Valuation case update: Estate of Streightoff vs Commissioner

Demystifying Valuation, Economic Damages + Forensic Accounting

Streightoff, litigationIn the case of Estate of Streightoff vs Commissioner, the IRS argued that the interest to be valued in a family limited partnership (FLP) was a limited partner interest, not an assignee interest. The Tax Court agreed with the IRS noting characteristics of the property transferred and admission requirements of the FLP.

Case background

Streightoff Investments, L.P. was formed in Texas in October 2008. Frank Streightoff held an 88.99 percent limited partner interest in the entity at formation. The sole one percent general partner interest was held by Streightoff Management, LLC with Mr. Streightoff’s daughter as the Managing Member. On the date of formation, Mr. Streightoff transferred his entire 88.99 percent interest in the FLP to the Frank D. Streightoff Revocable Living Trust via an assignment of interest (AOI) agreement.

Mr. Streightoff died on May 6, 2011. The estate used the alternate valuation date of November 6, 2011 for the value of the assets. An appraisal was prepared for the valuation of the 88.99 percent owned in the trust as of November 6, 2011. The assets were comprised primarily of marketable securities. The estate’s representatives contended that the AOI agreement created an assignee interest in the decedent’s FLP interest. Therefore, the valuation prepared for the estate valued the 88.99 percent interest as an assignee interest with little to no voting rights. A lack of control discount of 13.4 percent was applied as well as a lack of marketability discount of 27.5 percent. The effective total blended discount applied to the value of the interest was 37.2 percent.

The IRS argued that the decedent transferred a limited partner interest. The IRS stated that although the AOI referred to the revocable trust as the assignee, the agreement also stated that the trust would be entitled to all the rights associated with the ownership of the decedent’s 88.99 percent limited partner interest. The AOI was signed by Mr. Streightoff’s daughter in her capacity as Managing Member of the General Partner of Streightoff Investments, L.P. The Tax Court noted that this met the requirement for the General Partner to approve of any transfers and admission as a substitute Limited Partner pursuant to the Partnership Agreement.

The Tax Court ruled in favor of the IRS and agreed that the interest transferred was a limited partner interest, not an assignee interest. Pursuant to the Partnership Agreement, a Limited Partner holding in excess of 75 percent of the limited partner interests could remove the General Partner and terminate the partnership. The IRS appraiser had not applied any lack of control discount to the value of the limited partner interest with which the Tax Court concurred.

Interestingly enough to note, the IRS appraiser did apply a discount for lack of marketability of 18 percent to the limited partner interest. Given the ability to terminate the partnership and liquidate the assets, presumably rather quickly given the holdings of marketable securities, the 18 percent discount may be somewhat generous.

Melissa E. Loughlin-Sines, CPA, CFE, CVA, CFF, ABV