Tax Court Rules on Side of Taxpayer of Family Limited Partnership in Precedential Gift Tax Case

In a decision by U.S. Tax Court reached in early March, the taxpayer was deemed victorious when it came to the valuation of nonvoting interests held by a family limited partnership and gifted to various estate planning tools. Grieve v. Commissioner, T.C. Memo. 2020-28 (March 2, 2020), is a precedential case regarding the gift tax value of 99.8% nonvoting interests in LLCs comprised predominantly of marketable assets. In the case, the Tax Court rejected the IRS valuation approach, which was based on the notion that a willing buyer of nonvoting shares would attempt to additionally purchase the voting shares, instead confirming the taxpayer’s valuation, which utilized the market approach and included discounts for lack of control and lack of marketability in determining the fair market value for gift tax purposes.

The facts of the case: Pierson M. Grieve (the “Taxpayer”) established the Grieve Family Limited Partnership to manage his wealth sometime around 1990 with Pierson M. Grieve Management Corp. (“PMG”) as general partner. Taxpayer’s daughter Margaret, who helped Taxpayer manage his wealth, purchased PMG from Taxpayer in 2008 and became its president. PMG then owned the Class A voting shares of two LLCs created in 2012 and 2013, with ownership interests making up 0.2% of each LLC. The remaining 99.8% of each LLC was comprised of Class B nonvoting shares, the shares at issue in this case. These shares were owned either in a revocable trust or outright and, in 2013, were gifted to a two-year GRAT in one instance and to an irrevocable trust in exchange for a single-life private annuity in the other. The gifts were listed on Taxpayer’s 2013 gift tax return based on appraisal reports using a cost approach method with the fair market values being adjusted by applying lack of control and lack of marketability discounts to each LLC. The IRS issued a notice of deficiency, significantly increasing the fair market values of the LLC interests. This case centers on the Tax Court’s determination of an appropriate valuation method.

At trial, Taxpayer provided additional valuation reports, including well-researched and well-reasoned reports using the market approach and income approach methods, and employed previous rulings (see Mandelbaum v. Commissioner, T.C. Memo. 1995-255, aff’d, 91 F.3d 124 (3d Cir. 1996) in its argument of how fair market value should be determined. The IRS took a vastly different approach and pushed for a fair market value based on the premise that a prospective buyer would try to purchase the Class A voting shares of each LLC, an approach that effectively negated any discounts for lack of control and lack of marketability.

Tax Court determined that the argument of the IRS was ineffective, as it was not based on data or evidence, but supported by an additional step, the requirement of the prospective buyer to attempt to purchase the voting shares in addition to the nonvoting. By refusing to accept the “imaginary scenarios” as required by the IRS, Tax Court accepted the market approach as outlined by Taxpayer.

The decision not only accepted the values as reported on the gift tax return, but also upheld the Tax Court’s acceptance of the inclusion of lack of control and lack of marketability discounts as they apply to the determination of fair market value for gifting purposes. The case will undoubtedly be cited in the future to reaffirm the fair market value of gifts from family limited partnerships to various estate planning vehicles.

To learn more about family limited partnerships, gifts or other estate planning strategies, contact us.

You’ve heard our thoughts… We’d like to hear yours

The Schneider Downs Our Thoughts On blog exists to create a dialogue on issues that are important to organizations and individuals. While we enjoy sharing our ideas and insights, we’re especially interested in what you may have to say. If you have a question or a comment about this article – or any article from the Our Thoughts On blog – we hope you’ll share it with us. After all, a dialogue is an exchange of ideas, and we’d like to hear from you. Email us at contactSD@schneiderdowns.com.

Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.

© 2020 Schneider Downs. All rights-reserved. All content on this site is property of Schneider Downs unless otherwise noted and should not be used without written permission.

our thoughts on

What to Expect During a Sale Transaction
Coronavirus, Tax BY Jacob Clark
Ohio Unemployment Benefits for Self-Employed and 1099-Misc Filers
Individual Tax Planning Under COVID-19
IRS Announces 2019 Marginal Well Credit
Cash Flow and Liquidity Planning Opportunities
Are You Prepared for the Next Stage of Your Business?

Register to receive our weekly newsletter with our most recent columns and insights.

Have a question? Ask us!

We’d love to hear from you. Drop us a note, and we’ll respond to you as quickly as possible.

Ask us

contact us

Map of Pittsburgh Office
Pittsburgh

One PPG Place, Suite 1700
Pittsburgh, PA 15222

contactsd@schneiderdowns.com
p:412.261.3644     f:412.261.4876

Map of Columbus Office
Columbus

65 East State Street, Suite 2000
Columbus, OH 43215

contactsd@schneiderdowns.com
p:614.621.4060     f:614.621.4062

Map of Washington Office
Washington, D.C.

1660 International Drive, Suite 600
McLean, VA 22102