The Tax Court ruled that a minority interest discount and lack of marketability discount applied to the valuation of a family limited partnership (FLP) interest. In the case, the decedent, daughter, and son-in law formed an FLP and a limited liability company (LLC). When the decedent died, he owned a majority interest in the FLP and a one-third interest in the LLC. The estate hired a valuation expert to appraise the estate and FLP. The expert applied a 53% discount based on several factors such as minority interest and lack of marketability. The IRS disputed the large discounts and assessed a deficiency against the estate of a net discount of 25%. In usual fashion, the Tax Court ruled a net discount of 35.5% was appropriate, reflecting minority shareholder status and lack of marketability.
The Tax Court is filled with truly intelligent and well educated men of tax law. Yet, it never ceases to amaze me how many of these cases end in a result which is essentially the mathematical mean between the estate’s discount and the IRS’s discount plus or minus a few points.
FLP vehicles are appropriate for estate planning in limited situations; however, most situations are such in nature that other planning instruments lead to better results. Business sales, for one, to children lead to fool-proof results most of the time. In FLP planning, the value and discounts are subject to challenge and audit which are usually avoided in sales to children or heirs.
By: Basi & Basi at the Center for Financial, Legal and Tax Planning for Transworld M&A Advisors