Friday April 26, 2024

1.5.3 Valuation Discounts

Valuation Discounts

Property Value Discounts:  There are several types of gifts in which a donor may give less than the entire value of an asset or business entity.

Business Entities:  A C Corporation files its own tax return and is a separate business entity.

Subchapter S Corporations:  Subchapter S corporations allow gains, losses, income and deductions to flow through to the Sub S shareholders.

Limited Liability Companies:  Limited Liability Companies are in many respects viewed as superior to the Subchapter S Corporation.

Family Limited Partnerships:  Family limited partnerships have grown greatly in popularity during the past decade.

Undivided Interests In Property:  It is possible to give an undivided interest in property to a charity.

Property Value Discounts

There are several types of gifts in which a donor may give less than the entire value of an asset or business entity. If the gift is publicly traded stock - such as 100 shares of IBM - then the deduction is permitted at fair market value. However, for other types of properties, such as gifts of a family C Corporation, a limited liability company, a family limited partnership or fractional interests in real estate, there may be a discount in value. For gift tax purposes, this discount is desired, but for charitable deduction purposes, a discount will reduce income tax savings.

Business Entities

A C corporation files its own tax return and is a separate business entity. Most C corporations held by families do not pay dividends. A minority shareholder may receive no dividends and no salary as an employee and has no control over the company. The value is reduced even more if the minority interest is in nonvoting stock. Therefore, the stock value is lower due to these adverse factors. Discounts for family-owned C corporation stock gifts have been recognized due to nonmarketability, minority interest and lack of control with nonvoting stock.

Subchapter S Corporations

Subchapter S corporations allow gains, losses, income and deductions to flow through to the shareholders. There is thus one level of taxation, rather than the two potential levels as is true for a C corporation. Gifts of Subchapter S stock may also be subject to discounts for lack of marketability and minority interests.

Limited Liability Companies

Limited Liability Companies (LLCs) are in many respects viewed as superior to the S corporation. The LLC was initially created by state statutes, but is recognized under federal law as a partnership entity. The main benefit of the LLC is liability protection for the LLC members. This is usually true even if the members are involved in management of the LLC. Since the LLC is similar to a partnership for federal tax purposes, the entity provides the flexibility of a partnership structure and the liability protection of a corporation. However, gifts of LLC units are potentially subject to the same discounts as partnership interest gifts.

Family Limited Partnerships

Family limited partnerships (FLPs) have grown greatly in popularity during the past decade. The family limited partnership typically has a 1% general partner and 99% limited partnership interests. The limited partnership interests are frequently transferred by gift to family members. Extensive estate litigation has resulted in discounts ranging from 15% to 60% on the value of the gifted partnership interests.

However, when the limited partnership interests are transferred to a charity, the discounts will also apply. The discounts typically reflect lack of marketability and minority interest.

Undivided Interests in Property

It is possible to give an undivided interest in property to a charity. If a charity receives a portion of the property, there may be an additional valuation discount. It is difficult to sell undivided interests on the open market. Individuals who acquire real estate nearly always desire to acquire all of the property interests. Thus, a gift of an undivided interest could result in a valuation discount for lack of marketability. Rev. Rul.87-37.

Private Letter Rulings

FSA 200143004 Service Prepares For Future Valuation Battles:   In FSA 200143004, the Service outlined in detail the current state of Treasury valuation positions. Virtually all of the arguments that could potentially increase valuations for gifts to family members were articulated and clarified.

TAM 200303010 No Valuation Discount Allowed For United States Series E Savings Bonds:   Taxpayer purchased Series E United States savings bonds. The value of the savings bonds consisted of the purchase price plus many years of accrued interest. Taxpayer recently died, and the bonds were distributed to Taxpayer's revocable trust. During the preparation of the estate tax return, Taxpayer's personal representative included the savings bonds in the gross estate. However, the personal representative reduced the overall value of the savings bonds when calculating the gross estate by claiming a lack of marketability discount.

Related Topics on Valuation Discounts

1.5.2  Form 8283 and Appraiser Qualifications:    Gifts of $250 or more to a charity require a receipt. The receipt issued by the charity must state that no goods or services have been transferred in exchange for the gift. Reg. 1.170A-13. If the donor receives a "quid pro quo" (i.e., something in return) from the charity, the deduction value is reduced by the value of the "quid pro quo." For "quid pro quo" gifts over $75, the charity must make a good faith estimate of the value of the goods or services transferred to the donor and disclose the estimate. Reg. 1.170A-13(f).

