... A facts-and-circumstances determination.
In 1989, the IRS reaffirmed its position in Letter Ruling (TAM) 9150001, stating that a corporation's inherent built-in capital gains tax liability could not be considered in valuing the corporation's stock--despite the repeal of the General Utilities doctrine--in the absence of evidence that a liquidation was actually contemplated....
Contrary to a recent decision in which the built-in capital gains tax was not recognized for valuation purposes (Irene Eisenberg, TC Memo 1997-483), the Tax Court, in Est. of Davis, 110 TC 530 (1998), found it necessary to apply a discount or adjustment for the built-in capital gains tax, because it is what a hypothetical willing buyer and seller would have done at the valuation date.
On Aug. 18, 1998, the Second Circuit, in Eisenberg, 155 F3d 50, reversed the Tax Court, holding:
... We believe that an adjustment for potential capital gains tax liabilities should be taken into account in valuing the stock at issue in the closely held C corporation even though no liquidation or sale of the Corporation or its assets was planned at the time of the gift of the stock. We therefore remand this matter to the Tax Court to ascertain the gift tax to be paid by the taxpayer consistent with this opinion [footnote 16].
Footnote 16 reads as follows:
Where there is a relatively sizable number of potential buyers who can avoid or defer the tax, the fair market value of the shares might well approach the pre-tax market value of the real estate. Potential buyers who could avoid or defer the tax would compete to purchase the shares, albeit in a market that would include similar real estate that was not owned by a corporation. However, where the number of potential buyers who can avoid or defer the tax is small, the fair market value of the shares might be only slightly above the value of the real estate net of taxes. In any event, all of these circumstances should be determined as a question of valuation for tax purposes.
The IRS has acquiesced in the Second Circuit's decision (AOD 1999-001).
FROM STUART R. JOSEPHS, CPA, TAX ASSISTANCE PRACTICE (TAP), SAN DIEGO, CA
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|Title Annotation:||update of article regarding built-in capital gains tax in The Tax Adviser, Dec. 1998, p. 818|
|Author:||Josephs, Stuart R.|
|Publication:||The Tax Adviser|
|Date:||May 1, 1999|
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