Swing vote attribute affects value of gifted minority interest.

Reducing the value of a transferred interest in property, such as closely held stock or a partnership interest, makes already beneficial techniques such as grantor retained annuity trusts even more attractive. Thus, a critical element in intrafamily gift giving strategies is the availability of discounts for lack of control and marketability.

Since the issuance of Rev. Rul. 93-12, claiming minority interest discounts on gifts of noncontrolling interests to family members has been perceived by many as a technique that has the IRS's stamp of approval. But the Service has now taken the position that all minority interests are not created equal.

In Letter Ruling (TAM) 9436005, the IRS has ruled that valuation discounts otherwise available when a donor makes gifts of minority interests of stock to children must be adjusted to take into account the swing vote attributes of the gifted block. In the TAM, the donor gave three separate 30% blocks of closely held stock to each of three children, claiming a 25% discount for "minority interest and marketability" on each gift.

The ruling explains that the owner of any 30% block could join with the owner of any other 30% block and control the corporation. Thus, any one of these blocks, whether owned by someone related or unrelated to the family, could be critical in controlling the company--a fact that would be taken into account by a hypothetical willing buyer of any of the 30% blocks. The Service relied on Est. of Winkler, TC Memo 1989-232, in which the court acknowledged that the swing vote attribute affected the value of a decedent's 10% stock interest when 40% of the stock was held by the decedent's family and 50% was held by a different family.

The position being taken by the IRS does not really conflict with its position in Rev. Rul. 93-12, in which a donor simultaneously gave five 20% interests to his five children. This ruling is generally cite as holding that minority discounts are allowed for intrafamily gifts of minority interests. TAM 9436005 emphasizes that Rev. Rul. 93-12 merely held that "a minority discount will not be disallowed solely because a transferred interest, when aggregated with interests held by other family members, would be part of a controlling interest." (Emphasis in original.)

For example, when a 100% owner makes a single gift of 30% to a child, the gifted interest has no swing vote attribute and the normal discount is appropriate. However, if the same owner gives a second 30% interest the next year to a second child, the Service explained that (1) the second 30% gift carries with it swing vote characteristics and (2) the first donee's 30% block increases in value because the second 30% transfer enhances its voting control by indirectly conferring on it a swing vote element. Since the IRS still has not argued that the donee's identity is relevant in valuing the transferred block, its position would presumably not differ even if the second 30% block were given to the same child who received the first block, thereby conferring control on that child. However, if the two gifts are close enough in time, the Service would probably attempt to aggregate them to deny discounts; see, e.g., Est. of Murphy, TC Memo 1990-472, in which small gifts by a terminally ill woman just before death were aggregated with the 49% interest remaining in her estate to deny the estate a minority discount.

There is no clear way to quantify the swing vote element as an offset to a minority discount. However, ignoring this issue in a valuation report could invite the IRS to attempt to reduce the discount claimed on this basis alone. Therefore, it may be appropriate to have a valuation professional address the swing vote issue in the appraisal report.