In two recent tax court decisions this summer (Eisenberg v. Commissioner, 2nd Cir., No. 97-4331, USTC and Davis v. Commissioner 110 T.C. No. 35 Tax Ct. Dkt. No. 9337-96 USTC), the courts have finally concluded that for gift tax purposes, a taxpayer is entitled to reduce the fair market value of closely held stock to take into account potential capital gains tax liabilities. Prior to these decisions, courts had generally held that no reduction in the value of closely held ownership interests may be taken to reflect the potential capital gains tax liability where evidence fails to establish a liquidation or sale of the corporation or its assets is likely to occur. The reasoning was that absent this expectation of a sale or liquidation, the tax liability was purely speculative.

In particular, the court in Eisenberg stated, "we believe that it is common business practice and not mere speculation to conclude a hypothetical willing buyer, having reasonable knowledge of the relevant facts, would take some account of the tax consequences of contingent built-in capital gains on the asset of a corporation in making a sound valuation of the property." In Davis, the court reached the same conclusion in its ruling to allow the taxpayer to increase the lack of marketability discount to account for the potential tax liability.

Depending on the specific facts, the value of certain C Corp entities should be less than the value of an identical company organized as an S Corp.