... A facts-and-circumstances determination.

• Author: Josephs, Stuart R.
• Position: Update of article regarding built-in capital gains tax in The Tax Adviser, Dec. 1998, p. 818

The Tax Clinic item, "Recent Case Recognizes Built-In Capital Gains Tax for Valuation Purposes" TTA, December 1998, p. 818 reads, in part, as follows:

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...