When Mr. Dailey died in 1982, he left his wife Elma marketable securities including shares of Exxon Corp. and AT&T. In 1992, Elma executed a will, a revocable living trust, and a family limited partnership (FLP) agreement. The will directed that her residuary estate would pass to the trust, which would distribute its corpus to her son Robert outright.
Elma took a 1% general interest and a 98% limited partnership interest in the FLP and Robert received a 1% limited partnership interest. She later contributed her stocks to the FLP, while Robert did not contribute any assets. After the FLP’s certificate of limited partnership was filed with the state, Elma transferred her 98% limited interest to Robert, his wife, and the trust, according to the following distribution:
- Robert 45%
- Robert’s wife 15%
- the Trust 38%
In 1995, Elma appointed Robert as the LLC managing partner. He also replaced her as the trustee of the trust and the FLP general partner. Elma’s 1% general partnership interest became a limited one.
After Elma’s death in 1997, her attorney filed a gift tax return for the gifts of FLP interests to Robert and his wife, reflecting a 40% discount for lack of marketability, control, and liquidity and taking into account the stocks’ significant unrealized capital gains. The IRS issued notices of deficiency for gift and estate taxes in 2000.
The Tax Court listened to the testimony of both parties’ experts. The estate’s expert cited published data and arrived at a discount of 40%. The government’s witness relied in part on an unpublished study that he had co-authored, and he admitted at trial that he could not recall reviewing the FLP agreement and he had not reviewed the documents to determine if the FLP had any capital gains. The Tax Court found the testimony of the government’s witness to be “contradictory, unsupported by the data, and inapplicable to the facts.”
The Court relied heavily on the testimony of the estate’s witness and concluded that an aggregate marketability and minority discount of 40% was warranted.
Applicable Federal Rates for January 2017:
- Short-Term (£ 3 years) Annual: 3.58%; Semiannual: 3.55%; Quarterly: 3.53%; Monthly; 3.52%
- Mid-Term (> 3 yrs and £ 9 yrs) Annual: 4.59%; Semiannual: 4.54%; Quarterly4.51%; Monthly4.50%
- Long-Term (> 9 years) Annual: 5.39%; Semiannual: 5.32%; Quarterly5.29%; Monthly5.26%
- Section 7520 Rate for Valuation Purposes: 5.6%
It will be too too bad to see this sweet deal go away. Minimizing taxes is a never ending game, though, and so it will have to continue being played. Amen.