Transfer Tax Valuation Principles Flashcards
Timing of Valuation for Estate and Gift Taxes
Estate tax valued at time of death. Gift tax valued on date of gift.
Isolation of Bequests/Gifts
Generally easier to isolate gifts than bequests.
Deathbed planning might hurt that. Lack of control denied when decedent gifts 1% to each of kids a year before dying and passing on remaining 49% interest in company.
General Standard of Valuation
20.2031-1(b); 25.2512-1
FMV is price at which proeprty would change hands between willing buyer and willing seller.
Judicial Considerations re Precision of Valuation, Expert Testimony, and Hindsight
Courts generally frustrated with litigants taking extreme positions and wish they would settle more. So far courts tend to take a middle-road approach rather than picking extreme approach which would arguably incentivize parties to settle more.
Court has discretion to choose what weight to give expert testimony. If experts are merely advocates for one side, they will likely lose credibility.
Hindsight may be considered only for limited purpose of determining the reasonable expectations of a willing buyer and willing seller on the valuation date.
Valuation of Publicly Traded Securities Principles
Valued as the average of the highest and lowest quoted selling prices on the valuation date.
Most common discount is for when decedent/donor owns such a large proportion of stock that selling it to the market at once would not receive full market price. Can be applied to entire block for estate tax purposes but must be applied separately to each gift of stock for gift tax purposes.
Amount realized is not decreased for selling expenses, but such expenses may be deducted under 2053 from estate.
Valuation of Real Property
Unimproved property generally valued by comparable sales method. Real property that produces income is generally valued on the basis of the property’s income stream.
Fractional interests in real property as tenant in common can often be discounted from proportional interest.
Property should be valued at highest and best use, but must be realistic potential uses.
2032A can be used to value farmland (primarily) at actual use rather than highest and best use. There are multiple conditions to qualify for this and maximum reduction in value cannot exceed 1,310,000 for 2023.
Valuation of Tangible Personal Property
Items with significant artistic or intrinsic value must be valued by an expert appraisal in a sworn statement filed with the estate tax return.
Courts are less likely to allow fractional interest discount than with real property but are potentially willing to allow blockage discount for things like sculptures or paintings.
Valuation of Closely-Held Business Interests: Generally
Businesses engaged in sale of goods or services should generally be valued on basis of earnings while entities serving as holding companies should generally be valued with reference to their net assets.
Valuations based on earnings when determining capitalization rate should consider nature of business, risk involved, and stability of past earnings.
Valuation of Closely-Held Business Interests: Common Discounts/Premiums
Minority-Interest Discount: Generally allowed for those who own less than 50% of an entity to reflect discount willing buyer would want for inability to control entity, inability to influence distributions, and inability to cause entity to redeem shares.
Control Premium: Service has argued that controlling interest should be valued above pro-rata value.
Lack of Marketability Discount: Allowed potentially for majority or minority interests if there is not a ready market to liquidate interests.
Valuation of Closely-Held Business Interests: Service Pushback
Unity of Ownership Argument: Rejected attempt by the Service to argue that a seller wouldn’t sell only a partial interest or something like that.
Economic Substance Doctrine: Courts appear much more reluctant to use this in transfer tax cases as they do in income tax cases. Lesson: Make sure form is perfect and may be fine.
Step Transaction Doctrine: Courts somewhat more willing to use than Economic Substance but still doesn’t seem like huge hurdle. One Tax Court case allowed assignment of partnership interests 5 days after transfer of assets to partnership. Ninth Circuit even allowed assignment of LLC interests to children on same day of LLC capitalization.
Annuities and Temporal Interests in Property (Such as Remainders and Contingent Remainders)
Use the tables and formulas in 7520.
If termination or beginning of interests are conditioned on events other than an individual’s death, use willing-buyer/seller approach.
Depart from mortality tables if individual has terminal illness.
2702 governs valuation of transfers in trust for benefit of family members where donor retains an interest in the property. Any interest retained by the donor in this context will be assigned a value of zero to ensure no gamemanship preventing transfer tax. Can use 7520 only if certain conditions met.
Alternate Valuation Date
2032
Can elect to use value of property 6 months after date of death. (Passed in aftermath of great depression).
Property sold during that time will be valued as of date of disposition. Property affected by mere lapse of time will still be valued as of death date.
