I got this question from an attorney a couple of weeks ago, I had to look it up, so I figured there might be some other weary practitioner that’s unclear. In any case, here’s some juice to support the notion of a dollar for dollar discount on built‐in capital gains.
Let me start by saying that Stout Risius and Ross (SRR) is awesome. They’re excellent about sharing useful information with the public, and their publications, though sometimes hard to find, are well‐written and informative. In their Trusts & Estates edition of The Journal (Summer 2009) publication, they’ve got an article called “Valuation Impact of the Built‐in Gains Liability.” After evaluating the IRS’ preferred methodology, which considers anticipated distributions, forecast asset growth, and projected capital gains tax rates (discounted back to present value using the company’s growth rate), SRR ultimately concludes it’s the same as a dollar‐for‐dollar discount. So a dollar‐for‐dollar discount it is.
To underscore the reality of our findings, just go ahead and read John Porter’s analysis on the history of discounts for built‐in capital gains. This guy doesn’t mess around. He’s got an excellent publication available through Business Valuation Resources called “Jelke Reversal: Case Law Overview.” In it, he provides a background of tax law and the IRS’ policy regarding built-in capital gains on a company’s assets. He then goes onto describe the Tax Court’s reversal of the Jelke decision, and the Court’s ultimate reliance on a dollar‐for‐dollar discount for built‐in capital gains, further supporting the findings from SRR.