Value Discounts
Laura McCann/IowaBar
Monday January 22, 2007 09:51


----- Message from "John Coonley" <highcut@mchsi.com> on Tue, 18 Jul 2006 14:36:07 -0600 -----
To:
<realestate@iabar.org>
Subject:
Re: Value Discounts

My understanding is that there are two lines of cases upon which the I.R.S. relies - one which says that you consider the circumstances at the time of death only without regard to the subsequent factors and the second line of cases which says the I.R.S. can use subsequently developed facts during the course of the audit in viewing date of death values.  
 
For example, if you take a discount equal to the cost of partition and can only rely on facts at time of death you will have no problem - but, under second line of cases if a partition action never materializes then the I.R.S. can use that later developing facts to thrwart the discount.
----- Original Message -----
From: William Stiles
To: realestate@iabar.org
Sent: Tuesday, July 18, 2006 2:53 PM
Subject: RE: Value Discounts

Although that argument may have some appeal to it, I think that the value is the value of the asset in the estate of the decedent as of the date of death…..not the value in the hands of the beneficiary. I have had minority interests and lack of marketability discounts done by qualified third party appraisers and they always appraise the value in the decedent’s estate. On a gift tax return that was audited, the IRS agreed, through negotiations, to a significant discount for a gift by the father to his three sons of a one third interest in an LLC that owned several shopping centers. The three boys were in the “family business” before the gift and ran the properties. Initially, we heard the same argument by the IRS that since they all were related and ran the shopping centers together they should not receive a minority interest discount. The IRS agent argued that the transfer to the LLC by the father shortly before the gifts should be ignored and the transfer should be treated as a fractional interest in real estate. He had a case he relied upon that I can forward to you if you are interested. I believe our position was somewhat better with the use of the LLC rather than direct interests in the property, especially on the lack of marketability discounts issue.
 


From: realestate-owner@iabar.org [mailto:realestate-owner@iabar.org] On Behalf Of Brad Nelson
Sent: Tuesday, July 18, 2006 2:31 PM
To: kcollins@dybb.com; realestate@iabar.org; probate@iabar.org
Subject: RE: Value Discounts
 
Very perceptive!  Do you believe the "value for inheritance tax purposes" of an undivided one-half interest in real estate is different depending on who owns the other half? or if the option holder owns the other half?  The "value for inheritance tax purposes" is fair market value in the ordinary course of trade per Iowa Code Section 450.37.  The regs and case law seem abundantly clear on the definition of that term and the definition does not include an analysis as to "who owns the rest".  I believe the undivided one-half interest in the real estate must be valued at fair market value of the undivided interest and NOT fair market value of the entire farm divided by two.  There is a BIG difference.
 
Anyone disagree?  I am interested in hearing all arguments pro or con.
 


From: Keith Collins [mailto:kcollins@dybb.com]
Sent: Tuesday, July 18, 2006 2:15 PM
To: Brad Nelson; realestate@iabar.org; probate@iabar.org
Subject: RE: Value Discounts
The replies thus far have been instructive on the technical question what the Iowa DOR may recognize as a discount on your set of facts, but isn’t your true question more in the line with how can my client buy the ½ interest at the cheapest price.  I would be very interested in knowing who owns or has a right to the other half of the farm.  I would argue the value would be different depending on whether the purchaser ends up with the whole farm (ie: already owns the other half), or will be sharing title with another relative or possibly a stranger.  My next immediate question is why the testator would give your client a right to buy only an undivided ½ interest?  One could also ask what the true intent of the decedent was in setting the purchase price using the value fixed for inheritance tax purposes.  Was the decedent so sophisticated that (s)he foresaw this whole discount argument in setting the price?  Or was the decedent relying on an estate appraisal and then having that amount divided by 2 for setting the price?  
 
Also, I would want to know who the beneficiaries of the residue are.  With a hefty discount, their shares of the estate will be lower.  Will this cause discord in an otherwise happy family?  I assume you represent the person with the option and not the executor of the estate.  Thanks for the question.  And good luck with the answer.
 
__________________________
KEITH D. COLLINS
Leslie, Collins & Foy
303 First Ave. N.E., Waverly, IA 50677
Phone: 319-352-1637
Fax: 319-352-0633
Email:  kcollins@dybb.com

SUPREME COURT - WASHINGTON, D.C.

 
 
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-----Original Message-----
From: probate-owner@iabar.org [mailto:probate-owner@iabar.org] On Behalf Of Brad Nelson
Sent: 07/18/2006 8:24 AM
To: realestate@iabar.org; probate@iabar.org
Subject: Value Discounts
 
Has anyone ever taken a lack of control or lack of marketability discount on an undivided interest in real estate for purposes of a probate inventory or Iowa inheritance tax return?
 
Problem is this:  Client inherits under decedent's will an option to purchase an undivided one-half interest in a farm at "the value fixed in my estate for Iowa Inheritance Tax purposes".  I want to argue that fair market value or value for inheritance tax purposes of an undivided one-half interest is significantly different than the fair market value of the whole farm divided by 2.
 
This has to have been argued before.  I am just taking the easy way out here.
 
Your thoughts will be appreciated.
 
I am sending this to both the probate and real estate boards so if you get two of these I apologize.
 
Brad Nelson

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