Valuation Reduction for Full Amount of Built-In Capital Gains Tax – Will Family Law Courts Follow Suit?

August 18, 2010 | Roger McEowen


In recent years, an important issue that has produced opinions by the U.S. Tax Court and several Federal Circuit Courts of Appeal involves the question of whether a full dollar-for-dollar discount should apply when valuing interests in a C corporation to reflect built-in capital gain tax.  The IRS had maintained successfully (until 1998) that no discount should apply, but the courts have disagreed with that view. Initially, the courts focused on the level of the discount.  But, in 2007, the United States Court of Appeals for the Eleventh Circuit, reversed the Tax Court, and held that in determining the estate tax value of holding company stock, the company's value is to be reduced by the entire built-in capital gain as of the date of death. 

In 2009, the U.S. Tax Court essentially allowed a full dollar-for-dollar discount in a case involving a C corporation with marketable securities.   So, it has come as no surprise that the Tax Court, in a recent opinion, again allowed a full dollar-for-dollar discount attributable to built-in capital gain when valuing an estate's 82 percent controlling interest in a closely-held C corporation holding real estate. 

A related question is whether the opinion could also begin to have some influence on family law courts handling divorce cases subject to equitable distribution procedures.

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