Estate of Jelke v. Commissioner

Frazier Jelke III died testate on March 4, 1999. His estate (plaintiff) filed a federal estate-tax return, reflecting Jelke’s 6.44% interest in Commercial Chemical Company (CCC), a closely held company engaged in investments. At the time of Jelke’s death, CCC’s securities were worth $178 million, and it had $10 million in other assets. CCC’s securities had a built-in contingent capital-gains tax liability of $51 million. When the estate of Jelke filed the estate-tax return, it valued Jelke’s interest in CCC at $4,588,155. This valuation was reached by reducing CCC’s $188 million in assets by the full $51 million in capital-gains tax liability, then applying a 20 percent discount for lack of control and a 35 percent discount for lack of marketability. In December 2002, the Commissioner of Internal Revenue (the commissioner) (defendant) sent a notice of deficiency claiming that Jelke’s interest in CCC was properly valued at $9,111,000, which was based on no discount for capital gains and lesser discounts for lack of control and marketability. The estate filed a petition contesting that valuation. The trial court rejected the estate’s argument of reducing CCC’s value dollar for dollar by $51 million, instead opting to reduce the value by $21 million. Instead, the trial court followed the commissioner’s contention that the capital-gains tax should be reduced to present value, which would be calculated on an annualized, indexed basis over the 16 years that would be normal turnover period of CCC’s assets. Essentially, with the estate having no control over the company and no indication of immediate plans to liquidate, the IRS did not wish to decrease the value of CCC as if a full liquidation were imminent. The estate appealed the trial court’s ruling, arguing for a dollar-for-dollar reduction of the value of CCC against the capital-gains tax liability based on a Fifth Circuit case, Estate of Dunn v. Commissioner, 301 F.3d 339 (2002). In that case, the Fifth Circuit held that a hypothetical willing buyer and seller should be assumed to immediately liquidate the corporation in question, immediately triggering the full capital-gains liability and allowing for a dollar-for-dollar reduction in value. However, the trial court discounted this ruling, as it was from the Fifth Circuit, not the Eleventh Circuit, which was the relevant appellate court.