Valuation of CPA Practice Owner's Interest for Estate Planning Under Permanent $15M Exclusion

Direct Answer

With the estate tax exclusion now permanent at $15,000,000 per person (indexed annually after 2026) under OBBBA, P.L. 119-21 (enacted July 4, 2025), valuation of a CPA practice owner's interest for estate planning purposes must satisfy the fair market value standard under IRC § 2031(a) and apply the eight factors enumerated in IRS Revenue Ruling 59-60, 1959-1 C.B. 237. The most defensible approach combines the income approach (capitalization of earnings or discounted cash flow) with market-based benchmarking using comparable transactions, supported by appropriate discounts for lack of marketability (DLOM) and lack of control (DLOC) where applicable. The permanence of the higher exclusion reduces urgency-driven planning but does not alter the fundamental valuation standard—fair market value remains "the price at which property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts" (Treas. Reg. § 20.2031-1(b)).

Regulatory Basis: Fair Market Value Standard and Rev. Ruling 59-60

IRC § 2031 — Estate Tax Valuation Standard

IRC § 2031(a) requires that the value of the gross estate be determined by including "the value at the time of death of all property, real or personal, tangible or intangible, wherever situated." Treasury Regulation § 20.2031-1(b) defines fair market value as the price at which property would change hands between a hypothetical willing buyer and willing seller, both reasonably informed and neither under compulsion. This standard applies to all assets, including closely-held business interests such as CPA practice ownership stakes.

IRS Revenue Ruling 59-60 — Eight Valuation Factors

Rev. Ruling 59-60 remains the foundational authority for valuing closely-held business interests for federal tax purposes. The ruling mandates consideration of eight factors:

1. Nature and history of the business — CPA practices are professional service businesses with revenue tied to client relationships, partner expertise, and recurring engagement streams. The practice's longevity, client retention rates, and succession planning history are critical.

2. Economic outlook and industry conditions — Current conditions in the accounting profession (demand for tax, audit, and advisory services; regulatory changes affecting compliance workload; technology disruption via AI and automation) must be assessed. The permanence of the $15M exclusion may increase demand for estate planning services, a revenue driver for many practices.

3. Book value and financial condition — CPA practices typically have low tangible asset bases (office equipment, leasehold improvements) but significant intangible value. Book value alone is insufficient; financial condition analysis should focus on working capital, accounts receivable quality, and partner capital account structures.

4. Earning capacity — Historical and projected earnings (normalized for owner compensation, non-recurring items, and partner draws) are the primary value driver. CPA practices are typically valued as multiples of discretionary earnings or EBITDA, with adjustments for partner-dependent revenue.

5. Dividend-paying capacity — For entity-level valuations (e.g., S corporation or partnership interests), the capacity to distribute cash to owners after debt service and reinvestment needs is relevant, though CPA practices often distribute most earnings.

6. Goodwill and intangible value — Client relationships, firm reputation, referral networks, and workforce-in-place constitute significant intangible assets. Personal goodwill attributable to the individual owner (non-transferable) must be distinguished from enterprise goodwill (transferable with the practice).

7. Sales of stock and size of block — Prior arm's-length transactions in the practice's ownership interests provide direct evidence of value. The size of the interest being valued (controlling vs. minority) affects the application of discounts.

8. Market price of comparable companies — Publicly traded accounting firms are rare, but transaction data from CPA practice sales (available through industry brokers and valuation databases) provide market multiples. Adjustments for size, geography, and service mix are necessary.

Three Valuation Approaches and Defensibility

Income Approach (Primary Method for CPA Practices)

The income approach is typically the most defensible for professional service firms because value derives primarily from future earnings capacity.

Capitalization of Earnings Method:

• Normalize historical earnings (3-5 years) by adjusting for owner compensation at market rates, non-recurring expenses, and discretionary items.
• Apply a capitalization rate derived from the weighted average cost of capital (WACC) or build-up method (risk-free rate + equity risk premium + size premium + firm-specific risk premium).
• Formula: Value = Normalized Earnings / Capitalization Rate.
• Authority: AICPA VS Section 100, ¶ .39–.42 (income approach); ASA Business Valuation Standards, BVS-III (income approach).

