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Future Expected Investment Strategy Determines Value of FLP Interest

January 2016 | Issue 83 The estate of Helen P. Richmond held a 23.44% interest in Pearson Holding Co. (“PHC”), a family investment company.  The estate valued this holding at $3,150,000, later adjusted to $5,046,000.  The IRS valued it at $7,330,000.  This difference of opinion was aired in US Tax Court in a case called Estate […] More...

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...

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IRS Valuation Win Upheld in Holman Appeal

May 2010 | Issue 45


The U.S. Court of Appeals for the Eighth Circuit, in a two-to-one decision, Holman v. Commissioner, No. 08-3774 (April 7, 2010) affirmed the judgment of the Tax Court in a 2008 case. In the earlier case, Holman v. Commissioner, 130 T. C. No. 12 (May 27, 2008), the Tax Court sided with the IRS in its view of how restrictions on the transfer of limited partnership interests should affect the value of LP interests for gift tax purposes..

The Background

The Holman Family, in 1999, set up a family limited partnership (FLP) to hold shares of Dell Computer Corporation. They made several gifts to their children of limited partnership interests in the FLP. In valuing the gifts for Federal gift tax purposes, they applied substantial valuation discounts for minority interest status and lack of marketability

The IRS Position on Transfer Restrictions

The Holman FLP partnership agreement had a number of provisions which restricted transfer of an LP interest in the FLP. These included a prohibition against transfer of an LP interest without the written consent of all partners, except for certain transfers within the family. The IRS argued that these restrictions on a limited partner’s right to transfer an LP interest should be disregarded for the purpose of valuing the interests for determining gift tax.  They made this argument pursuant to I.R.C. Sec. 2703 (a) (2).

The Tax Court’s Position on Transfer Restrictions

The Tax Court agreed with the IRS that the transfer restrictions in the partnership agreement should be disregarded for valuation purposes. The impact of this was that the appraisers were forced to analyze the partnership as if buyers and sellers were not subject to transfer restrictions. This hypothetical assumption reduced the discounts for lack of marketability, and therefore increased the fair market value of the LP interests.

The Tax Court’s Position on Valuation Discounts

Both sides agreed that the proper approach to valuing the LP interest was to begin with the net asset value of the partnership assets (the market value of Dell stock) and then reduce the net asset value with a discount for lack of control and a discount for lack of marketability. Both sides presented discount for lack of control data based on the discounts exhibited by the market prices of closed-end investment companies (CEICs). The taxpayers’ expert proposed a lack of control discount for the principal gift of 14.4%. The government’s expert proposed a discount of 11.2%. The Tax Court ended up at 11.32%.

There was a greater range of disagreement about the discount for lack of marketability. Taxpayers’ expert proposed 35%, while the IRS’s expert proposed only 12.5%. A major reason for the difference was the parties’ contrasting view on the proper treatment of the transfer restrictions in the partnership agreement. Taxpayers thought they should be taken into account while the IRS thought they should be ignored.

The Tax Court came down on the side of the IRS, ending up with a discount for lack of marketability of 12.5%.

The Decision is Appealed

The Taxpayers appealed the Tax Court decision to the Eighth Circuit Court of Appeals. This court supported the Tax Court’s view on Sec. 2703, stating that “there is little doubt that the restrictions included in the Holmans’ limited partnership agreement were not a bona fide business arrangement, but rather, were predominantly for purposes of estate planning, tax reduction, wealth transference, protection against dissipation by the children, and education for the children.”

Based on this conclusion, the Court took the transfer restrictions off the table in determining the discount for lack of marketability, thus supporting the valuation approach of the IRS. Following a further review of the valuation analysis for clear error, and finding none, the Appeals Court affirmed the judgment of the Tax Court.