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avoided corporate level tax paid by a C corporation, or the
shareholder level tax that results from the flowthrough of tax
items to the shareholders of an S corporation.
The clearest argument Mr. Wilhoite put forward explaining
why it is appropriate to "tax-affect" an S corporation's earnings
is:
In effect, an S corporation is committed to making
distributions to shareholders sufficient to cover
individual tax liabilities on allocated S corporation
earnings in the same fashion that a C corporation is
committed to making tax payments to the Service to
cover corporate tax liabilities on reported taxable
earnings. * * * Whether the outflow is a cash
distribution made by an S corporation to satisfy
shareholders' tax liabilities, or the direct payment of
a tax liability by a C corporation, the decrease in
cash experienced by either entity represents a known
payment which reduces the availability of cash which
could otherwise be used to maintain or expand existing
operations. Such a decrease must be taken into
consideration when valuing an entity, whether it is
structured as a C corporation or an S Corporation.
Mr. Wilhoite’s testimony is not persuasive. On redirect
examination, Mr. Wilhoite stated: “[Y]ou deduct the taxes that
would be paid if the company were structured as a C corporation;
and that leaves you with a distributable amount of earnings”.
Further, Mr. Wilhoite had the following discussion with the
Court:
Mr. Wilhoite: We’re dealing with a stock of a
corporation, G&J. And G&J is an S corporation. And
G&J has generated significant earnings up until the
date of the valuation * * * and all of those earnings
have been distributed to the shareholders.
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