Valuation Treatment of the Built-In Capital Gains TaxValuation Treatment of the Built-In Capital Gains Tax

The valuation impact of the unrealized capital gains tax liability on appreciated assets of closely held companies has been an area of controversy for nearly 30 years. After years of fighting the taxpayer on this particular issue, the Internal Revenue Service has been more willing to recognize this contingent liability and its impact on the value of closely held stock. In the same respect, the Tax Court has reviewed this issue in various cases over the years and has clearly recognized that the unrealized capital gains tax liability should be considered in the valuation process. However, the Tax Court’s view of how the liability should be factored into the analysis has changed over the years. More recently, the court’s prescribed way of h...