TAM 9403005

TAM 9403005

Story posted in Technical Advice Memoranda on 4 April 2002
audience: PGDC Network | last updated: 15 June 2011
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Date: October 14, 1993

Control No.: TR-32-196-93

District Director * * *
Taxpayer's Name: * * *
Taxpayer's Address: * * *
Date of Death: * * *
Taxpayer's SSN: * * *
Date of conference * * *

LEGEND:
decedent = * * *
Company = * * *

ISSUES:

(1) For purposes of gross estate valuation, is the decedent's stock in Company treated as a single controlling interest block of stock or (in view of the fact that the stock passes to two different beneficiaries) as two separate minority interest blocks of stock?

(2) For purposes of estate tax marital deduction valuation, is the portion of the decedent's stockholding in Company that passes to the surviving spouse treated as a separate minority interest block of stock?

FACTS:

The decedent died testate on November 13, l990, survived by his spouse and two children.

At the time of his death, the decedent owned a block of 400 preferred shares in Company and a block of 37,728 common shares in Company. We understand that the Internal Revenue Service and the decedent's estate agree that, considered as a combined block, the 400 shares of preferred stock are worth $1,300 per share and the 37,728 shares of common stock are worth $13.00 per share. We also understand that the Service and the decedent's estate agree that, considered as separate blocks, the preferred stock is worth $919.80 per share and the common stock is worth $6.98 per share. The fact that the two blocks are worth less as separate blocks reflects the difference in the voting power of the stock when considered as a combined block versus the value of the voting power of the stock when the two blocks are treated as separate blocks.

Article II of decedent's will divided the residuary of the decedent's estate into two shares: Share A and Share B. The decedent's common shares were bequeathed under Share A to a credit shelter trust for the benefit of decedent's spouse, son, and daughter. The bulk of the decedent's preferred shares were bequeathed under Share B to his surviving spouse.

LAW AND ANALYSIS:

Section 2001(a) of the Internal Revenue Code imposes a tax on the transfer of the taxable estate of every decedent who is a citizen or resident of the United States.

Section 2031(a) of the Code provides that the value of the gross estate of the decedent is to be determined by including, to the extent provided in sections 2033 through 2046, the value at the time of his or her death of all property, real or personal, tangible or intangible, wherever situated.

Section 20.2031-2(a) of the Estate Tax Regulations provides that the value of corporate stock is the fair market value of the shares on the applicable valuation date.

Section 20.2031-2(f) of the regulations describes the factors to be considered in valuing shares of stock when there is not a market for the stock, on an exchange, in an over-the-counter market, or otherwise. The factors to be considered are the company's net worth, management, goodwill, prospective earning power and dividend- paying capacity, and economic outlook and company position in the industry. Other relevant factors include the degree of control of the business represented by the block of stock to be valued and the values of securities of corporations engaged in the same or similar lines of business that are listed on a stock exchange.

Section 2056(a) of the Code provides that, for purposes of the tax imposed by section 2001, the value of the taxable estate is to be determined, except as limited by section 2056(b), by deducting from the value of the gross estate an amount equal to the value of any interest in property that passes or has passed from the decedent to the surviving spouse but only to the extent that such property is included in determining the value of the gross estate.

Section 20.2056(b)-4(a) of the regulations provides that the marital deduction may be taken only with respect to the net value of a deductible interest that passes from the decedent to the surviving spouse.

In Estate of Chenoweth v. Commissioner, 88 T.C. 1577 (1987), the decedent owned 100 percent of a closely-held corporation. For federal estate tax purposes, the decedent's estate reported the entire stock interest in the gross estate at a value that was accepted by the Service. The decedent's will devised 51 percent of the stock to his spouse in a form that qualified for the marital deduction under section 2056 of the Code. Because of the control element represented by the surviving spouse's 51 percent block, the block was worth more than 51 percent of the value of the stock that had been included in the gross estate. The Tax Court held that, where the transfer to the surviving spouse is unrestricted, but consists of less than the decedent's entire interest in the property, it is appropriate to value the interest passing to the surviving spouse as a separate interest in property rather than as an undivided portion of the decedent's entire interest. As a result, the marital deduction was allowed for more than 51 percent of the value of the block of stock that had been included in the gross estate.

