Estate of Black, Samuel v. Commissioner -
133 T.C. No. 15

Passive Entity Has Bona Fide Business Purpose
In contrast to Estate of Malkin v. Commissioner, Estate of Black v. Commissioner shows that proper financial and legal estate tax planning can be invaluable to the tax payer, particularly in Mr. Black’s case. Because of proper planning and documentation, the court found that although the taxpayer’s FLP was a passive entity it was still created for legitimate and significant nontax reasons. The case is a clear victory for use of the FLP in estate tax planning.

Estate of Fortunato v. Commissioner -
T.C. Memo. 2010-105

Lengthy Trial Determines Ownership Status
In a trial lasting almost three weeks and involving more than 3500 pages of testimony and more than 400 exhibits, the Tax Court was asked to determine if a manager for a national group of warehouse companies – although well-compensated, a key member of management, and brother of the sole owner – owned an interest in any or all of the companies.

Estate of Jorgensen v. Commissioner -
T.C. Memo. 2009-66

Primer On Dooming an FLP
While a somewhat lengthy summary, the following provides estate planning practitioners a guide book on how to doom the use of an FLP as an effective planning tool. More specifically, the co-mingling of assets, non-existent record keeping, poor management by general partners, and failure of clients to understand the duties required of them undermined the taxpayer’s arguments in this case.

Estate of Litchfield v. Commissioner -
T.C. Memo. 2009-21

C To S BIG Tax Inconsistent With 5^th & 11^th CCA
The Tax Court calculated the discount for built-in capital gains taxes in a recently converted C corporation along with discounts for lack of control (“DLOC”) and lack of marketability (“DLOM”).

Estate of Malkin, Roger v. Commissioner -
T.C. Memo. 2009-212

Poor Planning and Execution Dooms Taxpayer
More attentive estate planning by the Decedent and his advisors could have radically changed the outcome of the ruling. 

Estate of Miller v. Commissioner -
T.C. Memo. 2009-119

Cash and Securities FLP Actively Managed
The court allowed the application of a discount to the assets transferred during 2002, i.e., before the Decedent knew she had major medical problems.  However, the Court did not allow the discount to the assets transferred shortly prior to the Decedent’s passing because it found no non-tax reason for the transfer.  Additionally, in the first transfer, the Decedent retained sufficient assets outside of the partnership to pay for living expenses but failed to do so in the second transfer.

Estate of Shurtz, Charlene v. Commissioner -
T.C. Memo. 2010-21

Proper Execution Yields Taxpayer Victory
As with Estate of Black v. Commissioner (133 T.C. No. 15), Estate of Shurtz shows that proper financial and legal planning can be invaluable to the taxpayer. Additionally, actively managing operations and properly administering the partnership contributed to a favorable ruling. The case is another clear victory for use of the FLP in estate planning.

Fisher v. United States of America -
105 AFTR 2d 2010-600

Gifts of Future Interests
The United States District Court Southern District of Indiana, Indianapolis Division, held that gifts of minority member interests in a LLC from a married couple to their children were gifts of future interests and therefore did not qualify for the annual gift tax exclusion. 

Garnett v. Commissioner -
132 T.C. No. 19

Farms, Ranches and Tenancies In Common
Petitioners were general partners in seven limited liability partnerships and non-managing members of two limited liability companies, all of which were engaged in some form of farming or ranching.  They also owned interests in two other businesses which they claimed were tenancies-in-common.  Although the Petitioners’ tax return only listed Mr. Garnett as a partner or member, neither the Court nor the IRS challenged the Petitioners’ contention that the interests were owned jointly.

Holman v. Commissioner -
105 AFTR 2d ¶ 2010-721 (8th Cir. April 7, 2010)

LP Provisions Invalid, But Not Indirect Gifts
While a defeat for taxpayers, the Eighth Circuit’s ruling in Holman is particularly notable for its vigorous and well-reasoned dissent.  The majority decision paves the way for future IRS challenges to FLP gift valuations, while the dissent provides a legal framework to overcome the majority decision.

Ludwick v. Commissioner -
T.C. Memo. 2010-104

Undivided Real Estate Transferred to QPRT
In its ruling, the Tax Court concluded the step transaction doctrine applied to the simultaneous gift and sale transfers of interests in the LLC.  Additionally, the Tax Court determined that discounts for lack of control and lack of marketability totaling 35.6 percent were applicable to the transferred 50 percent member interests.

