Tax Facts

323 / How is a closely held business interest valued for federal estate tax purposes where there is no purchase agreement?



Valuation of closely held corporate stock requires a determination of fair market value. Estate tax regulations define this as “the price at which the property would change hands between a willing buyer and a willing seller, neither being under compulsion to buy or sell and both having reasonable knowledge of the relevant facts.”1

Factors that should be considered when determining fair market value include the company’s net worth, prospective earnings and dividend paying capacity, goodwill, the economic outlook in the particular industry and its management, the degree of control of the business represented by the block of stock to be valued, and the value of securities of corporations engaged in the same or similar lines of business that are listed on a stock exchange.2

If a block of stock represents a controlling interest in a corporation, a control premium generally adds to the value of the stock. If, however, shares constitute a minority ownership interest, a minority discount often is used. A premium also may attach for swing vote attributes where one block of stock may exercise control by joining with another block of stock.3 One memorandum valued stock included in a gross estate at a premium as a controlling interest, while applying a minority discount to a marital deduction portion that passed to a surviving spouse.4

Just because an interest being valued is a minority interest does not mean that a minority discount is available.5 One case, however, valued stock with voting rights at no more than stock without voting rights.6

The Tax Court has held that if real estate is specially valued for estate tax purposes under IRC Section 2032A, an estate may not take a minority discount with respect to stock in a corporation that held the real estate.7

In a split decision, however, the Tenth Circuit Court of Appeals has ruled that minority discounts and special use valuation under IRC Section 2032A are not mutually exclusive; it would apply the minority discount to the fair market value of the real estate as owned through a partnership and then apply the $750,000 cap on special use valuation to the difference between fair market value as discounted and special use value of the real estate.8

The Fifth Circuit Court of Appeals has ruled that shares of stock in a decedent’s estate were to be valued as a minority interest when the decedent owned less than 50 percent, despite the fact that control of the corporation was within the decedent’s family. This was true even when, immediately before death, the decedent and the decedent’s spouse owned more than 50 percent of the stock as community property. The court also ruled that family attribution ( Q 300) would not apply to lump a decedent’s stock with that of related parties for estate tax valuation purposes both because of prior case law and because applying attribution would be inconsistent with the willing buyer-willing seller rule.9

A minority discount will not be disallowed solely because a transferred interest would be part of a controlling interest if the interest were aggregated with interests held by family members.10

A minority discount was allowed even when the person to whom the interest was transferred already was a controlling shareholder.11

Deathbed transactions have, however, been aggregated into a single integrated transfer to which a control premium attached rather than minority discounts. In one such case, a parent, a 60 percent shareholder, sold a 30 percent interest in a corporation to a child, a 20 percent shareholder and the parent had the corporation redeem the remaining 30 percent interest in the corporation held by the parent.12

The Tax Court has determined that an estate would not be allowed a minority discount where a decedent transferred a small amount of stock immediately prior to death for the sole purpose of reducing her interest from a controlling interest to a minority interest for valuation purposes.13

Similarly, the IRS has disallowed minority discounts while disregarding partnerships or limited liability companies created on a decedent’s deathbed presumably to obtain minority discounts.14

Courts have also rejected the idea that a partnership can be ignored for purposes of IRC Section 2703.

A partnership or LLC entity may be included in a gross estate under IRC Section 2036 without the benefit of discounts under a number of circumstances. For example, if a decedent puts everything he or she owns into the entity, retains complete control over the income of the entity, uses the entity as a personal pocket book, or fails to follow entity formalities, the entity may be included in his or her gross estate.15

One case has held that IRC Section 2036 did not apply because the court concluded that the transfer to a partnership was a bona fide sale for adequate consideration.16

See note at Q 322 concerning proposed regulations under IRC Sections 2701 et seq. The controversial Section 2704 proposed regulations were eventually withdrawn by the Treasury Department.






1.     Treas. Reg. § 20.2031-1(b).

2.     Treas. Reg. § 20.2031-2. See also Rev. Rul. 59-60, 1959-1 CB 237.

3.     TAM 9436005.

4.     TAM 9403005.

5.     Godley v. Commissioner, 286 F.3d 210, 2002-1 USTC ¶ 60,436 (4th Cir. 2002) (partnerships held housing projects subject to long term government contracts).

6.     Est. of Simplot v. Commissioner, 249 F.3d 1191 (9th Cir. 2001).

7.     Est. of Maddox v. Commissioner, 93 TC 228 (1989).

8.     Est. of Hoover v. Commissioner, 69 F.3d 1044 (10th Cir. 1995), acq. 1998-2 CB xix, rev’g 102 TC 777 (1994).

9.     Est. of Bright v. Commissioner, 658 F.2d 999 (5th Cir. 1981).

10.   Rev. Rul. 93-12, 1993-1 CB 202.

11.   TAM 9432001.

12.   TAM 9504004.

13.   Est. of Murphy v. Commissioner, TC Memo 1990-472.

14.   TAMs 9719006, 9723009, 9725002, 9730004, 9735003, 9736004, 9842003.

15.   Est. of Bigelow v. Commissioner, 503 F. 3d 955, 2007-2 USTC ¶ 60,548 (9th Cir. 2007), aff’g TC Memo 2005-65; Est. of Strangi v. Commissioner, 417 F. 3d 468, 2005-2 USTC ¶ 60,506 (5th Cir. 2005), aff’g TC Memo 2003-145; Est. of Bongard v. Commissioner, 124 TC 95 (2005); Turner v. Commissioner, 382 F. 3d 367, 2004-2 USTC ¶ 60,489 (3d Cir. 2004), aff’g TC Memo 2002-246; Kimbell v. U.S., 244 F. Supp. 2d 700, 2003-1 USTC ¶ 60,455 (N.D. Tex. 2003), rev’d, 371 F. 3d 257, 2004-1 USTC ¶ 60,486 (5th Cir. 2004); Est. of Abraham v. Commissioner, TC Memo 2004-39; Est. of Hilgren v. Commissioner, TC Memo 2004-46 (discount for business loan agreement was allowed).

16.   Kimbell v. U.S., 371 F. 3d 257, 2004-1 USTC ¶ 60,486 (5th Cir. 2004), rev’g 244 F. Supp. 200 2003-1 USTC ¶ 60,455 (N.D. Tex. 2003).


Tax Facts Premium Tools
Calculators
100+ calculators specifically designed to help you easily assist clients with specific planning situations and calculations.
Practice Guidance
Designed to help you discover new ways for which to build and maintain client relationships.
Concepts Illustrated
Specifically designed to help you easily assist clients with specific planning situations and calculations.
Tax Facts Archives
Access to the entire library of Tax Facts dating back to 2012 allowing you to look up the exact tax figures from prior years.