Discounted Cash Flow (DCF) Method:

• Project future cash flows (5-10 years) based on client retention assumptions, billing rate growth, and expense trends.
• Discount to present value using WACC.
• Calculate terminal value using a perpetuity growth model or exit multiple.
• Authority: AICPA VS Section 100, ¶ .43–.46 (DCF); NACVA Professional Standards, Section III.B.2.

Key Assumption (Income Approach): This analysis assumes the practice has stable, recurring revenue not solely dependent on the departing owner's personal relationships. If revenue is highly owner-dependent, personal goodwill must be segregated (not includible in the estate under IRC § 2031 if non-transferable), which would reduce the taxable estate value. See Martin Ice Cream Co. v. Commissioner, 110 T.C. 189 (1998) (personal goodwill not a corporate asset).

Market Approach (Benchmarking and Validation)

The market approach uses transaction data from comparable CPA practice sales to derive valuation multiples.

Guideline Transaction Method:

• Identify recent sales of CPA practices with similar size (revenue, number of partners), service mix (tax vs. audit vs. advisory), and geography.
• Extract multiples of gross revenue or EBITDA.
• Apply multiples to the subject practice's financial metrics, adjusting for differences.
• Data Sources: AICPA MAP Survey, Accounting Practice Sales (industry database), BizComps.
• Authority: AICPA VS Section 100, ¶ .47–.50 (market approach); ASA BVS-IV (market approach).

Typical Multiples (as of 2026):

• CPA practices: 0.8x to 1.5x gross revenue, or 4x to 7x EBITDA, depending on client concentration, recurring revenue percentage, and growth trajectory.

Key Assumption (Market Approach): This analysis assumes availability of comparable transaction data with sufficient detail on deal structure (asset vs. stock sale, earnouts, non-compete agreements). If comparables are scarce or materially different, the income approach should be weighted more heavily in a weighted-average conclusion of value.

Asset Approach (Limited Applicability)

The asset approach values the practice based on the fair market value of its net assets (tangible and intangible).

Adjusted Net Asset Method:

• Revalue tangible assets (furniture, equipment, leasehold improvements) to fair market value.
• Separately value intangible assets (client lists, trade name, non-compete agreements, workforce-in-place) using income or cost methods.
• Subtract liabilities.
• Authority: AICPA VS Section 100, ¶ .51–.54 (asset approach); ASA BVS-V (asset approach).

Limitation: The asset approach often understates value for going-concern professional practices because it does not fully capture earning capacity or assembled workforce synergies. It is most appropriate for practices being liquidated or with minimal earnings.

Discounts and Premiums: DLOM and DLOC

Discount for Lack of Marketability (DLOM)

DLOM reflects the reduced value of an ownership interest that cannot be readily sold in a public market. For minority interests in closely-held CPA practices, DLOM typically ranges from 20% to 40%, depending on:

• Restrictions on transfer in the partnership/shareholder agreement.
• Absence of a ready market for CPA practice minority interests.
• Holding period until liquidity (e.g., mandatory buyout provisions).

Supporting Authority:

• Estate of Jung v. Commissioner, T.C. Memo. 2019-101 (applied 30% DLOM to closely-held business interest).
• Mandelbaum v. Commissioner, T.C. Memo. 1995-255 (ten factors for determining DLOM, including put rights, dividend policy, and marketability of comparable interests).
• Empirical Studies: Restricted stock studies (SEC Rule 144 discounts) and pre-IPO studies provide market evidence of DLOM, though CPA practices require firm-specific analysis.

Key Assumption (DLOM): This analysis assumes the interest is a non-controlling, minority stake with no put rights or mandatory redemption within 12 months. If the partnership agreement includes a put option at appraised value, DLOM may be reduced or eliminated (see Estate of Blount v. Commissioner, T.C. Memo. 2004-116).

Discount for Lack of Control (DLOC)

DLOC reflects the reduced value of a minority interest that cannot compel distributions, elect management, or force a sale. DLOC typically ranges from 10% to 30% for CPA practice minority interests, depending on:

• Voting rights and governance provisions.
• Ability to influence firm strategy or partner compensation.
• Presence of oppressive majority conduct or fiduciary duties.

