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Do Attached Strings Affect the Value of a Gift?

October 2015 | Issue 82 Steinberg v. Commissioner, 145 T.C. No. 7 (Sept. 16, 2015) explores how a contingent liability accepted by a donee can impact the value of a gift for gift tax purposes. Introduction In 2007, Petitioner Jean Steinberg, age 89, entered into a net gift agreement under which she gave her four […] More...

Dodgy Fairness Opinion Earns Financial Advisor a Trip to the Woodshed

July 2015 | Issue 81 Vice Chancellor Laster of the Delaware Court of Chancery was underwhelmed, to say the least, by the quality of the fairness analysis put forward by the Conflicts Committee and its Financial Advisor in connection with the approval of the pricing of a major financial transaction between two related public companies. […] More...

Valuation Discounts Still in IRS Cross Hairs

June 2015 | Issue 80 Background A very popular and efficient estate and gift planning strategy is to reduce the value of estate assets by transferring such assets into a private, family-controlled entity such as a limited partnership or limited liability company. This type of entity is often referred to as a “family limited partnership” […] More...

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Family LLC Half-Interest Wins a 35% Valuation Discount

June 2010 | Issue 47

The U. S. Tax Court, in a recent supplemental opinion, Pierre v. Commissioner, T. C. Memo. 2010-106 (May 13, 2010), concurred with an overall 35.6% valuation discount for a 50% interest in a family LLC. The discount was applied for the purpose of determining gift tax and generation-skipping transfer tax.  The Court had bifurcated the case because it involved a number of issues in addition to the valuation issue.  The valuation issue was dealt with in the supplemental opinion.

Establishment of Pierre LLC

Suzanne Pierre organized the single-member Pierre LLC on July 13, 2000. She funded it with $4.25 million in cash and marketable securities.  She then created a trust for her son, Jacques and another for her granddaughter, Kati.

Twelve days after funding it, Petitioner transferred her entire interest in Pierre LLC to the two trusts.  Each trust received a 50% interest in Pierre LLC.  An appraiser retained by the Taxpayer performed a valuation of Pierre LLC.  He discounted the value of Pierre LLC’s $4.25 million of cash and marketable securities by 10% for lack of control and by 30% for lack of marketability, producing an overall cumulative discount of 36.55%.  A portion of each transfer, an amount up to the available credit amount and GST exemption, was characterized as a gift. The balance, $1.1 million for each trust, was treated  as a sale in exchange for a secured promissory note.

Operation of Pierre LLC

Suzanne Pierre named herself a sole manager of Pierre LLC at its formation, and maintained control until she appointed her estate attorney as her successor.  Neither Jacque nor Kati was involved in the management of the LLC.

The Step Transaction Issue

The Petitioner argued that each of the four transfers of Pierre LLC interests (the two gifts and the two sales) had independent business purposes.  Respondent argued that Petitioner intended to transfer a 50% interest to each trust, and that the gift and the sale transactions should be collapsed and treated as disguised gifts.  The Court agreed with Respondent.  The valuation issue therefore became one of determining the value of a 50% interest in Pierre LLC, rather than that of a minority interest.

The Valuation

The parties agreed that a willing buyer would presumably pay less for the Pierre LLC interests than for an outright purchase of its freely transferable cash and securities.  This reduction in value is normally made up of two discounts, a discount for lack of control (also known as a minority discount) and a discount for lack of marketability.

The appraiser for the Petitioner had originally applied a 10% discount for lack of control, assuming that each of the four interests in the LLC was a minority interest.  Respondent argued that Petitioner’s expert should have reviewed the rights and restrictions related to the two 50% blocks gifted to the trusts, rather than to the minority interests.  The Court agreed, and the Petitioner’s expert admitted that the lack of control discount for a 50% interest would be modestly lower than that of a minority interest, perhaps as low as 8%.

In addition to a discount for lack of control, Petitioner had advocated a 30% discount for lack of marketability.  Respondent did not present any expert testimony concerning value, and did not argue that such a discount was inappropriate.  Accordingly, the Court found that the 30% marketability discount was “appropriate for these facts,” awarding an overall discount of 35.6% (1-(.92x.7)).