FLP Valuation in the U.S. Tax Court

Will Frazier, Managing Director, Valuation Services, sat down with Wealth Management’s Trust & Estates magazine to discuss the divination of discounts for lack of marketability.

  • “FLP Valuation in the U.S. Tax Court” is an article I published this month in Trusts & Estates. In focusing on the discount for lack of marketability, and, more particularly, the popular usage of restricted stock studies, it is apparent that the IRS sees the primary determining factor to be asset risk while the taxpayers’ experts’ arguments center primarily on the holding period. The Tax Court seems divided as to how it views the use of these studies.
  • In 1990 Congress enacted Chapter 14 (Special Valuation Rules Sections 2701 to 2704). The purpose was to rationalize and regulate the process of estate planning in a way that allowed the transfer of assets from one generation to the next but which limited the ability of taxpayers to utilize “value reducing” strategies such as those found in the estate freezes in the 1980s.
  • The primary culprit of these strategies in the eyes of the IRS was the valuation discount. In their belief, the special valuation rules of Chapter 14 would eliminate or greatly reduce the ability of taxpayers to use such discounts. But, the estate planning community quickly realized that, by using strategies such as family limited partnerships (FLPs), valuation discounts were very much alive and well.
  • The proliferation of FLPs in the 1990s brought about a host of challenges by the IRS. In the ten year period between 1999 and 2008, there were more than 30 U.S. Tax Court and Federal District Court cases involving FLPs—at least a dozen of them dealt with valuation issues in detail.
  • There was a quiet period of ten years but, in 2018, we began to see FLP valuation cases reappearing on court dockets. One interesting new development, as seen in the cases of Grieve v. Commissioner (2020) and Nelson v. Commissioner (2020), was the appearance of the Income Approach as a way to either determine valuation discounts, or, as is the case with the Nonmarketable Investment Company Evaluation (NICE) Method, to determine fair market value in a way that already includes the cost of illiquidity.
  • I hope you find the article interesting and of some use."
  • — Will Frazier, ASA

 

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