Donors Dispute IRS Valuation of Gifted Interests in Limited Partnership
Jermone C. Hunsaker, Jr. et al. v. Commissioner
- Case NameJEROME C. HUNSAKER, JR. & ALICE W. HUNSAKER, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
- CourtUnited States Tax Court
- DocketNo. 13094-01
- AuthorsBrier, Kenneth P.Brown, John S.Schnall, Matthew D.
- Institutional AuthorsBingham Dana LLP
- Code Sections
- Subject Area/Tax Topics
- Index Termsgift tax, valuation
- Jurisdictions
- LanguageEnglish
- Tax Analysts Document NumberDoc 2001-30114 (57 original pages)
- Tax Analysts Electronic Citation2001 TNT 241-27
Jermone C. Hunsaker, Jr. et al. v. Commissioner
=============== SUMMARY ===============
Jerome and Alice Hunsaker have challenged the IRS's $605,000 gift tax deficiency determination, arguing that the Service overvalued the gifts of interests in Hunsaker Enterprises LP made by the couple in 1995-1998.
The Hunsakers state that Hunsaker Enterprises LP was formed as a limited partnership to serve as a vehicle to consolidate investments of the individual partners, to manage those investments in a unified and coordinated manner, to invest in assets beyond those which fiduciaries by law or custom might hold, and facilitate gifts of interest in a diversified portfolio of assets, as opposed to individual holdings.
During each of the years at issue, Jermone Hunsaker made eight gifts of a 1.25 percent interest in the limited partnership. Half of the gifts were treated as gifts by Jerome and half were treated as gifts by Alice under section 2513. The couple engaged an independent valuation firm which produced a contemporaneous study concluding that the fair market value of a minority interest in the limited partnership should be based on the net asset value of the limited partnership's assets, adjusted sequentially by a reduction of 20 percent for lack of control (minority interest) and 35 percent for lack of marketability. All of the gifts were reported at values determined in accordance with the methodology set forth in the valuation study.
The IRS used the same basic valuation methodology used by the Hunsakers but valued the gifts by first determining the value of the net assets of the limited partnership and then applying discounts based on the size of the minority interests transferred and their lack of marketability. In particular, the IRS applied sequential discounts of 10 percent for lack of control and 10 percent for lack of marketability against the values of the limited partnerships net assets. In determining the values of the limited partnerships net assets, the IRS also adjusted the values of the limited partnership's securities and real estate upward.
The Hunsakers insist that the Service erred in making upward adjustments to the value of the limited partnership's real property. They also contend that the 10 percent minority interest and marketability discounts did not fully reflect the reduced value of the transferred interests. Finally, the Hunsakers contend that the IRS erred in determining that they were liable for late filing penalties under section 6651 because any delay in filing was due to reasonable cause and not willful neglect.
=============== FULL TEXT ===============
UNITED STATES TAX COURT
For cause, it is
ORDERED that the caption of this case is amended to read, "Jerome C. Hunsaker, Jr. & Alice W. Hunsaker, Donors, Petitioners v. Commissioner of Internal Revenue, Respondent."
Chief Judge
Dated: Washington, D.C. October 22, 2001
PETITION
The petitioners, Jerome C. Hunsaker, Jr. and Alice W. Hunsaker (the "Hunsakers") hereby request a redetermination of the gift tax deficiencies and additions to tax set forth by the Commissioner of Internal Revenue (the "Commissioner") in notices of deficiency dated July 30, 2001 and July 31, 2001. As the basis for their case, the petitioners allege as follows:
1. The petitioners are individuals with a mailing address and legal
residence at 100 Newbury Court #602, Concord, MA 01742. The
petitioners' taxpayer identification numbers are 042-12-2275
(Jerome Hunsaker) and 126-16- 1871 (Alice Hunsaker). The gift tax
returns for the periods here involved were filed with the Office
of the Internal Revenue Service at Andover, Massachusetts.
2. The notices of deficiency (the "Notices," copies of which are
attached hereto and marked as Exhibits A-1 through
A-8) were mailed to the Petitioners no earlier than July
30, 2001, in the case of the Notices addressed to Jerome Hunsaker
and no earlier than July 31, 2001, in the case of the Notices
addressed to Alice Hunsaker. The Notices were issued by the Office
of the Internal Revenue Service at Boston, Massachusetts.
