Jointly owned property may not be subject to valuation discounts.

In preparing Form 706, U.S. Estate (and Generation-Skipping Transfer) Tax Return, a practitioner is often faced with the dilemma of determining the valuation of certain assets in a decedent's gross estate. When a decedent owns assets such as interests in real property or shares of closely held stock, the gross value of these interests may need to be adjusted for factors affecting value (such as discounts for minority interests, fractional interests and lack of marketability) to determine the asset's fair market value.

Estate of Young, 110 TC 297 (1998), addressed whether discounts for fractional interests or lack of marketability (which have been allowed for tenancy in common and community property interests) should be applied to a decedent's property held in joint tenancy with right of survivorship.

In Young, the decedent and his wife had owned real property as joint tenants with right of survivorship in a community property state. On the decedent's estate tax return, the estate had excluded one-half of the value of the real property, claiming that the decedent's property was community property; the estate also claimed a 15% fractional interest discount. On audit, the Service determined that the estate was not entitled to a valuation discount.

The Tax Court determined that the decedent's interest in the real property was includible in his gross estate under Sec. 2040(a) as an interest in joint tenancy, and not under Sec. 2033 as an interest in community property. Because neither the decedent nor his wife were U.S. citizens, the court determined that, under Sec. 2056(d)(1)(B), Sec. 2040(a) applied, requiring the entire value of the jointly owned property (less any portion found to be contributed by the surviving spouse) to be included in the decedent's gross estate.

Valuation discounts may be available for decedents who own real property as tenants in common or as community property. For those forms of ownership, the rationale for a fractional interest discount is based on the rights of the tenants in common under local law, arising from unities of interest and possession. A fractional interest discount may be appropriate when a partial interest in property would sell for less than its proportionate share. Thus, when a tenant in common has an undivided half interest in the property, a willing buyer may discount the value of his interest; a buyer of such interest would own the property concurrently with the other tenant in common, and, thus, would have the inconvenience of dealing with several owners, partition suits and potential disagreements. Discounts for lack of marketability arise from the inherent difficulty in the sale of the asset.

On the other hand, an interest in a joint tenancy is different from a property interest in a tenancy in common or in community property. The right of survivorship is the distinguishing feature. While a joint tenancy may be severed by mutual agreement or by a conveyance by one of the joint tenants, a decedent cannot devise property held by the decedent and another in joint tenancy. Joint tenancy has been characterized as a specialized form of a life estate, amounting to a contingent remainder in the fee, the contingency being dependent on which joint tenant survives. The surviving joint tenant does not secure that right from the deceased joint tenant, but from the devise or conveyance by which the joint tenancy was first created. At the time of the decedent's death, his interest in the property is extinguished, with the joint tenancy automatically passing to the surviving joint tenant by operation of law.

In determining that the estate was not entitled to any form of discount in valuing the decedent's interest in the real property held as joint tenants with right of survivorship, the court stated that, under Sec. 2040(a), the amount includible in a decedent's gross estate does not depend on a valuation of property rights actually transferred at death or on a valuation of the actual interest held by the decedent (i.e., legal title). Instead, the decedent's gross estate includes the entire value of property held in a joint tenancy by him and any other person, except to the extent the consideration for the property was furnished by such other person. Sec. 2040(a) provides an artificial inclusion of the joint tenancy property--the entire value of the property less any contribution by the surviving joint tenant. Except for Sec. 2040(a) statutory exclusions, there is no further allowance to account for the fact that less than the entire interest is being included. Consequently, the court held that the decedent's interest in the joint tenancy was not entitled to any valuation discount.

FROM LEE DUNN, J.D., NEW BERN, NC