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We have talked in prior letters about the tax valuation of ownership interest in closely held business entities
and especially FLP’s. We will use the accepted definition of an FLP as a Family Limited Partnership or
Limited Liability Company (LLC). The FLP has become increasingly popular as a means of socializing
management of investment assets, real estate, closely held family businesses, and marketable securities,
by transferring these assets to the FLP.
While there are many non-tax reasons for such action, the popularity of FLP is probably closely linked to the
favorable discounts that have been achieved by taxpayers in published Court decisions.
As these Court decisions keep coming out, indicating the popularity of the FLP mechanism and the
continuing controversies between taxpayers and the IRS in these instances.
FACTUAL DIFFERENCES
Each valuation case is a unique combination of many factors:
1) Time between implementation of the plan and the major taxable event (usually death).
2) Following housekeeping and business procedures.
3) Allocation of ownership interest between voting and non-voting categories.
4) Existence of Buy-Sell Agreements or sales transactions closely related in time to the major taxable event.
5) Thoroughness and professionalism of appraisal evidence>
As we indicated in prior newsletters, the IRS is not rolling over and playing dead on the issue of valuation
discounts. The thirty to forty-five percent discounts allowed in various tax court cases have come at the price of
litigation, fees of attorneys, accountants and appraisers. Therefore, the published cases tend to involve large
amounts of money, many millions of dollars in taxes and value.
How cases are settled before trial, and at what level of discounts would depend of the facts of each case, the
amounts of discounts claimed, the quality of the taxpayer’s appraisal evidence, and, of course, all related
facts and circumstances surrounding each set of events. There is also reported to be considerable disparity
in treatment between various IRS offices in different parts of the country.
Some recent cases and administrative rulings are of interest (in each case, of course, they are fact specific).
VOTING AND NON-VOTING INTERESTS
How much influence on the valuation is the division between voting and non-voting interests. Usually,
taxpayers argue for larger valuation discounts for non-voting interests. The recent case of The Estate of
Schwan, TC Memo 2001-174 was just the opposite: The taxpayer was arguing that non-voting shares should
be valued the same as voting shares because the decedent owned two-thirds of the voting stock in the
Schwan Company (you see Schwan trucks everywhere).
A similar issue was presented in the Estate of Simplot, 112 TC 130, which involved minority blocks of voting
and non-voting stock in the Simplot Company (McDonald’s french fries). In that case, the assignment by the
Tax Court of a huge valuation premium to the voting stock was rejected by the Appeals Court (249 F 3rd 191
[2001]).
These cases involving big names in the food industry and many tens of millions in valuation and taxes,
demonstrate the complexities of these issues and shifting sands of Court opinion.
TRUSTS
Division of FLP interest between husband and wife is a common practice to establish minority discounts. If
there is zero tax on the first death, the issue may not present itself until the second death. In a recent Field
Service Advice (FSA 2001 19013), the IRS ruled that the specific language of the trusts utilized in the estate
plan meant that the stock interests were aggravated at the second death, losing any benefit of minority status
for valuation purposes. Therefore, even a small error in drafting can have drastic tax affects.
CONCLUSION
The IRS has repeated sought, during the Clinton Administration, to have valuation discounts legislatively
abolished. These efforts failed in a Republican Congress. What will come out in our current circumstances,
with three more years of a Republican Administration, and rising deficits, is difficult to predict. It is probable
that abolition will not get through Congress, but where tax compromises are involved, anything can happen.
We continue to utilize the FLP to estate planning in larger estates, but it is an area of complexity as well as
opportunity.
©BRANDT, FISHER, ALWARD & ROY, P.C.
This newsletter is provided for informational purposes and should not be acted upon without professional
advice.
| WEALTH CONSERVATION: PROFESSIONAL ALERT Brandt, Fisher, Alward & Roy, P.C. |
| December 2001 VALUATION MAZE by James R. Modrall III, J.D., C.P.A. |
| If you would like to receive future editions of the monthly Wealth Conservation Newsletter directly to your e-mail account, please e-mail our office using the following link: Estate Planning Newsletter |
| Brandt, Fisher, Alward & Roy, P.C. Attorneys at Law |