Supporting Authority:

• Estate of Simplot v. Commissioner, T.C. Memo. 2020-3 (applied 7.5% DLOC to family-controlled entity with strong governance protections).
• Mercer Capital studies (industry benchmarks for DLOC in professional service firms).

Cumulative Application: DLOM and DLOC are applied sequentially, not additively. Formula: Discounted Value = Pro Rata Value × (1 – DLOC) × (1 – DLOM). For example, a 20% DLOC and 30% DLOM yield a combined discount of 44% [1 – (0.80 × 0.70)].

Control Premium (Rarely Applicable)

A control premium (typically 20%–40%) applies to controlling interests that can direct firm operations, set compensation, and force liquidation. For estate planning of a majority owner's interest, the valuation should reflect control attributes without adding a separate premium if the income/market approaches already incorporate control-level earnings and multiples.

AICPA and NACVA Standards for Engagement Performance

AICPA Valuation Services (VS) Section 100

VS Section 100, ¶ .01–.06 distinguishes three types of engagements:

1. Valuation Engagement — The valuation analyst expresses a conclusion of value (most appropriate for estate tax reporting under IRC § 2031).
2. Calculation Engagement — The valuation analyst calculates an approximate value using limited procedures agreed upon with the client (not suitable for IRS reporting without additional support).
3. Valuation Advisory Services — Consulting on valuation matters without expressing a conclusion (e.g., preliminary range of value for planning).

For estate planning purposes, a valuation engagement is required to support the fair market value reported on IRS Form 706 (United States Estate (and Generation-Skipping Transfer) Tax Return). The engagement must comply with VS Section 100, ¶ .18–.30 (scope, procedures, and reporting requirements).

NACVA Professional Standards

NACVA Professional Standards, Section III.A requires the valuation analyst to:

• Define the subject interest (percentage ownership, rights and restrictions).
• Identify the standard of value (fair market value for estate tax).
• Specify the valuation date (date of death under IRC § 2031).
• Disclose assumptions and limiting conditions.
• Apply appropriate valuation approaches and methods.

Uniform Standards of Professional Appraisal Practice (USPAP)

If the valuation analyst is a credentialed appraiser (e.g., ASA, ABV), USPAP Standards Rule 9 (Business Appraisal, Development) and Standards Rule 10 (Business Appraisal, Reporting) apply. USPAP requires:

• Competency in the subject matter (CPA practice valuation).
• Independence and objectivity.
• Adequate support for all significant assumptions.
• Clear communication of the scope of work.

Forensic Accounting and Litigation Support Considerations

Daubert/Frye Standards for Expert Testimony

If the valuation is challenged by the IRS and proceeds to Tax Court, the valuation expert's testimony must satisfy the Daubert standard (federal courts) or Frye standard (some state courts, though Tax Court applies Daubert principles).

Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579 (1993), requires the expert's methodology to be:

1. Testable — The valuation methods (income, market, asset approaches) must be capable of empirical validation.
2. Peer-reviewed — The methods must be generally accepted in the valuation profession (satisfied by AICPA, ASA, NACVA standards).
3. Reliable — The expert must have applied the methods correctly to the facts of the case.
4. Relevant — The valuation must address the fair market value standard under IRC § 2031.

Tax Court Precedent:

• Estate of Giustina v. Commissioner, T.C. Memo. 2011-141 (Tax Court excluded expert testimony for failure to adequately support DLOM assumptions).
• Estate of Kelley v. Commissioner, T.C. Memo. 2005-235 (Tax Court gave significant weight to expert who applied Rev. Ruling 59-60 factors systematically).

Documentation Requirements for Litigation Support

If the valuation is likely to be contested (e.g., large estate, aggressive discounts), the engagement should be structured as a litigation support engagement from the outset, with enhanced documentation:

• Detailed workpapers showing all calculations, data sources, and adjustments.
• Sensitivity analysis (testing value under alternative assumptions).
• Rebuttal analysis of potential IRS positions (e.g., higher capitalization rate, lower DLOM).
• Expert report complying with Federal Rule of Civil Procedure 26(a)(2)(B) (if federal litigation) or Tax Court Rule 143(g) (expert report requirements).

