GIFT TAX VALUATION
In gift tax situations, the value of the gift is what the donee receives. A donor can control both type and quantity of gifted items so as to generate interests which are valued on a noncontrolling nonliquid basis. As a result, much estate planning involves structuring entities into controlling and noncontrolling units or shares. Then, the controlling units or shares are removed from the donor’s estate usually through gifting. In that case, the donor can have a very large interest and still be valued on a noncontrolling nonliquid basis [usually with significant discounting (hence the frequent use of Delaware entities)]. It has not been unusual to have a 90+% interest being valued on such a basis. The IRS’ response to these plans has been to assert aggregation of the interests. This attempt has met with very limited success. The following case shows that the IRS tried a new tactic to defeat these plans.
In Pierson M. Grieve vs IRS, TC Memo 2020-28 (March 2, 2020), the donor owned 99.8% noncontrolling nonliquid interests (Class B) in two Delaware LLC entities which had investments in financial assets. They were noncontrolling because the Class B interests could not vote or participate in any proceedings. The controlling interests (Class A) were held by his daughter who had lifetime appointment as manager. She could be removed only for cause and then she had the right to designate her successor. Transfers were allowed only with the consent of the Class A units. The Class B interests were then transferred to a GRAT.
The donor had the Class B interests appraised and the IRS did an appraisal (a lengthy discussion of the appraisal process is provided in the opinion). The donor’s appraiser correctly appraised the units on a noncontrolling nonliquid basis with what appear to be appropriate levels of adjustment for lack of control and lack of marketability. The donor’s report also appears to have been detailed and self contained which is important in dealing with the IRS and/or the Tax Court.
The IRS, however, could not assert aggregation as the Class A and Class B units were owned by different parties. The interesting thing about this case is that the IRS argued that any potential buyer of the Class B units would first buy the Class A units for a premium (thus a roundabout way to get aggregation) and then proceeded to value the Class B units on a controlling basis. I have not seen this approach tried before and apparently neither had the Court. The outcome was that the Court threw out the IRS’ appraisal because, among other things, it was based on rampant speculation. With the donor’s report as the only one left and appearing reasonable, the donor’s position prevailed.
The IRS was not successful on this end run attempt to get aggregation. However, it is necessary to be always vigilant. If you have any questions, please do not hesitate to contact us.
