On September 24, 2021, Judge Alvin W. Thompson of the United States District Court of Connecticut denied a motion made by the IRS asking the Court to conclude that no discount should be available for a gift of a fractional interest unless the taxpayer held such interest in fractional form before the gift. (1) In other words, the IRS’s position was that if a donor held a controlling interest just prior to the time of gift, then a fractional interest discount, aka discount for lack of control and discount for lack of marketability, should not be allowed for gift tax purposes. In its decision the Court discussed the nature of fractional interests and the IRS’s arguments, prior case decisions, and well-established gift tax valuation principles.
Principle 1: Gifts Should be Valued at the Time of The Gift
In his ruling Judge Thompson discussed the principle that gifts should be valued at the time of the gift, not before or after they are made. A gift’s value is its value at the moment it is made.
Principle 2: Each Separate Gift Must be Valued Separately
Judge Thompson also discussed the principle that each separate gift must be valued separately. Separate gifts of stock made on the same day are not aggregated whether it may be by a taxpayer seeking to take advantage of a blockage discount on publicly traded shares or by the IRS seeking to value minority interests in a private company on a control basis.
The above principles stand for the premise that the value of a gift for gift tax purposes is the value of what the donor gave to each donee at the moment it was given. Accordingly, each gift must be valued separately and as of the time it was made.
Time to Act
As of the date of this writing, the Internal Revenue Code and regulations and their interpretation in numerous case decisions provide that discounts for lack of control and lack of marketability are allowed for gifts of fractional interests even when a 100% controlling interest was owned by the donor just prior to making a gift(s) to the donee(s). While it can be expected this will remain the case until Congress, if it ever shall, passes legislation banning the use of such discounts for gift tax purposes, efforts are currently underway to reduce the federal exclusion amounts for gift and estate taxes and to otherwise subject more accumulated wealth to taxation.
Accordingly, if you have reached that point in life where transitioning your business to the next generation is on your to do list, or you are otherwise interested in planning your retirement and exit strategy or the administration of your estate, it is a perfect time to discuss your situation and develop a plan that suits your goals with our team of professionals here at BST.
About the Author
Tom Hutson is a partner at BST who specializes in business valuation and matrimonial financial matters and is a Certified Public Accountant (CPA), Accredited in Business Valuation (ABV) and Certified in Financial Forensics (CFF) by the American Institute of Certified Public Accountants. Tom is also a CFP® certificant, approved by the Certified Financial Planner Board of Standards, Inc. to use the Certified Financial Planner™ mark, and a CDFA® professional, approved by the Institute for Divorce Financial Analysts™ to use the Certified Divorce Financial Analyst® mark. Tom has more than 33 years of experience as an accountant and business appraiser. In addition to his years of experience in auditing, accounting, and financial statement and income tax preparation, Tom specialized in business valuation and financial forensic services.
Tom received his ABV credential in 1998 and has extensive experience valuing business interests for gift tax reporting, estate tax reporting, matrimonial dissolution, and other purposes.
(1) Peter Buck v. United States of America; Civil No. 3:18-cv-1253 (AWT), United States District Court, District of Connecticut.