Built-in capital gains tax can be a real drag

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Abstract: Capital gains tax obligations can significantly affect value, especially for an established holding company with low cost basis. Even if a sale isn’t imminent, investors consider tax obligations when buying and selling business interests. This article notes that courts increasingly embrace valuation discounts for built-in capital gains tax, using a case study to illustrate the point that it’s not so much whether capital gains tax affects value but how to quantify the discount. Because the IRS and the Tax Court haven’t agreed on the proper method for quantifying the discount, it’s even more important that the discount be well supported by facts and legal precedent.