blogger visitor

Monday, April 10, 2006

"LOCKSTEP" TRANSFERS CAN AFFECT MINORITY INTEREST DISCOUNT

In valuing a block of shares of stock of a corporation that do not constitute enough shares to control the corporation, for federal gift tax purposes or for the purpose of computing a charitable deduction a minority interest discount is generally applied. That is, in calculating the value of the shares an acknowledgment is made that since the owner of the shares at issue does not have majority control over the corporation, the value of the shares should be reduced to reflect this lack of control because an unrelated buyer would generally pay less on a per share basis for shares that do not provide control than for a block of shares that constitutes control.

How should this principal be applied when several taxpayers make gifts of shares of a corporation to a charitable recipient, if each taxpayer is only transferring a minority interest, but taken all together the total shares transferred by all of the shareholders constitutes control? In Koblick v. Comm., T.C. Memo. 2006-63 (April 3, 2006), the taxpayers argued that since control was being transferred in the aggregate, a reduced minority interest discount should be allowed under these facts.

The Tax Court looked at its decision In N. Trust Co. v. Commissioner, 87 T.C. 349 (1986). There, four shareholders agreed to transfer each of their 25-percent noncontrolling interests in their closely held corporation to certain long-term trusts. The taxpayers contended that the minority discount should be 90 percent. However, the Court allowed only a 25-percent discount. The Court determined that the taxpayers, by following a prearranged agreement to transfer the shares simultaneously, "marched in lockstep" and that "[s]o marching, their position was no different than that of a single majority shareholder."

The Court in Koblick noted that they were faced with a similar situation since the transferring taxpayer and the two other shareholders of a closely held corporation had a prearranged plan to transfer their minority shares simultaneously to the charitable recipient. Applying the "lockstep" principle, the Court found the IRS’ proposed minority interest figure of 22 percent to be too high and instead allowed only a 10 percent discount.

Note that in the N. Trust Co. case, the taxpayers wanted a large minority interest discount, to have a smaller taxable gift subject to gift tax. In the current case, the taxpayers wanted a smaller minority interest discount, so that they could obtain a larger income tax deduction for a charitable gift.
Post a Comment