Jelke briefs are in: Now it’s up to U.S. Supreme Court

BVWireIssue #72-3
September 24, 2008

In a decision that could have a “profound effect on valuation,” according to attorney John Prokey (Ramsbacher Prokey, LLP), the U.S. Supreme Court has now received the IRS’s petition for writ of certiorari in Commissioner v. Estate of Jelke, the 11th Circuit’s approval of a dollar-for-dollar discount for embedded capital gains (see BVWire # 62-3 and #64-3).  The taxpayer filed its response in August, followed by the IRS’s reply on September 3, 2008.

Briefs from “friends of the court” will surely be forthcoming if the Supreme Court grants cert in the case.  The key issue: whether the choice of methodology for valuing the embedded capital gains tax of a closely held corporation is a matter of fact or law.  If it’s the former, as the IRS contends, then the trial court is given broad discretion to make its valuation determinations based on the facts and circumstances of each case, reversible on appeal only for “clear error.”   But if the application of a particular valuation methodology (net asset value, in this case) is a question of law, as the taxpayer argues, then an appellate court reviews the method de novo (as new), which is what the 11th Circuit did in its rejection of the Tax Court’s original findings in Jelke.  Only the determinations of value would then be factual and within the trial court’s discretion.

The Supreme Court could rule on the basis of the briefs alone, Prokey told attendees at the DLOM Summit in San Diego—or it could set the case for oral argument; or it could decline the case altogether.  The timing of the decision is also unclear—but tax attorneys and appraisers alike will be awaiting the outcome, wondering whether the certainty of a dollar-for-dollar discount trumps the alleged accuracy of valuation methodologies.  Click here to read all three briefs in the Jelke appeal to the highest court.

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