Swing vote attribute affects value of gifted minority interest.

• Author: Coplan, Robert B.

Reducing the value of a transferred interest in property, such as closely held stock or a partnership interest, makes already beneficial techniques such as grantor retained annuity trusts even more attractive. Thus, a critical element in intrafamily gift giving strategies is the availability of discounts for lack of control and marketability.

Since the issuance of Rev. Rul. 93-12, claiming minority interest discounts on gifts of noncontrolling interests to family members has been perceived by many as a technique that has the IRS's stamp of approval. But the Service has now taken the position that all minority interests are not created equal.

In Letter Ruling (TAM) 9436005, the IRS has ruled that valuation discounts otherwise available when a donor makes gifts of minority interests of stock to children must be adjusted to take into account the swing vote attributes of the gifted block. In the TAM, the donor gave three separate 30% blocks of closely held stock to each of three children, claiming a 25% discount for "minority interest and marketability" on each gift.

The ruling explains that the owner of any 30% block could join with the owner of any other 30% block and control the corporation. Thus, any one of these blocks, whether owned by someone related or unrelated to the family, could be critical in controlling the company--a fact that would be taken into account by a hypothetical willing buyer of any of the 30% blocks. The Service relied on Est. of Winkler, TC Memo 1989-232, in which the court acknowledged that the swing vote attribute affected the value of a decedent's 10% stock interest when 40% of the stock was held by the decedent's family and 50% was held by a different family.

The position being taken by the IRS does not really conflict with its position in Rev. Rul. 93-12, in which a donor simultaneously gave five 20% interests to his five children. This ruling is generally cite as holding that minority discounts are allowed for intrafamily gifts of minority interests. TAM...