1.6.4  Property Gifts:    Various types of property require specific forms of substantiation. While the appraiser will document most substantiation requirements, it is useful to understand the general factors that apply to specific properties.

Rector:    In Estate of Concetta H. Rector et al. v. Commissioner; T.C. Memo. 2007-367; No. 20860-05 (13 Dec. 2007), the tax court added to the IRS victories on "bad facts" family limited partnerships. An IRS deficiency of $1,633,049 and Sec. 6662(a) accuracy-related penalty of $92,790 were sustained.

Anthony:    In Tincy Anthony v. United States; No. 07-30089 (4 Mar 2008), the decendent James Bankston was seriously injured in a vehicle accident in 1990. He settled the claim in 1991 and received three annuities payable for a minimum of fifteen years. The annuities were not assignable, and approximately ten years of payments remained at his death in 1996.

Negron:    In Carol Negron et al. v. United States; No. 07-4460 (28 Jan 2009), the 6th Circuit determined that Sec. 7520 tables are appropriate for use in valuing a stream of state lottery payments.

Litchfield:    In Estate of Marjorie deGreeff Litchfield et al. v. Commissioner; T.C. Memo. 2009-21; No. 15882-05 (29 Jan 2009), the tax court upheld the estate's discounts on built-in capital gains and lack of control, but reduced the claimed estate discounts for lack of marketability.

Jorgensen:    In Estate of Erma V. Jorgensen et al. v. Commissioner; T.C. Memo. 2009-66; No. 21936-06 (26 Mar 2009), the Tax Court determined that no valuation discounts would be permitted for a family limited partnership.

Shackleford:    In 1987, retired Air Force officer Thomas J. Shackleford won the $10 million California Lotto. He received three $508,000 payments and then passed away in 1990. California law at that time prohibited the transfer or alienation of the 17-year remaining annuity stream of payments.

Arbini:    In Gerald E. Arbini, et ux. v. Commissioner; T. C. Memo. 2001-141, No. 11324-98 (15 Jun 2001), Taxpayers had purchased volumes of Montana newspapers for $1,750. Taxpayers then sought to locate a charity to donate the newspapers and contacted the San Francisco Academy of Comic Art (SFACA). The SFACA determined that it would be willing to receive a contribution, but sought instead other newspapers.

Keller:    In Thomas Lane Keller et al. v. United States; No. 10-41311 (24 Sep 2012), the Fifth Circuit determined that a family limited partnership (FLP) had been funded, even though the documents to transfer $250 million in bonds, CDs and cash were not completed before the FLP owner passed away.
Beyer:    In Estate of Edward G. Beyer v. Commissioner; T.C. No. 2016-183; No. 10231-11 (8 Sep 2016), the Tax Court denied a discount for shares of public stock held in a family limited partnership.


Powell:    In Powell, Estate of Nancy H. et al. v. Commissioner; No. 24703-12; No. 24731-12; 148 T.C. No. 18 (18 May 2017), the Tax Court denied a family limited partnership (FLP) discount and a charitable lead annuity trust (CLAT) deduction.


Betsy Turner:    In Betsy T. Turner, Executrix of the Estate of Theodore Thompson, Deceased v. Commissioner; No. 03-3173 (1 Sep 2004), the family limited partnership discount collapsed.

Kimbell:    In David A. Kimbell, Sr., et. al. v. U. S.; No. 03-1059 (20 May 2004), the Fifth Circuit vacated and remanded the district court decision in favor of the IRS.

Smith:    In John D. Smith v. United States; No. 04-20194 (15 Nov 2004), the Fifth Circuit affirmed inclusion of the full fair market value of a qualified retirement plan for estate tax purposes.

Donovan:    In Estate of John R. Donovan, Jr. v. United States; No. 04-10594-DPW (26 Apr 2005), the Massachusetts District Court determined that it was appropriate to use the Sec. 7520 tables and methods to value a lottery annuity.

Korby:    In Estate of Austin Korby et al. v. Commissioner; T.C. Memo 2005-103; No. 18452-02 (10 May 2005), the IRS won another Tax Court victory and the assets of a family limited partnership were included at full fair market value in the estate.

Bigelow:    In Estate of Virginia A. Bigelow et al. v. Commissioner: T.C. Memo. 2005-65; No. 4066-02 (30 Mar 2005), the Tax Court determined that real estate within an FLP would be includable at fair market value. In effect, the FLP discounts were disallowed under Sec. 2036(a)(1).

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