November 30, 2021

Volume XI, Number 334

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November 30, 2021

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November 29, 2021

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Capital Gains Tax Treatment for a Closely Held Business

When it comes to closely held businesses, taxation can also be a challenging issue. This turned out to be especially the case where differences of opinion rose concerning valuations of a built-in capital gains tax discount. This occurred upon the death of one of the family members who owned 23.44 percent of the business. Without any discounts, the value of her share would have been placed at $12.2 million.

The main assets of family run holding company were publicly traded stock. The company which had been in business since 1928 has looked towards various investments to increase its dividends. The company apparently had put off selling any of its stock holdings in order to not have to pay capital gains tax. And since the company had been set up as a corporation, the capital gains would have to be paid at the higher corporate income tax rate.

Accounting for built-in capital gains tax for closely held companies in asset valuation cases remains an issue in a number of courts. Certain circuits suggest a 100 percent discount because it could be assumed that assets would be liquidated on the date of the individual's death. However, other courts have felt that such an approach in inappropriate. There are also circuit courts that have not ruled upon the issue.

The tax court declined to completely follow the IRS or the estate's method for assessing discounts. It also declined to adapt the approach of certain circuit courts as well. While the IRS valued the estate after discounts at $7,348,864 and the estate valued it at $4,721,961, the tax court came up with a value of $6,503,804.

This matter demonstrates why tax attorneys should always be consulted when it comes to complex business tax returns. Every tax situation is unique and will require specific handling.  Corporate and business tax law will remain complex for whatever size company one owns. 

Source: Bloomberg BNA, "Discounting Built-in Capital Gains Tax Liability for Closely-Held Businesses," Katherine Adcock, March 2, 2014

© 2021 by McBrayer, McGinnis, Leslie & Kirkland, PLLC. All rights reserved.National Law Review, Volume IV, Number 98
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