The built-in gains value reduction for transfer tax purposes provides that the value of stock of a 'C' corporation is reduced by any untaxed gains inside the corporation. The theory is that a willing buyer would reduce the purchase price for such shares by the latent income tax liability inside the entity.
In a recent Tax Court case, the Tax Court recognized the value reduction. However, it did not allow a full reduction for the taxes that would arise on the sale or disposition of the corporate assets - instead, it discounted that reduction on the theory that the buyer would not sell all the assets at once but would only realize those gains (and resulting taxes) over time.
The Eleventh Circuit Court of Appeals has overturned that decision, and held that a 100% reduction in value for the income taxes on the built-in gains is appropriate. The Court ruled that the valuation should be conducted as if the corporation was liquidated, thus realizing its gains at the time of valuation. It did this based on its belief that a buyer would require a 100% reduction even if it did not intend to sell the corporate assets immediately.
Estate of Frazier Jelke III, 100 AFTR2d 2007-5475 (CA 11 11/15/2007)