After a relative dearth of cases tackling valuation issues, a recent case out of Texas that reminds us of the dos and don’ts of estate planning.

October 30, 2018

The Tax Court issued a memo opinion on the Estate of Frank D. Streightoff v. Commissioner on October 24, 2018, ruling in favor of the IRS.

The issue at hand was whether the 88.99% partner interest held by the estate represented a limited partner interest or an assignee interest. The distinction, in this case, was an important one, as an 88.99% limited partner interest could remove and replace the general partner. Removal of the general partner would also cause the termination of the partnership. An assignee interest, however, would be unable to remove and replace the general partner or control any other aspect of the partnership’s operations and investments.

The estate’s representatives argued that the interest was an assignee interest due to the fact that the interest had been transferred to a revocable trust some three years earlier and the trust had never been admitted as a substitute limited partner. In addition, the interest never participated in any partner meetings or voted as a limited partner interest.

However, the Tax Court stated that the decedent transferred with the interest “all and singular the rights and appurtenances thereto in anywise belonging,” meaning all rights were transferred, including the right to vote. In addition, the Tax Court found that “there was no difference in substance between the transfer of a limited partner interest in Streightoff Investments and the transfer of an assignee interest in that limited partner interest.”

The partnership held about $8.2 million in marketable equity and fixed income securities. The estate’s valuation experts had been asked to value the interest as an assignee interest and applied discounts for lack of control and marketability of 13.4% and 27.5%, respectively. The IRS’ internal valuation analyst valued the interest as a limited partner interest. Acknowledging that the “amount of control in the subject shares is considerable,” the IRS engineer applied an 18% discount for lack of marketability.

Since the Tax Court ruled that the interest represented a limited partner interest and the IRS appraisal was the only evidence of value of a limited partner interest, the Tax Court adopted the IRS position and allowed an 18% overall discount. While no doubt disappointing to the taxpayer, it seems what we are left with is a Tax Court ruling that applies an 18% discount to an effectively controlling interest (including the ability to force a liquidation of the partnership) in a marketable securities partnership.

Oliver Warnke and Alan Harp of Stout testified on behalf of the estate.

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