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Tax Court Partially Upholds Discounts Taken in Valuing Business Interests for Estate Tax Purposes

The Tax Court has partially upheld the discounts applied in the valuation of two closely held companies for estate tax purposes.  In the case, when the decedent died she held a 43% interest and 23% interest in two closely held corporations.  The estate tax return claimed a 68% discount for the decedent’s interest in one company and a 65% discount for the other.  However, the IRS found that these discounts should have been closer to 30% and

and 23%.  The Court disagreed with the IRS, holding that the materials submitted by the estate supported the previously claimed discounts.  Overall, the Court found that the IRS’s expert did not take into consideration appreciation in some assets and the fact that the decedent had a smaller ownership interest in one company, providing less control.  But the Court did conclude that the estate discount for lack of marketability was too high.

Points of Interest

  • The device known as “The Family Limited Partnership” or FLP has been developed through case law and has survived scrutiny from the IRS.
  • The importance of the details of formation of the Limited Partnership should not be overlooked.
  • While discounts for lack of control and lack of marketability can be justified, extending and taking discounts without justification can be fatal to an otherwise well crafted valuation.

By: Basi & Basi at the Center for Financial, Legal and Tax Planning for Transworld M&A Advisors