FLP valuation discounts approved.

• Author: Hills, Marvin D.
• Position: Family limited partnership

In Temple, ED TX, 3/10/06, a taxpayer claimed 58.75% valuation discounts for each of several very large gifts of interests in passthrough entities he gave to family members. The court ultimately allowed the discounts, which ranged from approximately 15% to 60% depending on the particular entity's assets and the size of the gift. Overall, the taxpayer transferred family limited partnership (FLP) and limited liability company (LLC) interests with a gross (undiscounted) value of over $34.9 million, with taxable gifts being assessed at just over $27 million (representing approximately a 22% average discount).

Facts

The taxpayer made the gifts at issue in 1997 and 1998. He created three FLPs and one LLC: Ladera Land was formed in 1992 to hold a South Texas ranch; Boggy Slough West, LLC was created in 1995 to purchase a Napa Valley, CA winery; and two identical Temple partnerships (one for each of the taxpayer's children) were formed in 1997 solely to hold marketable securities.

The taxpayer made relatively small gifts of one or both of the two real estate entities from 1992 to 1996, claiming a 40% discount for each gift. He did not consult an appraiser. For the larger gifts in 1997 and 1998, he hired an appraiser who concluded that the appropriate discount was 25% for lack of control, plus 45% for lack of marketability. When blended together, the taxpayer claimed a combined 58.75% minority/marketability discount for each gift on his 1997 and 1998 gift tax returns. The returns were audited by the IRS.

At trial, four expert witnesses presented valuation information to the district court judge. Three were hired by the taxpayer (including the person who prepared the original appraisal showing the 58% discount); the fourth was hired by the IRS.

The discounts ultimately applied by the court to the various gifts were determined in one of three ways depending on the particular partnership and the gift's size. In each case, the court rejected any additional discount for the potential, unrealized partnership capital gains. It cited Est. of Jones, 116 TC 121 (2001), to conclude a partnership (unlike a C corporation) can use Sec. 754 to increase its assets' basis to equal the basis in the acquired partnership interest.

Court's Analysis

Various discounts of 15% to 60% were determined.

Ladera Land: This FLP owned a South Texas ranch. According to the taxpayer's expert, the discount was 58.75%, based on information from Mergerstat Review, which shows control...