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June 2017 | Issue 86 Background Constellis Group,  Inc. is a private security firm.  In December 2013, the Company formed an Employee Stock Ownership Plan (“ESOP”), which purchased 100% of Constellis’s voting stock.  Wilmington Trust NA was named Trustee of the ESOP.  Less than a year after the ESOP was created, the ESOP sold all […] More...


March 2017 | Issue 85 Introduction Richard and Steven Parker are brothers who ran a flower business in Scotch Plains, New Jersey.  Richard is the President of Parker Interior Plantscapes (“PIP”), which installs and services plants and flowers in commercial settings.  Steven is the President of Parker Wholesale Florists (“PWF”), which is a garden center.  […] More...

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...

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Taxpayer Wins 60% Gift Tax Valuation Discount

July, 2006 | Issue 5

A team of valuation experts helped Arthur Temple win a $7 million refund of Federal gift tax and interest payments. The case, Temple v. United States, 2006 U. S. Dist. LEXIS 16171 (March 10, 2006), revolved around a battle between Temple and the IRS over the appropriate valuation discounts to be applied in valuing four limited liability entities owned by members of the Temple family.

The Gifts
In 1997 and 1998, Mr. Temple and his wife gave to their children and grandchildren gifts totaling over $34 million, made up of their interests in four separate investment entities. The four entities were Ladera Land, Ltd. (“Ladera”), which owned a ranch in Texas, Boggy Slough West, LLC (“Boggy Slough”), which owned a vineyard in California, Temple Interests, L. P. (“Temple Interests”) and Temple Partners, L. P. (“Temple Partners”), the latter two of which owned stocks in publicly-traded companies.

The IRS audited the gift tax returns, increased the value of the gifts, and assessed additional gift tax. The Temples paid the assessments and filed for a refund. The parties ended up in US District Court for the Eastern District of Texas.

The Discount Arguments
The Taxpayer and the IRS were in general agreement as to the net asset values of each of the entities. The disagreement was over the size of the discounts to apply. The parties’ experts deployed various arguments supporting their opinions of the appropriate valuation discounts that should be used to reflect the lack of control and lack of marketability of these interests. The Taxpayer also argued that he was entitled to an additional discount owing to the built-in capital gains tax liability arising from the low tax basis of the properties in the entities.

The Results
In the case of the Landera interests, the Court settled on a total discount of 38%, reflecting lack of control and lack of marketability.

The Boggy Slough interest was the most interesting of the properties from a valuation standpoint. The Court ended up at a 60% valuation discount, larger even than what the Taxpayer had asked for. The reason was that Boggy Slough was a California LLC. California law permits partnership dissolution to take the form of a distribution of real property in kind. (Boggy Slough’s assets were primarily a tract of real property.) The Court concluded that the distribution of the real property would be in the form of undivided interests to the members as tenants in common.

The Taxpayer presented a real estate expert who testified that the Boggy Slough property could be partitioned no more than one time because of zoning limitations, topography, and the varying values of parts of the land in question. Boggy Slough could only be divided into two tracts because of local zoning provisions. The expert could not determine a partitioning approach, by either value or area, that would allow Boggy Slough to stay within the zoning restrictions. Because of these difficulties, the Court concluded that, by a preponderance of the evidence, the Boggy Slough interest should be subjected to a 60% discount.

The two Temple LPs that held marketable securities ended up being awarded overall discounts ranging from 15 to 21%, representing both lack of control and lack of marketability.

Built-in Capital Gains
The Taxpayer brought up the issue of built-in capital gains taxes with respect to all four of the entities, arguing that a prospective buyer would insist on an additional discount to reflect the low tax basis of the assets in the partnerships. The Court rejected this on the grounds that IRS Code Sec. 754 allows a general partner to elect to increase a buyer’s basis in partnership assets to equal the basis in the acquired partnership interest, thus sparing the buyer the built-in gain. The Court was confident that a hypothetical willing buyer and willing seller would resolve the Sec. 754 issue before completing the transaction, making a built-in capital gains discount inapplicable.

At the end of the day, the Taxpayer went home with a $7 million refund as a result of pursuing this claim. Not a bad outcome.