Pierre v. Commissioner -
T.C. Memo. 2010-106

Single-Member LLC Discounts Appropriate
In its ruling, the Tax Court concluded the step transaction doctrine applied to the simultaneous gift and sale transfers of interests in the LLC.  Additionally, the Tax Court determined that discounts for lack of control and lack of marketability totaling 35.6 percent were applicable to the transferred 50 percent member interests.

Pierre v. Commissioner -
133 T.C. No. 2

Single-Member LLC Discounts Appropriate
This Tax Court Memorandum supplements Pierre v. Commissioner, 133 T.C. No. 2 (2009), in which the Tax Court determined that transferred interests in a single-member LLC (disregarded for federal income tax purposes) were transfers of membership interests rather than direct transfers of the marketable securities owned by the LLC.

Price v. Commissioner -
T.C. Memo. 2010-2

Annual Exclusion Gifts Challenged
The court considered whether the taxpayers’ gifts of limited partnership interests were properly characterized as present interests, thus qualifying for annual gift tax exclusions.

The Ringgold Telephone Company v.
Commissioner -
T.C. Memo. 2010-103

Post Valuation Date Transaction Relevant
The Tax Court determined whether a post valuation date sale of a partnership interest should be included as evidence of fair market value. 

Additionally, the Tax Court decided the taxpayer’s expert (who had a business valuation designation) was more credible and persuasive than the IRS’ expert (who was not accredited in business valuation and had never appraised a company in the telecommunications industry).

Estate of Jensen, Marie v. Commissioner -
T.C. No. 25681-08

Reversing its positions in Eisenberg, Estate of Dunn, and Estate of Jelke, the Tax Court allowed Jensen’s built-in, long term capital gains tax to be deducted dollar-for-dollar.

A less apparent fact associated with the case:  The taxpayer and IRS stipulated that the value of the 82-percent, controlling interest was subject to a 5% discount for lack of marketability from its pro rata share of tangible net asset value.

Cezar v. Commissioner - T.C. Memo 20120-173

The court’s ruling in Cezar demonstrates the importance of accurate record keeping and professional tax advice, both for corporations and individuals.  Tax practitioners can use the ruling as a marketing tool for small business owners who believe they can or should do it themselves.

Estate of Stewart, Margot v. United States -
2nd CCA 07-5370-ag

In a split decision associated with an alleged IRC § 2036(a)(1) issue, the Second Circuit concluded that an implied agreement between mother and son prevented the mother from enjoying the entire economic benefit associated with her gift of a 49-percent undivided interest.  More specifically, the majority ruled that IRC § 2036(a)(1) compliance is not an “all-or-nothing matter.”  In doing so, it relied on prior court rulings  which considered the following factors:
             • Continued exclusive possession by the donor, and
             • Withholding of possession from the donee.

Judge Livingston’s vigorous dissent is also noteworthy.  He fears the majority’s decision will allow cohabitating family members to engage in sham transactions for tax avoidance purposes.

Whitehouse v. Commissioner - USTC No. 0960085

While this appeal is centered on the value of a real estate facade easement, it presents issues that are applicable to other appraisal professions, too:
            • After considering his extensive real estate appraisal experience, the appeals court upheld the Tax Court’s ruling that the IRS’ expert was qualified to appraise the subject interest even though the taxpayer asserted he lacked significant experience valuing facade easements.
            • Strict compliance with the Uniform Standards of Professional Appraisal Practice (“USPAP”) is not required for an appraisal to be admissible in court.  However, failure to comply with USPAP may determine the relevant weight the report will be given.
            • On remand, the Tax Court will be required to consider a “reasonable and probable” future event that likely will impact the fair market value of the easement.

Holdner v. Commissioner - T.C. Memo 2010-175

Disproportionate allocation of income and expense items is permitted if 1) written agreements exist to explain the allocation and 2) income and expense items are allocated in proportion to the ownership interest owned.  Because the business in Holdner lacked a written partnership agreement, the Tax Court found that disproportionate allocation was impermissible and the accountant (who also was one of the two partners) was negligent by allowing such allocations.

Valuation of Minority Interests in Pass-Through-Tax Entities

Comparing Three Payout Assumptions’ Impact On Values of S Versus C Corps

The Simplified Treharne Model

White paper submitted to Treasury Dept. by S Corporation Association