3. The deficiencies as determined by the Commissioner are in gift
taxes, generation-skipping transfer taxes, and additions to tax for
the calendar years 1995 through 1998 (the "years at issue"), in
the amounts set forth in the following table. The entire amount of
each asserted deficiency is in dispute.
Taxpayer Tax Year Tax Deficiency Penalties Total
_________________________________________________________________
Jerome Hunsaker 1995 $26,189.00 $ 2,618.00 $28,807.00
Alice Hunsaker 1995 29,534.40 2,953.00 32,487.40
Jerome Hunsaker 1996 83,093.94 0.00 83,093.94
Alice Hunsaker 1996 78,696.55 0.00 78,696.55
Jerome Hunsaker 1997 89,472.13 0.00 89,472.13
Alice Hunsaker 1997 84,328.27 0.00 84,328.27
Jerome Hunsaker 1998 102,465.76 4,747.00 107,212.76
Alice Hunsaker 1998 96,132.90 4,746.00 100,878.90
_________________________________________________________________
Total deficiencies $589,912.95 $15,064.00 $604,976.95
4. The determinations of tax set forth in the Notices are based on
the following errors:
(a) The Commissioner erred in determining that the values of
Jerome Hunsaker's gifts (after gift-splitting) of 0.625%
interests in Hunsaker Enterprises, LP, a Massachusetts limited
partnership (the "LP"), during each of the years at issue
exceeded the amounts shown therefor on his gift tax returns
for the years at issue, resulting in increases in taxable
gifts of $65,640 for 1995,1 $77,980 for 1996, $81,396
for 1997 and $83,165 for 1998.
(b) The Commissioner erred in determining that the values of Alice
Hunsaker's gifts (after gift-splitting) of 0.625% interests in
the LP during each of the years at issue exceeded the amounts
shown therefor on her gift tax returns for the years at issue,
resulting in increases in taxable gifts of $65,632 for 1995,
$77,980 for 1996, $81,396 for 1997 and $83,163 for 1998.
(c) The Commissioner erred in determining that each of the
petitioners was liable for penalties for late filing of the
1995 and 1998 returns, under Section 6651(a)(1) of the
Code, 2 because
(1) the tax that had been paid by each of them, on or before
the date prescribed for payment for each of those years,
equaled or exceeded in each instance the amount of tax
properly due (see Section 6651(b)(1)), and
(2) additionally and alternatively, any failure to file was
due to reasonable cause and not willful neglect.
5. The petitioners rely on the following facts as the basis for their
case:
(a) The LP was formed as a limited partnership under the laws of
the Commonwealth of Massachusetts on December 22, 1994, by
the filing with the Secretary of the Commonwealth of
Massachusetts of a Certificate of Limited Partnership,
pursuant to an Agreement of Limited Partnership (the "LP
Agreement") dated December 22, 1994 by and between Jerome C.
Hunsaker, Jr. and Jerome C. Hunsaker III as original General
Partners and Jerome C. Hunsaker, Jr. as original Limited
Partner. David A. Swope was admitted as an additional General
Partner on December 23, 1994, and additional Limited Partners
have been admitted since the original formation of the
Partnership, reflecting the gifts described below. The LP
Agreement was amended and restated effective as of January 1,
1996.
(b) Under its terms, the LP was intended to serve, and has served,
as a vehicle to consolidate investments of the individual
partners, to manage those investments in a unified and
coordinated manner, to invest in assets beyond those which
fiduciaries by law or custom might hold, and to facilitate
gifts of interests in a diversified portfolio of assets, as
opposed to individual holdings.
(c) During each of the years at issue, Jerome Hunsaker made eight
gifts of interests in the LP (the "Gifts"). In each case, he
transferred to the donee a 1.25% interest in the LP. As a
result of the consents described in paragraph 5(d), below,
half of the Gifts were treated as gifts by Jerome Hunsaker,
and half were treated as gifts by Alice Hunsaker.
(d) Each of the petitioners filed a gift tax return on Form 709
for each of the years at issue, and timely paid the tax shown
to be due thereon. On each return, both petitioners properly
consented to have their gifts to third parties treated as
made one-half by each spouse, in accordance with Section
2513(a)(1) of the Code.
(e) The Hunsakers engaged an independent valuation firm, which
produced a contemporaneous study concluding that the fair
market value of a minority interest in the LP as of December
22, 1994 should be based on the net asset value of the LP's
assets, adjusted sequentially by a reduction of twenty
percent (20%) for lack of control (minority interest) and
thirty-five percent (35%) for lack of marketability. All of
the Gifts were reported at values determined in accordance
with the methodology set forth in the valuation study.
