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Built-In Capital Gains Tax


One of the issues we now see regularly is the computation and deductibility of built-in capital gains (BICG). This occurs when appreciated assets in a C corporation are sold, about to be sold, or the C is converted to an S corporation. In the context of estate planning (Form 709) or death tax filing (Form 706), the question is: how much can be deducted. Obviously, the taxpayer wants a dollar-for-dollar reduction from the current value of the asset.

Since 1997, there are 10 significant district and Tax Court cases specific to the allowable discount to value for BICG. In some cases, when sale/liquidation of real property was not considered imminent, the court denied a dollar-for-dollar reduction to appraised value. In other decisions, some form of present value of this BICG was adopted.

A decision in 2007 by the 11th Circuit vacated a Tax Court decision re Jelke, allowing a dollar-for-dollar reduction on the assumption that the asset is liquidated on the date of death. Making this decision more controversial was the fact that Jelke owned a minority interest that could not be sold.

It remains to be seen if the Tax Court will accept Jelke. However, taxpayers in the 5th Circuit and 11th Circuit should be allowed a dollar-for-dollar discount (deduction) from appraised value. These courts have consistently allowed the full discount. One caveat is that the BICG is more acceptable for a C corporation, and not a pass through entity (e.g. S corporation).