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In an established line of cases, this Court has held
that projected capital gains taxes do not reduce the
value of closely held stock when liquidation is
speculative. Ward v. Commissioner, 87 T.C. 78, 104
(1986); Estate of Andrews v. Commissioner, 79 T.C. 938,
942 (1982); Estate of Piper v. Commissioner, 72 T.C.
1062, 1086-1087 (1979); Estate of Cruikshank v.
Commissioner, 9 T.C. 162, 165 (1947); Estate of Luton v.
Commissioner, T.C. Memo. 1994-539, 68 T.C.M. (CCH) 1044,
1052 (1994); Estate of Bennett v. Commissioner, T.C.
Memo. 1993-34, 65 T.C.M. (CCH) 1816, 1825 (1993). These
cases reach that conclusion for two reasons.
First, prior to 1986, former I.R.C. �� 336 and 337
allowed the tax-free liquidation of a corporation; the
corporation could thereby completely avoid capital gains
taxes upon a subsequent sale of all its assets. Courts
reasoned that the corporation's ability to avoid taxes
upon liquidation rendered the projected liability so
speculative as to be irrelevant. Estate of Piper, 72
T.C. at 1087.
The repeal of those provisions, in the Tax Reform
Act of 1986, P.L. 99-514, �� 631-633, 100 Stat. 2269-
2282, as reprinted in 1986-3 C.B. (Vol. 1) 186-199, did
not foreclose the possibility of avoiding capital gains
taxes at the corporate level upon sale of all assets. A
subchapter C corporation can convert to a corporation
described in subchapter S (I.R.C. � 1361, et. seq.) and
avoid recognition of any gain, if the corporation retains
the assets for a period of ten years from the date of
conversion to an S corporation. See I.R.C. � 1374(d)(7).
One of petitioner's experts recognized this possible
alternative. Since Artemus D. Davis was a long term
investor in Winn-Dixie stock, electing subchapter S
appears to be a reasonable method to avoid the corporate
level capital gains tax.
Although the willing buyer might incorporate a
reduction in his price for costs of a subsequent
liquidation, the willing seller has no incentive to
accommodate that reduction. Why would the willing
seller, knowing that the capital gains taxes can be
deferred or avoided, agree to that reduction? Why would
the willing seller, knowing further that the buyer
controls the incidence of tax, agree to any reduction
based on the buyer's purely speculative tax burden? See
Mandelbaum v. Commissioner, T.C. Memo. 1995-254, 69
T.C.M. (CCH) 2852, 2866 (1995), aff'd, 91 F.3d 124 (3d
Cir. 1996).
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