Page 649 - TaxAdviser_2022

ESTATES, TRUSTS & GIFTS

interest. Each year from 2010 to 2013, meaning. They also supported the finding discounts in similar circumstances. In
the taxpayer reported and paid gift tax that a taxpayer should not also be required that case, the taxpayer formed a partner-
on those transfers as two separate gifts to pay gift tax where the value of property ship with his two sons, each of whom
to his sons, each representing the gifted the taxpayer retains after making a gift will held a 25% interest, with the taxpayer
48% interest in given tracts. The taxpayer be included in the taxpayer’s gross estate holding 50%. The taxpayer transferred
discounted the value of the gifts for the for estate tax purposes. However, the court to the partnership shares of his major-
possibility that each interest would be concluded that the cases do not support ity interests in three banks, as well as
less valuable to a hypothetical buyer. The a legal conclusion that if there would be an undivided 50% interest in leased
taxpayer thus declared the discounted no discount in determining the value of land in which the taxpayer and his wife
value of each son’s 48% fractional interest property for purposes of the estate tax, the owned the entire interest, subject to the
to be $18,496,249, for a combined value interests in the property should be aggre- lease. The taxpayer claimed a minority
of $36,992,498. This represented a 55% gated and there should be no discount in discount of 15% for the bank shares and
discount from the total purchase price. determining the value of those interests for reported the value of the leased land as
The IRS challenged the taxpayer’s purposes of the gift tax. a whole at $400,000. The IRS assessed
valuations and assessed gift tax deficien- Second, the IRS argued that “the value a gift tax deficiency on the basis that the
cies, which the taxpayer contested in the of a gift for federal gift tax purposes is FMV of the 50% interest in the leased
district court action. The IRS moved the value to the donor, not the donee.” land that petitioner gifted to his sons was
for partial summary judgment, asking The IRS then argued that the value of the $639,300, far greater than the $200,000
the court to conclude as a matter of law properties gifted here should reflect the value that the taxpayer had claimed, but
that no discount should be available for economic reality to the taxpayer of the the IRS accepted the minority discount
a gift of a fractional interest unless the value of a 96% interest in each property for the bank shares as reported.
taxpayer held the interest in fractional that he transferred. Disallowing fractional The district court found that Shepherd
form before the gift, rather than viewing discounts on a previously unified interest was consistent with the well-established
several simultaneously gifted portions of ensures that “the value of the gift made by principle that gifts should be valued at
the property as fractional interests in the the donor, not the measure of enrichment the time of the gift, not before or after
hands of the donor for the purpose of to the donee, ... is determinative,” the IRS they are made. Shepherd also made clear
valuing the gift. argued. Alternately phrased, even if the that each separate gift must be val-
The IRS advanced two principal ar- creation of fractional interests decreased ued separately.
guments in support of its position. First, the property’s value, it was worth more In Buck, under applicable law, the gifts
it argued that “allowing the discounts in the donor’s hands before the fractional were not a single 96% interest but two
would endorse a circumvention of one interests were created, and gift tax should 48% interests, with each given to one of
of the primary purposes of the gift tax, be calculated on the basis of that old value, two donees, and, thus, the gifts must be
which is to assure that estate tax is not not the new value. valued separately at the time of transfer,
avoided.” The district court agreed with The court noted it was required to the district court held. The court denied
the IRS that, if this were a case about analyze the value of gifts at the time they the IRS’s motion for partial summary
estate tax, then no discounts would be al- passed from donor to donee. Sec. 2512(a) judgment with regard to whether the
lowed based on the separate values of the provides: “If the gift is made in property, discounts were appropriate in valuing
interests received by each son. the value thereof at the date of the gift gifts of partial interests in the taxpayer’s
The IRS cited prior jurisprudence for shall be considered the amount of the gift.” properties for federal gift tax purposes.
the proposition that the gift tax and the By way of contrast, Sec. 2031, pertaining
estate tax are in pari materia and must to the valuation of bequests, expressly Subsequent events considered in
be analyzed together.15 After reviewing looks at the value of all property to the ex- GRAT’s valuation
these cases, the district court determined tent of the interest therein of the decedent In a Chief Counsel Advice (CCA),17the
that the same words appearing in the at the time of the decedent’s death. IRS Office of Chief Counsel concluded
gift tax statute and the estate tax statute The court analyzed Shepherd,16 where that a grantor retained annuity trust
should be understood to have the same the Tax Court applied fractional interest (GRAT) funded with aggressively

15. Merrill v. Fahs, 324 U.S. 308 (1945); Estate of Sanford, 308 U.S. 39 (1939); 16. Shepherd, 115 T.C. 376 (2000).
Converse, 163 F.2d 131 (2d Cir. 1947). 17. CCA 202152018, released Dec. 20, 2021.

40 December 2022 The Tax Adviser