Transfer Tax Valuation Issues, the Game Theory, and Final Offer Arbitration: A Modest Proposal for Reform

29 Pages Posted: 3 Aug 2014

Date Written: August 1, 1997


One of the most difficult tasks of federal tax administration is determining the value of closely-held business interests where there is no readily available market quotation. The Internal Revenue Code ("Code") and accompanying regulations provide little guidance: The Code offers a broad definition of value and the applicable Treasury regulations requires a willing buyer/willing seller test. In practice, however, these guideposts often fail to generate a consensus between taxpayers and Internal Revenue Service ("Service"). A common by-product of this failure is prolonged litigation, marked by "Solomon-like" pronouncements, as judges tend to split warring parties' valuation differences. But, unlike the judgment rendered by King Solomon, litigants involved in these valuation disputes rarely venerate the wisdom of these valuation decisions or the process by which they were derived.

If we assume that Congress has no inclination to change its half-century old willing buyer/willing seller test, reform must take a different tack. To stem the tide of valuation litigation, this analysis proposes that Congress legislatively adopt final-offer arbitration, where a judge must choose either the taxpayer's or Service's valuation proposal. Judges would be precluded from reaching a compromise position. The reason for this limitation is based on game theory, a branch of social science that studies strategic decision-making. Game theory analysis reveals that the judiciary's propensity to compromise (or the perception of such) cause exaggerated estimates lessen the likelihood of the taxpayer and Service settling their differences.

Keywords: Tax

JEL Classification: K34

Suggested Citation

Soled, Jay, Transfer Tax Valuation Issues, the Game Theory, and Final Offer Arbitration: A Modest Proposal for Reform (August 1, 1997). Arizona Law Review, Vol. 39, No. 282, 1997, Available at SSRN:

Jay Soled (Contact Author)

Rutgers University ( email )

1 Washington Park
Newark, NJ 07901-1825
United States
(973) 353-1727 (Phone)

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