Tax Court Rejects IRS Valuation Theory Aimed at Reducing Nonvoting Interest Discounts

In a recent Tax Court Memorandum decision, the taxpayer undertook two inter vivos gifting transactions – one to a GRAT, and one to an irrevocable trust. The latter was a part sale/part gift transaction. The transferred items were LLCs holding securities, limited partnership interests, and promissory notes. The taxpayer’s transferred interests were 99.8% nonvoting class B member interests, with 0.2% of the member interests being voting class A interests retained by a management entity owned and controlled by the taxpayer’s daughter.

Traditional appraisal methodologies were applied to yield lack of control discounts in the 13-14% range, and lack of marketability discounts at 25%.

Rather than engage in a direct attack on these discounts, the IRS’ primary approach was . . .

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