Copyright 1996, Marc S. Weissman
Certified Specialist: Estate Planning, Trust and Probate Law
Certified by the California Board of Legal Specialization of The State Bar of California
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Return to Estate Planning Directory This Article is designed to be of general interest. The specific techniques and information discussed may not apply to you. Before acting on any matter contained herein, you should consult with your personal legal adviser.

Minority and Lack of Marketability Discount

In September, 1996, we won an IRS Tax Court valuation case. Bob and Tom lived together in a condo; each owned 50%. Tom died, leaving everything to Bob. We told IRS that Bob sold the condo 3 years later for $475,000. Everyone agrees, the whole condo was worth $450,000 the day Tom died. But Tom owned only 50%.

Tom had other assets worth $500,000.

How much is Tom's 50% of the condo worth? If it is worth more than $100,000, Bob owes tax, since Tom's net estate then exceeds $600,000.

Half a condo is NOT worth 50% of the total. The issue is Fair Market Value (FMV), which is what an outside buyer would pay (to buy half a condo where someone else owns the other half and lives there). The real question is how hard it is to convert the decedent's asset into cash.

Normally, a buyer could force liquidation of assets (converting the condo into cash) with a partition lawsuit. Then, the proper legal valuation would have been the full value less legal costs of a partition lawsuit [($450,000 - $7,000) x 50%].

Happily, Bob and Tom had unusually thorough documentation, including a written waiver of the right of partition. Therefore, the FMV was what would a buyer pay if he could not force a sale, but instead had to wait for Bob to die before he could cash out his share.

We argued with IRS that the value of Tom's 50% was minimal, because any buyer would have to live with Bob or wait for him to die! The issue is how much an outsider would pay for half a condo - not how much is it worth to Bob.

Finally, one week before the Tax Court trial, IRS gave up.

This is an excellent example of a Minority Discount (or lack of control discount) and a Lack of Marketability Discount, which are similar but different concepts.

Discounts apply in several areas (gift and death tax), and this case illustrates how important good documentation is, without which Bob would have owed a lot of money to IRS.

Good documents can drop the value up to 70% in certain circumstances, even for investment assets. This explains the popularity of Family Limited Partnerships. [See Family Limited Partnerships and Family Limited Partnership; Advanced]

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