- 44 -
Based on the foregoing, we have calculated Johnco's
estimated future built-in capital gains recognition necessary to
fully recognize the built-in capital gains present on the
valuation date. Using the above assumptions in our calculations,
as indicated in the appendix, approximately 9 years of timber
sales on a sustainable yield basis would be required to recognize
fully the built-in capital gains present on the valuation date.
To simplify our calculations, for each year's cutting, we have
assumed that timber prices on the cutting date equaled the fair
market value on the first day of the taxable year, so that no
ordinary gains or losses result. As shown in the appendix, we
have calculated the expected cash outflows for each of those 9
years attributable to tax liability from the built-in capital
gains in existence on the valuation date. Discounting those
expected cash outflows back to the present using a 20-percent
rate, we find the net present value of the future built-in
capital gains tax liability to be ($872,920) and allow a
reduction of $855,46226 in determining the fair market value of
decedent's Johnco stock.27
26 Decedent’s Johnco shares constituted 98 percent of the
company’s outstanding stock, and 98 percent of $872,920 is
$855,462.
27 The parties have not addressed the applicability of a
built-in capital gains discount with respect to the Harris County
Real Estate, which had a fair market value and basis of $240,000
and $111,740, respectively, on the valuation date. We
accordingly decline to do so.
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