Do’s and don’ts of FLP valuations

BVWireIssue #53-2
February 14, 2007

Anyone who believes the IRS lacks a sense of humor should have attended the session by Harry J. Furhman, a financial analyst with the Service, on FLP valuations. In the context of multi-tiered entities, “we’ve seen discounts out the yin yang,” Furhman says, using what must be a technical term. The IRS is still seeing full marketability discounts applied on top of Real Estate Limited Partnership (RELP) net asset value discounts. “That’s just not good,” he says.

Also not good: In calculating net asset value, don’t deduct selling expense from a non-liquidating premise of value “unless you have a darned good argument.” The same goes for using the inverse of control premiums to estimate discounts for lack of control (DLOC) for FLPs holding cash, marketable securities, and real estate. “Courts prefer closed-end funds, REITs, and RELP data for asset-holding entities,” Furhman says. If you still decide to use the inverse control premiums, either adjust them downward or include an explanation why you didn’t adjust. But in the end, “just don’t use them for FLP DLOCs.”

For an excellent, related article from the November 2006 BVU on “Why NAV May Not Be the Best Method for Valuing Multi-Tiered Entities,” by Lari Masten and Dennis Webb (Webb is also the “mastermind” who put together the IRS Symposium), click here.

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