In Ahmanson Foundation v. United States, 764 F.2d 761 (9th Cir. 1981), the decedent owned a controlling interest in a corporation. The decedent bequeathed a nonvoting interest to charity, while bequeathing the stock with control to his son. The Ahmanson court held that the value of assets includible in the gross estate for purposes of section 2031 of the Code is to be determined at the moment of death and that the amount of the charitable deduction for purposes of section 2055 must be limited to the value received by charity. The court stated,

There is nothing in the statutes or in the case law that suggests that valuation of the gross estate should take into account that the assets would come to rest in several hands rather than one. . . .

. . . The valuation of these same sorts of assets for the purpose of the charitable deduction, however, is subject to the principle that the testator may only be allowed a deduction for estate tax purposes for what is actually received by the charity. [674 F.2d at 768, 772.]

In determining the amount deductible for purposes of the marital deduction, similar principles apply. A marital deduction may be taken only with respect to the net value of any deductible interest which passed from the decedent to the surviving spouse. Section 20.2056(b)- 4(a). If, as in the present case, a minority interest block of stock passes to the surviving spouse, a marital deduction may be taken for only for the value of the block as such. However, in accordance with the holdings in the Ahmanson and Chenoweth cases, the value of the same property for purposes of inclusion in the gross estate under section 2031 may be different if the decedent, at the time of death, possessed a controlling interest block of stock.

CONCLUSION NO. 1

The court in Ahmanson stated that changes in value resulting from the fact that under the decedent's estate plan the assets in the gross estate ultimately come to rest in the hands of different beneficiaries is not a factor to be considered for purposes of valuing property in the decedent's estate. In the present case, at the time of the decedent's death, he owned a combined block of common and preferred stock in Company that represented a controlling interest in Company. Under the terms of the decedent's will, only a noncontrolling interest in the preferred stock passed to the decedent's surviving spouse. Accordingly, we conclude that, (1) the control premium that is attributed to the decedent's holdings in Company is applicable in determining the value of the decedent's entire holding for purposes of inclusion in the gross estate and (2) the valuation of the decedent's holdings in Company for purposes of section 2031 does not reflect the fact that only a minority interest in the Company stock passes to the surviving spouse.

CONCLUSION NO. 2

Under the decedent's will a portion of the decedent's preferred shares in Company pass to his surviving spouse. This block of preferred stock represents a minority interest in Company. The value of the shares passing to the surviving spouse for purposes of the marital deduction is different from the value of the shares when considered as part of a larger block for purposes of determining the value of the gross estate under section 2031. See Ahmanson, 764 F.2d 761 (9th Cir. 1981).

Section 20.2056(b)-4(a) of the regulations provides that the marital deduction may be taken only with respect to the net value of any deductible interest which passed from the decedent to the surviving spouse. Because the value of the interest that passed to the surviving spouse is a minority interest in Company, the value deductible for purposes of section 2056 must reflect this fact. Accordingly, we conclude that, for purposes of the estate tax marital deduction, a minority discount is appropriate in valuing the portion of the decedent's stockholding in Company that passes to the surviving spouse.

CONCLUSIONS:

(1) For purposes of the decedent's gross estate value, the decedent's stock in Company is treated as a single controlling interest block of stock even though the stock passes to two different beneficiaries.

(2) For purposes of the marital deduction valuation, the portion of the decedent's stockholding in Company that passes to the surviving spouse is treated as a separate minority interest block.

A copy of this technical advice memorandum is to be given to the taxpayer. Section 6110(j)(3) provides that it may not be used or cited as precedent.



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