Grieve and FLP Discounts
March 5, 2020 - News
The use of family limited partnerships (“FLPs”) to make discounted gifts has diminished somewhat since the increase in the estate tax freebie, which is $11,580,000 for decedents dying in 2020 (and indexed for inflation). However, for wealthier clients and for those subject to state inheritance taxes that kick-in for lesser estates, gifts of FLP interests are still a very useful tool.
In the last couple of years, the IRS has had some success in eliminating discounts on death with respect to FLP interests held by a decedent. However, earlier this week the IRS was handed a resounding defeat in Grieve v. Commissioner, TC Memo 2020-28 (Mar. 2, 2020), in its attempt to eliminate valuation discounts on gifts of FLP interests.
In a nutshell, the taxpayer reported valuation discounts of approximately 35% on gifts of 99.8% of the FLP interests in partnerships holding primarily cash and marketable securities. The taxpayer’s daughter held the managing .2% interest. Instead of challenging the magnitude of the discount, the IRS asserted that a willing seller would attempt to acquire the .2% managing interest, albeit at a premium, in order to then be able to transfer all the interests without any discount. Consequently, the IRS valued the gift by reference to underlying asset value, reducing the amount of the gift by the small premium with respect to the .2% managing interest (resulting in an overall discount of approximately 1.5%). The Tax Court resoundingly rejected this approach, finding it not “reasonably probable” that a seller would be able to acquire the managing interest.