Bright v. United States
- Revenue Ruling 59-60
- Polack v. Commissioner
- Okerlund v. United States
- Estate of Scanlan v. Commissioner
- Estate of Noble v. Commissioner
Sara Maddox, ASA, ABV, CVA, EA
Sara Maddox is a Senior Manager and Director at DMJPS CPAs + Advisors in Business Valuations. At DMJPS, her work includes valuing business enterprises using fundamental and complex analysis for purposes of succession planning, gift and estate tax, mergers & acquisitions, litigation matters, and shareholder buyouts. She works with a variety of industries, including retail/wholesale, real estate and construction, professional and personal services, and manufacturing.