A recent Tax Court decision demonstrated – once again – that taxpayers can derive significant benefits by structuring their business assets to compound discounts and reduce estate or gift taxes.
Jane Astleford (“Astleford”) and her husband were successful real estate investors. After her husband died in 1995, Astleford restructured some of her real estate investments and made gifts to her children in 1996 and 1997 of interests in the entity she created. First, in 1996 she created the Astleford Family Limited Partnership (“AFLP”) and contributed real estate to the partnership, then gave each of her children a 30% limited partnership interest in the AFLP, retaining a 10% general partnership interest. In 1997, she transferred substantial real estate holdings to the AFLP, including her 50% interest in an entity called Pine Bend General Partnership (“PBGP”). The effect of the 1997 transfers would have been to increase Astleford’s general partnership interest, but she also gave additional limited partnership interests to her children. The IRS audited the 1996 and 1997 gift tax returns Astleford filed with respect to these gifts, and determined the total value of her gifts was approximately $11.56 million, whereas Astleford claimed the total gifts were $4.23 million.
Astleford and the IRS litigated the dispute in the U.S. Tax Court. The Tax Court judge addressed a number of disputed issues. First, Astleford argued that her transfer to the AFLP of the PBGP general partnership interests should be treated as a transfer of an assignee interest (with limited rights) rather than a general partnership interest (with substantial rights), and, as a result, the transfer should have been allowed a 45% discount. The judge held that the form of the transaction should not control the substance, and that Astleford should not receive a discount for that transfer.
While the judge denied the taxpayer’s discount for the claimed difference between the assignee interest and a general partnership interest for PBGP, the judge agreed that two levels of discounts were appropriate under the facts presented. Astleford claimed separate discounts for lack of control and lack of marketability should be applied to the value of the PBGP interest contributed to the AFLP and that the same type of discounts should apply to the limited partnership interests which Astleford gave to her children.
The IRS had a very different view. Its expert took the position that discounts should be applied only to the AFLP interests given to the children, and that the discount should be slightly higher given that the PBGP interest owned by AFLP was not a controlling interest.
The judge agreed with the taxpayer, and concluded that discounts were indeed appropriate for both the PBGP interest as an asset of AFLP and for the gifts of the AFLP interests. The court applied a 30% lack of control discount to the PBGP interest, and combined discounts for lack of control and marketability of approximately 17% and 21%, respectively, for Astleford’s 1996 and 1997 gifts of AFLP interests. The result was that judge determined that the aggregate value of the gifts was approximately $7.1 million, which was significantly less than the IRS’ claim of $11.56 million. This result was a huge victory for the taxpayer.
This case, and similar cases over the past few years, provides valuable guidance to taxpayers with respect to structuring business interests to obtain significant gift and estate tax discounts. If you have any questions regarding your estate planning involving business interests, please do not hesitate to contact us.