There have been two recent tax case rulings revolving around valuations of entities for either estate or gift tax filing purposes that those involved in estate tax planning should be aware of. Here is the finding for the first case.
Grieve v Commissioner
What appears at first to be a straight-forward valuation of two entities for gift tax filing, took a bit of a bizarre turn when the IRS’ trial expert tried to apply unusual reasoning and methodology to the appraisals. In 2013, the taxpayer gifted a 99.8% membership interest in a limited liability company (LLC) to a grantor retained annuity trust (GRAT) and a 99.8% membership interest in a separate LLC to an irrevocable trust. Both 99.8% interests were of Class B nonvoting units with an entity owned solely by the taxpayer’s daughter owning the .2 percent interest in Class A voting units. All voting power was held by the Class A unit holder. The Class B unit holders could not participate in any of the entities’ decision making. Both LLCs held marketable securities, other investments and promissory notes.
The original appraisal prepared for the gift tax return determined discounts for lack of control of 13.4% for the first entity and 12.7% for the second entity. Both entities received a discount for lack of marketability of 25%.
The IRS appraiser took the position that a buyer of a 99.8% interest would try to maximize his/her economic interest by acquiring the additional .2% interest of Class A units. With the purchase of the controlling interest, the hypothetical buyer would gain control and therefore increase the value of the Class B interests by decreasing any discount for lack of control. The result of this position was a significantly higher value for each 99.8% Class B interest.
The Tax Court dismissed the IRS expert’s valuations finding multiple defects. The court found the calculations relied upon several additional actions which were not reasonably probable under the facts of the case. The court found the holder of the Class A units had no intent to sell. The court stated, “we are looking at the value of the class B units on the date of the gift and not the value of the class B units on the basis of subsequent events that…are not reasonably probable.”
The Tax Court adopted the original appraisal values determined for the gift tax return.
If you have questions, please contact us.
Melissa E. Loughlin-Sines, CPA, CFE, CVA, CFF, ABV