Impact of Permanent $15M Exclusion on Valuation Strategy

Reduced Urgency for Aggressive Discounting

Under prior law (pre-OBBBA), the estate tax exclusion was scheduled to sunset to approximately $7M per person on January 1, 2026, creating urgency to transfer assets before the sunset. With the exclusion now permanent at $15M (indexed for inflation after 2026), the strategic calculus shifts:

• Estates under $15M (single) or $30M (married couple): No federal estate tax exposure, so valuation precision is less critical for tax minimization. However, accurate valuation remains necessary for:

  • Basis step-up planning under IRC § 1014 (heirs receive basis equal to fair market value at death).
  • State estate taxes (17 states plus D.C. impose estate or inheritance taxes, many with lower exclusions than the federal $15M).
  • Equitable distribution among heirs (non-tax reason for accurate valuation).

• Estates exceeding $15M: Valuation remains critical for minimizing estate tax liability. Defensible discounts (DLOM, DLOC) can reduce the taxable estate value by 30%–50%, generating significant tax savings at the 40% estate tax rate (IRC § 2001(c)).

Increased IRS Scrutiny of High-Value Estates

The permanence of the higher exclusion may lead the IRS to focus audit resources on estates that do exceed $15M, where tax revenue is at stake. IRS Estate and Gift Tax Examination Process (Publication 3498) prioritizes:

• Estates with closely-held business interests claiming discounts exceeding 30%.
• Valuations performed by non-credentialed appraisers or using unsupported assumptions.
• Estates with prior history of valuation disputes.

Defensive Measures:

• Engage a credentialed valuation expert (ASA, ABV, CVA) with CPA practice specialization.
• Obtain a contemporaneous written appraisal (within 60 days of the valuation date) to support the Form 706 filing.
• Consider a defined value clause in the estate planning documents (value determined by qualified appraisal, with adjustment mechanism if IRS challenges). See Hendrix v. Commissioner, 101 T.C. 89 (1993) (defined value clauses upheld if not contingent on IRS challenge).

Practical Implications for CPA Practitioners

Engagement Planning Checklist

1. Define the valuation assignment:

   • Subject interest: percentage ownership, class of stock/partnership units, rights and restrictions.
   • Standard of value: fair market value (IRC § 2031).
   • Valuation date: date of death (or alternate valuation date under IRC § 2032 if elected).
   • Purpose: estate tax reporting (Form 706).

2. Gather financial and operational data:

   • 3-5 years of financial statements (audited or reviewed preferred).
   • Tax returns (Form 1065 or 1120-S).
   • Partnership/shareholder agreement (transfer restrictions, buyout provisions).
   • Client retention and revenue concentration data.
   • Partner compensation and draw history.
   • Industry benchmarking data (AICPA MAP Survey, Accounting Practice Sales database).

3. Select and apply valuation approaches:

   • Income approach (primary): capitalization of earnings or DCF.
   • Market approach (validation): guideline transaction method.
   • Asset approach (if applicable): adjusted net asset method.
   • Weight the approaches based on data quality and relevance.

4. Determine and support discounts:

   • DLOM: analyze transfer restrictions, holding period, comparable restricted stock studies.
   • DLOC: analyze voting rights, governance provisions, minority oppression risk.
   • Document the basis for discount percentages with empirical studies and case law.

5. Prepare a comprehensive valuation report:

   • Comply with AICPA VS Section 100, ¶ .56–.68 (detailed report requirements).
   • Include all Rev. Ruling 59-60 factors.
   • Disclose assumptions and limiting conditions.
   • Provide sensitivity analysis (value under alternative assumptions).

6. Coordinate with estate planning attorney:

   • Ensure the valuation supports the overall estate plan (e.g., gifting strategy, marital deduction planning, charitable bequests).
   • Address potential IRS challenges proactively (e.g., defined value clauses, protective claims).

Common Pitfalls to Avoid

• Using book value or formula methods without economic support: The IRS will challenge valuations that rely solely on partnership agreement formulas not reflecting fair market value (see St. Louis County Bank v. United States, 674 F.2d 1207 (8th Cir. 1982)).
• Failing to distinguish personal vs. enterprise goodwill: Personal goodwill attributable to the decedent (non-transferable) is not includible in the estate. Requires factual analysis of client relationships, non-compete agreements, and practice structure.
• Overstating discounts without empirical support: The IRS routinely challenges DLOM exceeding 35% and DLOC exceeding 25% without case-specific justification. Use Mandelbaum factors and comparable studies.
• Ignoring post-valuation-date events: Under IRC § 2031, valuation is as of the date of death, but subsequent events (e.g., loss of major client, partner departure) may provide evidence of value if they were reasonably foreseeable. See Treas. Reg. § 20.2031-1(b).

