Last week’s issue included an excerpt from a Letter to the Editor that took exception to the position offered by William Frazier, vice-chairman of the American Society of Appraisers’ Government Relations Committee, on “the Pomeroy Bill,” also known as the Certain Estate Tax Relief Act of 2009, H.R. 436. Among other things, Frazier’s contention—published here and in the March Business Valuation Update—is that the bill could bring about the demise of the valuation of fractional interests in family owned investment entities. The letter-writer disagreed and cautioned that one “should not assume all readers agree… If its bad policy, we cannot endorse it just because some of us make money executing that poor policy.”
Not surprisingly, we received a number of responses to this letter, one of which—from attorney Owen Fiore, an Idaho-based family wealth-planning consultant—we offer below:
The reader who commented negatively on the Frazier article does not understand either the dynamics of family wealth planning or the scope and limitations of the Federal transfer tax (gift, estate, and GST taxes). The IRS continues to aggressively attack claimed valuation discounts in gift and estate tax cases, but for various reasons, including taxpayer failure to obtain credible appraisals from well-qualified business valuation appraisers. The courts also now appear to have settled in on a couple of areas: (1) require substantial, real non-tax purposes for the creation of the family entity, such as an FLP, LLC or even an S corporation; and (2) insist on credible, understandable appraisal evidence. Valuation largely is a fact issue, and thus the planning and implementation by a family, and its advisors, of a "pass-through entity" designed to control and manage wealth should be carefully done in all respects. Most IRS victories are seen as "bad facts" cases where taxpayers and their advisors have failed in a major way.
Remember, the federal transfer tax is an excise tax, (i.e. a tax upon the transfer of property and limited to the specific property interest transferred). By now, we should realize that there is a vast body of knowledge, many studies, in-depth appraisal profession understanding, and judicial recognition supporting the viability of entities holding and controlling wealth, including passive investment portfolios. Taxpayers are free under our laws, including the tax system, to make choices among trusts and entities such as FLPs and LLCs when structuring multi-generational plans to preserve and to manage wealth, whether to create an active business or a portfolio of investment real estate or marketable securities. Families should not be forced into a less advantageous position than other investors by an ill-conceived piece of legislation, namely, the valuation restrictions portion of H.R. 436. The traditional 'two-step' approach of transfer tax valuation should be maintained, namely 1) value the enterprise itself, and then 2) value the specific entity equity interest being transferred by the donor or decedent.