Statment of Specified Foreign Financial Assets is a Valuation MInefield


Form 8938 “Statement of Specified Foreign Financial Assets” is required as part of the 2011 individual income tax returns. Taxpayer’s must estimate values of certain assets, including equity interests in foreign corporations and partnerships. For those assets that are traded on an established exchange traditional valuation methods can be used to determine value. But for privately held investment interests valuation is more complex and disclosure issues become important.

Three basic approaches to discounting privately held investment interests can be used for taxpayer’s holding investments in privately held investments, including foreign investments. These methods are the Discount for Lack of Marketability, (DLOM) Discount for Lack of Liquidity (DLOL) and Discount for Lack of Control (DLOC). These discounts need to be carefully considered when taxpayers or their advisers consider the range of value disclosure for the foreign investment interest. The IRS will, upon subsequent examination look at filed Forms 8938 along with the Form 1040 to determine the value of the disclosed interest. The value statement may have adverse affects on estate and gift tax audits if rights to later submit an discount argument through proper appraisal. The result could be a long an expensive process to determine value of the interest if there IRS estate and gift tax auditor and taxpayer disagree on valuation. Proper efforts to reserve the right to submit evidence that a discount to valuation should be made with the filing of the Form 8938.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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