Embedded Capital Gains, One More Time
Estate of Jelke v. Commissioner
There were three valuation issues before the Court in Estate of Jelke v. Commissioner (T.C. Memo 2005-131, filed May 31, 2005).
- What is the appropriate treatment of the embedded capital gains tax liability within Commercial Chemical
Company ("CCC"), a C corporation? - What is the appropriate minority interest discount?
- What is the appropriate marketability discount?
This article focuses soley on the treatment of the embedded capital gains tax liability.
Background
Frazier Jelke Ill died on March 4, 1999 owning 3,000 (or 6.44% of the 46,584 shares outstanding) of Commercial Chemical Co.
At the date of death, CCC was an asset holding entity whose holdings were comprised primarily of large-capitalization, publicly traded securities and nominal liabilities. Total assets at market values were $190.8 million and stated liabilities were $2.1 million. Therefore, asset value was $188.6 million prior to consideration of the impact of embedded capital gains liabilities resulting from significant capital gains in CCC's portfolio. The embedded liability for such deferred tax liabilities was $51.6 million. These facts were not in dispute. The taxpayer's valuation expert was William H. Frazier, ASA, (Howard Barker Frazier Elliott). The valuation expert for the Internal Revenue Service was Professor Israel Shaked (Boston University).
The Court's Conclusion
In the final analysis, the Court agreed with Professor Shaked regarding a partial consideration of the embedded capital gains liability and chose minority interest and marketability discounts between those suggested by the two experts, although closer to Professor Shaked than Mr. Frazier.