QTIP and non-QTIP asset aggregation for estate tax valuation purposes rejected.

• Author: Barton, Peter C.
• Position: Qualified terminable interest property

In Estate of Mellinger, 112 TC No. 4 (1999), the Tax Court recently held that two minority interests in a corporation's common stock should not be aggregated to create a controlling interest for estate tax valuation purposes, even though the decedent owned 28% of the stock in a revocable trust and a qualified terminable interest property (QTIP) interest in another 28% block. The court rejected a control premium and instead allowed a 25% discount for lack of marketability as a minority interest for each stock block. Estate of Mellinger is a very important case, because it reduces estate taxes for decedents owning less than a controlling interest in family businesses.

Sec. 2031 provides that property specified in Secs. 2033-2044 is included in a decedent's gross estate at its fair market value (FMV) on the date of the decedent's death. Sec. 2033 includes all property to the extent of the decedent's interest in the property at death. Sec. 2038 includes revocable transfers made for less than FMV. Sec. 2044 includes property in which the decedent had a qualified life income interest and for which a marital deduction was allowed in the estate of the first spouse to die under Sec 2056(b)(7) (QTIP property).

Regs. Sec. 20.2031-1(b) defines FMV as the price a "willing buyer" would pay a "willing seller," both persons having reasonable knowledge of all the relevant facts and neither under compulsion to buy or sell. The willing buyer and willing seller are hypothetical persons; therefore, they do not necessarily have the same characteristics as an actual buyer and seller.

Prior cases have established that undivided fractional interests in property included in an estate have been valued at a discount to reflect lack of marketability and minority interests. Included are any undivided interests in real estate and noncontrolling interests in corporate stock. The IRS has opposed these discounts, arguing that a decedent's fractional interest should be aggregated with fractional interests owned by family members in the same property. The Service has based this position on the practical point that families are likely to cooperate and sell the fractional interests together rather than separately.

In Estate of Bright, 658 F2d 999 (5th Cir. 1981), the decedent owned a 55% control block of stock as community property with her husband. The Fifth Circuit held in an en banc decision that family attribution could not be applied in valuing the decedent's 27.5%...