Because transfer taxes (gift and estate taxes) are paid based on the value of the business interests being transferred, taxpayers typically seek low values to minimize their tax paid while the IRS generally seeks higher values to maximize their tax revenue. The differing values typically hinge on discounts for lack of control and marketability.
When stock is contributed to charity, the best interests of the taxpayer and the IRS become reversed as the taxpayer seeks a higher value for the stock to maximize their charitable income tax deduction. Although this seems like a simple role reversal, the “IRS has to be mindful since the arguments it makes for a low value may be used against it in a later transfer tax case when it is seeking a high value for the same type of asset,” says Charles Rubin, Esq. (Gutter Chaves Josepher Rubin Forman Fleisher, Boca Raton, FL) in his blog. He points out that the IRS’ support for a 35% lack of control discount and 45% lack of marketability discount in the recent Bergquist v. Commissioner case would never have flown in a transfer tax case—“the IRS would clearly have vigorously objected.” Will the IRS’ discounts come back to haunt them? Only time will tell.
Watch for a comprehensive abstract of Bergquist v. Commissioner in the September issue of the Business Valuation Update, and read the full court opinion in BVLaw.
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