The Tax Ramifications of Taking Playboy Private

Posted on January 10, 2011

by: Raymond Sheffield

Hugh Hefner is purchasing the 30% of Playboy Enterprizes he doesn’t own for an 18% premium. The media is focusing on his age and the poor future propects for the company. They seem to be ignoring the tax aspects of this deal for Mr. Hefner’s family.

A publicly traded company is easy to value for estate and gift tax purposes. The publicly traded price is the valuation price for the stock. There is no discount. Not only that, but publicly traded companies generally trade at higher multiples of earnings than their closely held counterparts.

When a company is closely held, the value as a percentage of earnings is generally lower than corresponding publicly held companies and the shares are discountable as well.

Assuming Mr. Hefner is not going to live for another 20 years, this tranaction makes perfect sense from an estate and gift tax perspective. The cash he puts out to purchase the shares will reduce the value of his estate since the overall value of the company, now privately held, will go down.

The reduction in value for estate tax purposes will save the estate taxes on Mr. Hefner’s death.
Later, when the economy is better, the family can sell the company back to the public for a premium to generate and realize the value that has been there all along.

This type of strategy works in reverse as well.

If your client has stock in a privately held company that may go public (i.e. Facebook, etc.), they should see a qualified estate tax planning attorney to create strategies for them while the valuation of the stock is still relatively low. As the day of going public nears, the value of the shares is increasing for tax purposes and the less tax savings your client will realize.