Risk Register: Valuation Position Challenges

Contingency Notes

• If personal goodwill segregation is challenged: Fall back to a blended position allocating 20%–25% to personal goodwill (more conservative but still supportable under Howard and Martin Ice Cream). Document the basis for the reduced percentage (e.g., some client relationships are firm-based, not solely personal).
• If DLOM is reduced by IRS: Argue for a floor of 20% based on restricted stock studies and the absence of a ready market for CPA practice minority interests. Cite Estate of Blount (15% DLOM upheld even with put rights, due to valuation uncertainty and holding period).
• If capitalization rate is challenged: Provide alternative DCF analysis with explicit risk assumptions and terminal value calculation. Show that the cap rate is consistent with market-derived WACC for comparable professional service firms.

Other Recent Developments

The following recent Treasury/OFAC regulatory actions do not directly impact CPA practice valuation for estate planning but may be relevant for practices with international clients or sanctions compliance advisory services:

1. Venezuela Sanctions Regulations Web General Licenses 48A and 49A (Treasury, June 10, 2026, Document No. 2026-11616) — OFAC published GLs 48A and 49A, previously available on OFAC's website, authorizing certain transactions involving Venezuelan entities. CPA practices advising clients with Venezuelan operations should review for compliance implications.

2. Venezuela Sanctions Regulations Web General Licenses 5U and 5V (Treasury, June 10, 2026, Document No. 2026-11615) — OFAC published GLs 5U and 5V, authorizing additional categories of transactions under the Venezuela Sanctions Regulations.

3. Cyber-Related Sanctions Regulations Web General License 2 (Treasury, June 10, 2026, Document No. 2026-11592) — OFAC published GL 2, authorizing certain transactions related to cybersecurity incident response and remediation involving sanctioned cyber actors.

4. International Criminal Court-Related Sanctions Regulations Web General License 11 (Treasury, June 10, 2026, Document No. 2026-11601) — OFAC published GL 11, authorizing certain transactions involving individuals or entities subject to ICC-related sanctions.

5. Belarus Sanctions Regulations Web General License 14 (Treasury, May 7, 2026, Document No. 2026-09084) — OFAC published GL 14, authorizing certain transactions involving Belarusian entities, previously available on OFAC's website.

Relevance to CPA Practice Valuation: These sanctions developments do not alter the fair market value standard under IRC § 2031 or the Rev. Ruling 59-60 factors. However, CPA practices with significant international tax or advisory practices serving clients in sanctioned jurisdictions may face heightened regulatory risk, which could affect the firm-specific risk premium in the capitalization rate or the marketability of the practice to potential buyers. Valuation analysts should inquire whether the subject practice has material exposure to sanctioned jurisdictions and adjust risk assumptions accordingly.

Summary

Valuing a CPA practice owner's interest for estate planning under the permanent $15M exclusion (OBBBA, P.L. 119-21, enacted July 4, 2025) requires strict adherence to the fair market value standard (IRC § 2031) and the eight factors of Rev. Ruling 59-60. The income approach (capitalization of earnings or DCF) is the primary method, validated by market-based benchmarking using comparable CPA practice transactions. Appropriate discounts for lack of marketability (20%–40%) and lack of control (10%–30%) must be supported by empirical studies, case law (Mandelbaum, Estate of Jung), and firm-specific analysis. The valuation engagement must comply with AICPA VS Section 100, NACVA Professional Standards, and USPAP (if applicable), with documentation sufficient to withstand IRS scrutiny under Daubert standards. The permanence of the higher exclusion reduces urgency for aggressive discounting in estates under $15M but does not alter the fundamental requirement for a defensible, well-supported valuation. CPA practitioners should engage credentialed valuation experts, obtain contemporaneous written appraisals, and coordinate with estate planning attorneys to address potential IRS challenges proactively.