How is value affected according to the ruling in Dunn v Commissioner?

The correct choice reflects the ruling in Dunn v Commissioner, which addresses how the presence of built-in capital gains taxes can affect the valuation of an asset. Specifically, the court held that the value of an asset or interest should be adjusted downward to account for potential tax liabilities that would be incurred upon its sale.

This means that when valuing an entity, appraisers are encouraged to consider the impact of these taxes on the net proceeds that an owner would receive if they sold the asset. By taking into account the built-in capital gains taxes, the valuation reflects a more realistic perspective of the asset's worth in the market, factoring in costs that would arise for the owner in a hypothetical sale scenario.

This ruling emphasizes the importance of considering tax implications in business valuations, which can significantly influence the perceived value of an asset beyond just market trends or intrinsic value. As a result, it ensures that valuations are not overly optimistic and provide a more accurate picture of an asset’s true financial impact.