2008 Valuation Cases of Note

The Tax Court approved “tiered” discounts in Ashford v. Com’r., T.C. Memo, 2008-128. A family limited partnership owned a 50% general partnership interest in another partnership which owned Minnesota farmland. The 50% interest was noncontrolling, since neither 50% general partner could act unilaterally. Although the IRS argued that valuation discounts below the top tier or “parent” entity were not appropriate, the court allowed both lack of control and lack of marketability discounts at both levels. Combined discounts were 30% for the general partnership interest and 35% for the limited partnership interest.

In Bergquist v. Com’r., 131 T.C. No. 2, a group of anesthesiologists gifted stock in their professional service corporation to a newly formed tax-exempt professional service corporation. Four months later, they transferred their individual practices to the tax-exempt when a planned consolidation with other medical practice groups was completed. The doctors claimed substantial income tax charitable deductions. The court held that since consolidation was “imminent” when the gifts were made, they were required to be valued under an asset-based, rather than a going concern, valuation approach. The court accepted the minority interest discount of 35% and the lack of marketability discount of 45% proposed by the IRS. Finding bad faith, the Tax Court also upheld the imposition of penalties.

In Holman v. Com’r., 130 T.C. 12, gifts of limited partnership interests were made a few days after the partnership was formed. Although the Tax Court rejected the “indirect gift” and step transaction arguments, it held that the transfer restrictions in the partnership agreement should be ignored for valuation purposes under IRC § 2703. Under IRC § 2703, a restriction on transfer is disregarded unless “it is not a device to transfer property to the family for less than adequate consideration.” The court theorized that given the large minority and marketability discounts available in valuing the gifts, any limited partner wishing to assign a limited partnership interest would “strike a deal” with the remaining limited partners “at some price between the discounted value of the unit and the dollar value of the units’ proportional share of the partnership’s NAV.” The decision has been criticized as ignoring the willing buyer-willing seller precedents set forth in Morrissey and Simplot.

In Estate of Mirowski v. Com’r., T.C. Memo 2008-74, the decedent, two weeks before her death, funded a Maryland LLC with 90% of her assets and made gifts of 48% of the noncontrolling limited partnership interests to her three daughter’s trusts. The decedent, Mrs. Mirowski, retained a 52% majority interest as general partner. Despite the proximity to her death of both the funding of the LLC and her subsequent gifts of limited partnership interests, the Tax Court held that IRC §§ 2036 and 2038 did not operate to bring the asset back into Mrs. Mirowski’s estate since her illness was treatable and her death was unexpected. Among the “legitimate and significant” nontax purposes of creating the LLC were (i) the joint management of family assets and (ii) the objective of having the children and grandchildren sharing equally in family assets.

An important positive factor in the case was that the decedent had retained enough assets to live on following her her transfers to the trusts. A gift tax liability of $11.8 million would have been paid for by a combination of retained assets. The LLC was found to be a “valid functioning business operation” whose responsibilities included managing patents invented by the deceased husband. Another factor which militated against the application of IRC §§ 2036 and 2038 was the fact that Mrs. Mirowski did not have authority to decide the timing and amount of distributions. Maryland law also imposed upon Mrs. Mirowski a fiduciary duty to the other LLC members.

In Gross v. Com’r, T.C. Memo, 2008-221, the decedent filed a certificate of limited partnership with New York on July 15, 1998. Transfers of marketable securities were made to a partnership account over the next few months. On December 15, 1998, the decedent and her two daughters signed a partnership agreement, and the decedent made gifts of limited partnership interests to each daughter. A 35% discount was applied in valuing the gifts.

The IRS argued that indirect gifts of marketable securities had been made since the partnership was not formed until the agreement was signed on December 15, 1998. Rejecting the IRS arguments and finding for the taxpayer, the Tax Court held that (i) the filing of a Certificate of Limited Partnership is conclusive evidence of the formation of a partnership under New York law; and (ii) New York law permits formation of a general partnership where limited partnership formation requirements fail, if the conduct of the parties suggests a partnership arrangement.

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