Another big taxpayer victory: Federal court accepts appraiser's 35% combined discounts for 94% family LP interest

The Murphy Oil Corp. grew from a small, family owned business into a multinational conglomerate, with over $2 billion in market cap. During the 1990s, the CEO and son of the founder set out to preserve his holdings and his investment philosophy for the benefit of his children. He formed a family limited partnership (FLP with an LLC as general partner) in which he retained a 49% interest and two of his kids took a 51% interest, leaving them in charge. When all was formed and funded, the father owned a 96.75% LP interest in the FLP. He also retained $1.3 million in assets, sufficient to pay his living expenses and estate taxes after death.

Five years later, the father died unexpectedly. After his estate paid over $46 million in taxes, the IRS cited an additional $34 million in deficiencies, including those related to the FLP transfers. Not surprisingly, the estate lacked sufficient liquidity to pay the assessment, because its only remaining assets were tied up in the FLP’s non-controlling, non-marketable interests. It borrowed from the children’s trusts and sued the IRS for a refund. At trial, both parties’ experts asserted minority and marketability discounts, plus Rule 144 discounts for large blocks of stock. Held: In each determination, the federal district court (W.D. Ark) found the taxpayer’s appraiser (Donald Barker, HFBE) more credible than the IRS’s expert, and adopted his 32.5% combined discounts versus the government’s 10%. (Notably, the IRS’s “option collar approach” to valuing the Rule 144 blocks failed just as it did in Litman v. U.S.; see BVWire™ #60-1). The 50-page decision in Murphy v. U.S., issued October 9, 2009, makes fascinating reading: As with every other major FLP case, an abstract of Murphy will appear in Business Valuation Update™ and the full-text court opinion at BVLaw™