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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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Multi-Level Discounts Allowed in Gift Tax Valuation

May, 2008 | Issue 26

Introduction

In a recent Tax Court gift tax valuation decision, the court (Swift) permitted the taxpayer to apply a 30% valuation discount for lack of control and marketability to a partnership interest held within a family limited partnership, and a successive 17.47% discount for lack of control and 22% discount for lack of marketability to gifted limited partnership interests in the FLP. The case is Astleford v. Commissioner, T. C. Memo. 2008-128 (May 5, 2008).

The Facts (simplified)

Petitioner, Jane Astleford, owned a 50% general partnership in Pine Bend Development Co. (“Pine Bend”), a general partnership owning primarily real estate in Minnesota. In August 1996, Ms. Astleford formed Astleford Family Limited Partnership (“AFLP”), a Minnesota limited partnership, to facilitate ownership and management of various real estate and partnership interests. In December 1997, petitioner contributed her interest in Pine Bend and 14 other real estate properties to AFLP. Thereafter, she gifted 30% LP interests in AFLP to each of her three children, leaving herself with a 10% GP interest. She valued these gifts at $3,955,000, in aggregate, with a gift tax payable of $2,006,000. The IRS audited the return and determined a gift value of $10,937,000 and a gift tax liability of $3,997,000.

The Parties’ Positions

The largest part of the disagreement between taxpayer and IRS stemmed from a difference of opinion about the proper size and use of valuation discounts for lack of control and lack of marketability. Taxpayer’s expert applied a 40% discount for lack of control and lack of marketability (combined) to the net asset value of Pine Bend. He then applied a 40% discount for lack of control and a 15% discount for lack of marketability to the LP interests in AFLP.

The IRS argued that there should be no discount applied to the value of the Pine Bend interest because the Pine Belt interest was simply an asset of AFLP and that discounts should only be applied at the AFLP level. As far as the AFLP discounts were concerned, the IRS expert argued for a lack of control discount of 8.34% and a lack of marketability discount of 21.23%.

The taxpayer’s expert relied primarily on data from sales of registered real estate limited partnership interests (“RELPs”) in developing his discount data. The IRS used primarily trading data of real estate investment trusts (REITs”).

The Court’s Position

The court declined to choose between REIT or RELP data, noting that courts have accepted expert valuations using both kinds of data.

On the question of whether it was appropriate to use two levels of valuation discounts, one level to value Pine Bend and one to value AFLP, the court pointed out that the court and the IRS have done so in the past where a taxpayer held a minority interest in an entity that in turn had a minority interest in another entity. Multiple discounts to tiered entities have been rejected, however, when the lower level interest constituted a significant portion of the parent entity’s assets, or when the lower level interest was the parent entity’s principal operating subsidiary.

The court concluded on this issue as follows; “The 50% Pine Bend interest constituted less than 16 percent of AFLP’s NAV and was only 1 of 15 real estate investments … held by AFLP, and lack of control and lack of marketability discounts at both the Pine Bend level and the AFLP parent level are appropriate.”

In summary, the court applied a 30% combined discount for lack of control and lack of marketability to the Pine Bend interest, and then applied successive discounts of 17.47% for lack of control and 22% for lack of marketability to the gifted interests in AFLP.