Controversial Jelke case currently on appeal

BVWireIssue #48-1
September 13, 2006

A “poor decision” for taxpayers is now on appeal in the 11th Circuit. In the 2005 case of Estate of Jelke v. Commissioner, the Tax Court considered three discounts in the valuation of a C Corp’s stock portfolio—for trapped-in capital gains, lack of marketability, and lack of control.

The estate provided expertise by William Frazier, ASA (HFBE, Houston), who testified to a dollar-for-dollar discount for the embedded tax liability in an asset approach—as is the general consensus among appraisers. “Unfortunately, Judge Gerber went entirely with the IRS expert,” Shannon Pratt wrote in the October 2005 BVU. “I believe the taxpayer was ill-served by the decision.” For a copy of Dr. Pratt’s original editorial, click here.

The 11th Circuit has already heard legal arguments, and will issue a holding soon. The big question: Will it follow the 5th Circuit precedent of Dunn (Estate of Dunn v. Commissioner, 2002), which found a dollar-for-dollar reduction for built-in capital gains—for which both Frazier and Pratt served as estate experts? “If Jelke had been decided in the 5th Circuit, it would have been a slam dunk,” Frazier tells the BVWire. Instead, the lower court all but “ignored” Dunn—and the BV community may be faced with a jurisdictional split if the 11th Circuit declines to reverse. Stay tuned…

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