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Dell Appraisal Spawns a Multitude of Valuation Approaches

February 2017 | Issue 84 Introduction A Delaware Chancery appraisal case involving computer company Dell Inc. gave rise to a multitude of valuation measurements.  It is instructive to see how the court sorted through them in coming up with its final appraisal conclusion.  The case is In re Appraisal of Dell Inc., 2016 Del. Ch. LEXIS […] More...

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...

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Is the Holman FLP Valuation Decision a Win for the IRS?

June, 2008 | Issue 27

Introduction

The U. S. Tax Court, in its recent decision, Holman v. Commissioner, 130 T. C. No. 12 (May 27, 2008), may have given the IRS a new weapon to use in its long-running campaign to dilute the effectiveness of the family limited partnership as an estate planning tool.

The Facts (in brief)

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. §2703 (a) (2).

The Court’s Position on Transfer Restrictions

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

The 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 partnerships assets (the market value of the 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 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%. The court agreed with the 12.5% proposed by the IRS expert. A 12.5% lack of marketability discount is considerably below the levels normally found in FLP valuations. Its use here can be attributed to the requirement that the appraiser ignore the transferability restrictions in the partnership agreement. If this becomes the new FLP valuation reality, the IRS can put the Holman case in the win column.