Nelson and FLP Double Discounting

Recently, the Tax Court issued a memorandum decision in Nelson v. Commissioner, TC Memo 2020-81 (June 10, 2020). While the case theoretically was an IRS victory because it was able to knock down aggregate valuation discounts from 66.7% to 59.5%, it really was a taxpayer victory for taxpayers seeking “double discounts” in tiered structures, as the IRS did not litigate the issue. In the case, there was a combination of a taxpayer gift and a sale of closely held, family controlled C corporation stock to a family limited partnership (“FLP”). Substantial valuation discounts were taken both with respect to the C corporation stock and the limited partner interests being transferred, hence the large discounts. Typically, the IRS has fought multiple FLP discounts in such tiered arrangements, but not in Nelson.

The case also is noteworthy for its discussion of Wandry-type “savings clauses,” i.e., a conveyance clause whereby the amount of the property being conveyed is designated in the conveyance document as an amount equal to a value “as finally determined for federal gift tax purposes,” with any amount of property in excess of that value being returned to the donor, thereby precluding any gift having occurred. In Nelson, the taxpayer’s documents referred to the value as the amount “as determined by a qualified appraiser,” as opposed to the above quoted language that was used in Wandry. The Tax Court found the taxpayer’s clause to be defective, but, nevertheless, the result in this case can be viewed as a taxpayer victory in other contexts, because the court cited the Wandry-type clauses favorably.