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PDtax, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 4678
Experience:  35 years tax experience, including four years at a Big 4 firm.
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I have a non public client with an investment in the stock

Customer Question

I have a non public client with an investment in the stock of a nonpublic company. The investment is very nominal, however, the company is very successful and pays dividends. The client shows the investment at its nominal cost on its balance sheet even though the dividend returns are significant. The client has not elected to use fair value presentation. The stock does not have a market value and is a non-trading security. The client wonders if the stock should be shown at an amount higher than original cost. I can't find any support for this.
Submitted: 2 years ago.
Category: Tax
Expert:  Lane replied 2 years ago.


No, becasue it's not publicly traded...

(1) no SEC or other regs (fair value, etc)

(2) without an appraisal or recent sales, no justification FOR a higher value

IRS would say (for determining estate values for estate tax, basis value for capital gains of inherited assets, value of charitable deductions, etc) that Fair Market Value (FMV) = ...

"Fair market value. Fair market value (FMV) is the price that property would sell for on the open market. It is the price that would be agreed on between a willing buyer and a willing seller, with neither being required to act, and both having reasonable knowledge of the relevant facts."


So with no buys or sells, no required SEC reporting and plenty of support that FMV means what a disinterested 3rd party would pay, there no real support or regulation for a different price.


From an academic finance perspective (and this MAY reflect his thinking AND what someone MIGHT pay) what an asset generates in income (capitalization of income) IS what's being (or a large factor IN what's being ) bought or sold.


But from a regulatory perspective I do not see the need.


Here's a great quote:

Accounting Principles Underlying Asset Measurement

The accounting view of asset value is to a great extent grounded in the notion of historical cost, which is the original cost of the asset, adjusted upward for improvements made to the asset since purchase and downward for loss in value associated with the aging of the asset. This historical cost is called the book value. Although the generally accepted accounting principles for valuing an asset vary across different kinds of assets, three principles underlie the way assets are valued in accounting statements.

An abiding belief in book value as the best estimate of value: Accounting estimates of asset value begin with the book value. Unless a substantial reason is given to do otherwise, accountants view the historical cost as the best estimate of the value of an asset.

A distrust of market or estimated value: When a current market value exists for an asset that is different from the book value, accounting convention seems to view it with suspicion. The market price of an asset is often viewed as both much too volatile and too easily manipulated to be used as an estimate of value for an asset. This suspicion runs even deeper when values are estimated for an asset based on expected future cash flows.

A preference for underestimating value rather than overestimating it: When there is more than one approach to valuing an asset, accounting convention takes the view that the more conservative (lower) estimate of value should be used rather than the less conservative (higher) estimate of value.

Expert:  Lane replied 2 years ago.

Sorry, meant to give you that reference:

But both to err on the side of an accounting preference for historical value AND becasue there's no market indication of interest, I would err on the side of reporting at cost


Let me know if you have questions ...




If this HAS helped, I'd appreciate a positive rating, using the smiley faces or stars on your screen ... that's the ONLY WAY I'm credited for the work here.

Customer: replied 2 years ago.
Doe have any CPA's on staff that would confirm this conclusion? This is the conclusion I have reached, however, I would like to have a college's opinion.
Expert:  Lane replied 2 years ago.

There is no STAFF here. We experts are just users (although credentials have been verified), as you are.


I have a masters in Finance AND Tax, a concentration in tax law and corporate law with my law degree (a Juris Doctorate - a doctoral degree in the law).


Quite honestly, i feel more confident in MY answer, given my background, tax experience (30 yrs), and education than I would in getting an answer from someone that just has a CPA. ( base level proficiency in general accounting, NOT neccessarily an unerstanding of tax LAW. (Title 26 of the U.S.Code)


And probably most important to your request, if you look around the site, you'll see that when one verified expert in an area is wrong another expert will post to corrrect..

Finally, i will not be credited for my time and expertise if you do not rate positively, JustAnswer will just keep the money.


I have given you NYU Stern School of Business perspective on GAAP acounting, the perspective from my experience in corporate law (in terms of any SEC regulation required not being required for private companies, and the IRS definition of Fair Market Value. ... I would submit to you that the perspective of a CPA (especially if you don't know whether the individual's specialization and experience is, tax, audit, basic financial statement compilation or simply bookkeeping) has the same 80% chance of being wrong as with any other profession.


Further ... that the CPA perspective tends to be that of Tax administration rather than the unerlying tax law (which always prevails in tax court, once you've passed the front lines IRS collection division), which get's it right about 60% of the time (right about 20% of the time where facts and circumstances matter more than a general application of statute)


Let me know what you want to do here.


I'll opt out and let someone else get the crediting for the question if that's really what you want.

Customer: replied 2 years ago.
Do you have any CPA's on staff that would confirm this conclusion? This is the conclusion I have reached, however, I would like to have a college's opinion.
Expert:  Lane replied 2 years ago.

There are no CPAs on staff here

Customer: replied 2 years ago.
I don't think the gift response applies.
Customer: replied 2 years ago.
Posted by JustAnswer at customer's request) Hello. I would like to request the following Expert Service(s) from you: Live Phone Call. Let me know if you need more information, or send me the service offer(s) so we can proceed.
Expert:  Lane replied 2 years ago.

As you can see that was edited out... inended for another client. YOU continue to ask for a CPA on Staff and that's just not how ths works.

I'll opt out now.

This is not the best interest of my time.

And again, getting a COLLEAGUE'S perspective on this gets you an accountant.

Expert:  PDtax replied 2 years ago.
Hi. I'm PDtax, a New York CPA.
I will post an offer of additional service to assist. Accept, and we can work on this Saturday.