- 37 -
even less of a ready market for each of those two blocks because
of ADDI&C's built-in capital gains tax than there would have been
for each such block without such a tax. We thus also agree with
and accept the views of petitioner's expert Mr. Pratt and
respondent's expert Mr. Thomson that a discount or adjustment for
some amount of ADDI&C's built-in capital gains tax should be taken
into account in valuing each block of stock at issue and that such
a discount or adjustment should be part of the lack-of-
marketability discount that the parties and all of the experts
concluded should be applied in that valuation process.18
Petitioner's expert Mr. Pratt included $8,776,317 of the total
ADDI&C's built-in capital gains tax as part of the lack-of-
marketability discount that he applied in valuing each of the
18 See Estate of Luton v. Commissioner, T.C. Memo. 1994-539,
which involved, inter alia, valuation of a stock interest in a
corporation for which an election to be taxed as an S corporation
had been made and which was subject to the transitional rules in
the Subchapter S Revision Act of 1982, Pub. L. 97-354, sec. 2, 96
Stat. 1669, 1683. Consequently, that corporation was required to
recognize certain of its net capital gain for the 3 taxable years
immediately following the date of that S corporation election.
Although we refused to allow a reduction equal to the full amount
of the Federal and State capital gains taxes that would have been
incurred if that corporation had liquidated on the valuation date
involved in the Estate of Luton case, we found:
Accordingly, with the exception of the 14-month period
from the valuation date until December 31, 1988, RSJ,
Inc.,'s built-in capital gains could be recognized
without a corporate level tax. Notwithstanding the
potential elimination of any corporate level tax, we do
recognize that some discount is in order. We believe
such discount is appropriately considered in the
discount for lack of marketability, discussed below.
* * * [Emphasis added.]
Estate of Luton v. Commissioner, supra.
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