Built-In Gains Tax Victory for Taxpayer (Estate of Jensen v. Commissioner)

In T.C. Memo 2010-182, the U.S. Tax Court found in favor of the taxpayer with regard to a valuation reduction for the estimated built-in long-term capital gains tax (LTCG tax).  Decedent Jensen owned a controlling interest in a closely-held C-Corporation that held a parcel of real estate with improvements that had appreciated significantly.  Wa-Klo Corporation ran a summer camp for girls on the parcel in question.  In valuing Wa-Klo, the Estate's expert relied on the Asset Approach and reduced the value of the net assets by 40% for the combined federal and state LTCG tax.  The Court accepted this reduction while rejecting the analysis performed by the IRS's expert. 

The IRS's expert used discounts from net asset values on closed-end funds which primarily held real estate investments.  The Court held that such discounts derive from a multitude of factors, which may or may not include the liability for LTCG tax.  Further, the Court found that the real estate held by the selected closed-end funds were not similar to Wa-Klo's holding.

The full text of T.C. Memo. 2010-182 can be found at the following link.

www.ustaxcourt.gov/InOpHistoric/estatejensen.TCM.WPD.pdf