## Facts

- Frazier Jelke III died in 1999 owning, through a revocable trust, a 6.44% minority interest (3,000 shares) in Commercial Chemical Company (CCC), a closely held C corporation.
- CCC had ceased operating as a chemical business decades earlier and functioned as an investment holding company with a portfolio dominated by publicly traded equities with readily determinable market values.
- On the valuation date, CCC’s total assets were about $188 million, including roughly $178 million in securities, and it carried built-in capital gains tax (BIG) liability of about $51 million on appreciated holdings.
- The estate’s return valued the CCC interest by subtracting the full $51 million BIG liability from asset value and then applying minority and marketability discounts.
- The IRS issued a deficiency notice asserting a higher value, rejecting (or substantially limiting) any BIG-related reduction and using smaller discounts.
- The Tax Court treated BIG as a real burden but allowed only a partial, present-value reduction based on an assumed 16-year asset turnover period, rather than deducting the full $51 million.
- The estate appealed, arguing that under the willing-buyer/willing-seller fair market value standard, a buyer would demand a full reduction for the BIG liability.

## Issues

1. When valuing a minority interest in an investment holding C corporation using net asset value for estate tax purposes, must built-in capital gains tax be deducted dollar-for-dollar as of the valuation date, or discounted to present value based on assumed future asset sales?
2. Is the Tax Court’s choice of a BIG discount methodology, in this setting, reviewed as a legal determination (de novo) or a factual determination (clear error)?

## Decision

- The Eleventh Circuit vacated the Tax Court’s valuation and remanded with instructions to recalculate net asset value using a dollar-for-dollar reduction for the entire BIG liability.
- The court held that, for a holding company valued primarily by net asset value, BIG must be treated as a full liability as of the valuation date, based on an assumed liquidation, regardless of any intent to liquidate.
- The court treated the Tax Court’s present-value/turnover methodology as use of an incorrect legal standard in applying the fair market value test in this context and reviewed the issue de novo.

## Legal Principles

- Estate tax fair market value applies a hypothetical willing buyer and willing seller, neither under compulsion and both reasonably informed.
- Where a closely held C corporation is essentially an investment holding company and net asset value is the principal indicator of value, built-in capital gains tax reduces value dollar-for-dollar as of the valuation date.
- Courts need not accept speculative projections about holding periods or asset turnover to determine the BIG discount under a net asset value approach for a holding company with readily marketable assets.
- A valuation may assume an immediate liquidation to account for BIG, even absent evidence of any actual liquidation plan, when applying the hypothetical buyer-seller framework to net asset value.

## Conclusion

The Eleventh Circuit required that, in valuing a minority interest in a holding-company C corporation by net asset value for estate tax purposes, the built-in capital gains tax liability be deducted in full on the valuation date, rejecting a discounted, present-value turnover model and remanding for recalculation using a dollar-for-dollar BIG reduction.


Estate of Jelke v. Commissioner, 507 F.3d 1317 (11th Cir. 2007)