Page 56 - Business Valuation for Estates & Gift Taxes

case back to the Tax Court for a valuation analysis consistent with its opinion that the buyer would ei-
ther lower the purchase price or sell the interest quickly and redeploy the proceeds elsewhere. fn 6

The following paragraphs summarize some other cases of interest in which the court found in favor of
allowing discounts for the BIG tax liability.

In 2002, the Fifth Circuit decided in Estate of Dunn that, as a matter of law, the BIG tax liability should
be considered as a dollar-for-dollar reduction when calculating the asset-based value. fn 7

In 2007, the Eleventh Circuit decided in Estate of Jelke, that the asset-based valuation approach contem-
plates the consummation of the sale of the subject asset, thereby triggering the BIG tax. The court
agreed with and adopted the Fifth Circuit’s dollar-for-dollar valuation discount procedure. fn 8

In 2009, the Tax Court decided in Estate of Litchfield to allow a BIG tax-related valuation discount
based on the assumption that the assets would be sold over time. The Tax Court adopted the taxpayer’s
methodology of

 projecting holding periods and estimated sales dates for the corporation’s assets,

 projecting asset appreciation to the estimated sales dates, and

 discounting the expected future BIG tax back to the valuation date. fn 9

In 2010, the Tax Court decided in Estate of Jensen that the BIG tax valuation discount was to be applied
in a case where the primary assets of the C corporation were real estate and real property improvements.
The Tax Court, assuming that the assets would be sold in the future, calculated the appreciated future
value of the land and related improvements. The resulting estimated future tax payments (based on fu-
ture value of the assets) were then discounted to a present value using a discount rate equal to the as-
sumed appreciation rate of the assets. Ultimately, the Tax Court accepted the taxpayer’s BIG discount
because the Tax Court’s analyses resulted in a BIG tax liability slightly greater than the taxpayer’s. fn 10

In 2014, the Tax Court decided in Estate of Richmond fn 11 that some discount for a built-in gains tax lia-
bility was appropriate for an interest in a corporation that held a portfolio of publicly traded securities.
The court rejected a dollar-for-dollar discount as suggested by the estate’s expert and also rejected the
IRS expert’s approach of embedding an additional 15 percent discount within the discount for lack of
marketability. Ultimately, the court found that a potential investor would expect that the company’s

fn 6 Estate of Jameson v. Commissioner, 267 F.3d 366 (5th Cir. 2001).

fn 7
Estate of Dunn v. Commissioner, 301 F.3d 339 (5th Cir. 2002).
fn 8 Estate of Jelke v. Commissioner, 507 F.3d 1317 (11th Cir. 2007).

fn 9
Estate of Litchfield v. Commissioner, T.C. Memo. 2009-21 (January 29, 2009).
fn 10 Estate of Jensen v. Commissioner, T.C. Memo 2010-182 (August 10, 2010).

fn 11
Estate of Helen P. Richmond, Amanda Zerbey v. Commissioner, T.C. memo. 2014-26 (February 11, 2014).

Page 54 ©2015, AICPA