Submitted by: Kevin Gilboy
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The Tax Court upheld the estate's valuation of a general partnership as a whole, but reduced the estate's minority and lack of marketability discounts from 67.5% to 45% (19% minority and 26% lack of marketability) in an estate tax valuation dispute. The IRS had argued for a 15% discount for lack of marketability and a 15% minority discount.
The partnership held interests in commercial real estate in New York city and the decedent owned 1/95th of the partnership at his death. Control of the general partnership rested with a 50%+ non-related partner. The partnership agreement allowed transfer of a partnership interest only with the consent of a majority of the partners.
In valuing the partnership as a whole, the court found that the recession in the NYC real estate market supported a decline from a 1988 refinancing appraisal of $110,000,000 to $100,000,000 at date of death (December 31, 1989). Both the estate and the IRS used a capitalization of rent approach. The court rejected the IRS' assumed increases in future rent because of the depressed state of the NYC real estate market. The court accepted the estate's large contingency loss reserve because the partnership's most significant tenant had given notice of intent not to renew its lease.
The IRS' expert testified that a 19% minority discount would be appropriate, but the IRS argued for a 15% minority discount because the estate as a general partner had the right to participate in management. The court acknowledged that under NY law any general partner had the right to dissolve the partnership, but found that such authority had little impact on the practical control exercised by the 50%+ partner. Testimony supported lack of marketability discounts from 25.8% to 45%. The court applied a 26% discount because of the history of significant cash distributions and good management. The court added to two discounts together to arrive at a 45% discount and did not apply them separately.