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Thursday, May 2, 2013

Coverdale: Reforming the Estate and Gift Tax Valuation Rules to Achieve Horizontal Equity

John F. Coverdale (Seton Hall), Of Red Bags and Family Limited Partnerships: Reforming the Estate and Gift Tax Valuation Rules to Achieve Horizontal Equity, 51 U. Louisville L. Rev. 239 (2013):

This Article suggests legislation to bring estate and gift tax valuation of assets held by FLPs back in touch with economic reality. It proposes using family attribution to deny minority discounts for entities controlled by members of a family. It further recommends disallowing marketability discounts for family-controlled entities that do not conduct an active trade or business. These measures would restore a measure of horizontal equity to estate and gift taxes, in addition to making the tax system more economically efficient by eliminating the incentive to spend money to form, operate, and wind up entities that generally have little utility other than their ability to reduce taxes.

Part I provides essential background on the valuation of closely held businesses. Part I.A gives an overview of the process of valuing a business as a whole, focusing especially on how it applies in the estate and gift tax context. Part I.B explores control premiums and minority discounts. Part I.C examines the marketability discount. Part II.A discusses minority discounts as applied to FLPs and proposes legislation to disallow them through family attribution. Part II.B explores marketability discounts as applied to FLPs and proposes legislation to deny them where the FLP does not conduct an active trade or business.

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