(f) In determining the net asset value of the LP's assets, the
Hunsakers used a value of $175,000 for the real estate owned
by the LP. The property was ultimately sold, in June, 1999,
for $175,000.
(g) The Commissioner subsequently audited the gift tax returns
filed by the petitioners. In issuing the Notices, the
Commissioner made certain adjustments relating to the
petitioners' valuation of the Gifts, as described in
paragraphs 5(h) and 5(i), below, but did not make any other
adjustment to the gifts reported on the petitioners' gift tax
returns.
(h) In determining the deficiencies proposed in the Notices, the
Commissioner used the same basic valuation methodology used
by the petitioners in preparing their gift tax returns. The
Commissioner valued the Gifts by first determining the
value of the net assets of the LP and then applying discounts
based on the size of the minority interests transferred
and their lack of marketability. In particular, the
Commissioner applied sequential discounts of 10% (for lack of
control) and 10% (for lack of marketability) against the
values of the LP's net assets.
(i) In determining the values of the LP's net assets, the
Commissioner adjusted the values of the LP's securities upward
by $93 for 1996 and by $84,460 for 1997. The Commissioner also
adjusted the value of the LP's real estate upward by $285,000
for 1995 (from $175,000 to $460,000), by $380,000 for 1996 and
1997 (from $175,000 to $555,000), and by $475,000 for 1998
(from $175,000 to $650,000).
(j) The Commissioner's determinations with respect to the values
of the Gifts were erroneous and improper because:
(1) The Commissioner erred in making upward adjustments to the
value of the LP's real property. The $175,000 value used
by the Hunsakers reflected the fair market value of that
property.
(2) The 10% minority interest discount used by the
Commissioner did not fully reflect the reduced value of
the very small minority interests in the LP transferred by
the petitioners.
(3) The 10% lack of marketability discount used by the
Commissioner did not fully reflect the reduced value of
the transferred LP interests resulting from the
restrictions upon the transfer of those interests
under the LP Agreement.
(k) The Commissioner's imposition of penalties was erroneous and
improper, because:
(1) Each of the petitioners paid, on or before the date
prescribed for payment for each of the years at issue,
gift tax equal to or exceeding in each case the tax
properly due for that year; and
(2) any failure by the petitioners to timely file returns and
pay the tax due was due to reasonable cause and not
willful neglect.
WHEREFORE, the Petitioners pray that the Court:
1. Determine that the Commissioner erred as alleged in the
assignments of error set forth in paragraph 4 above;
2. Determine that there is no deficiency in. the gift taxes payable
by the petitioners for the calendar years 1995 through 1998; and
3. Grant the petitioners such other and further relief as is
appropriate.
Kenneth P. Brier
Practitioner Code BK0107
John S. Brown
Practitioner Code BJ1083
Matthew D. Schnall
Practitioner Code SM0979
BINGHAM DANA LLP
150 Federal Street
Boston, MA 02110
(617) 951-8000
Dated: October 19, 2001.
1 The Commissioner's Form 3615-A, captioned "Statement Schedule 1," that is appended to the Notices addressed to Jerome Hunsaker, shows an increase in taxable gifts of $105,068 for 1995. However, the Commissioner's determination of the total value of all gifts (including prior year gifts) made through and including 1995, shown on the same schedule, reflects an increase in the 1995 gifts of only $65,640 for that year. Such an increase is consistent with the Commissioner's calculation of the value of the gifted LP interests, as set forth in the Notices themselves, and also with the increase in taxable gifts of $65,632 for Alice Hunsaker as reported on the Commissioner's Form 3615-A for her (the eight dollar difference is attributable to an eight dollar discrepancy in the total gifts reflected on the Hunsakers' original returns for 1995).
2 "Section" references in this petition are to the sections of the Internal Revenue Code of 1986, as amended and in effect for the years at issue (the "Code"), as codified at Title 26 of the United States Code.
END OF FOOTNOTES
- Case NameJEROME C. HUNSAKER, JR. & ALICE W. HUNSAKER, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
- CourtUnited States Tax Court
- DocketNo. 13094-01
- AuthorsBrier, Kenneth P.Brown, John S.Schnall, Matthew D.
- Institutional AuthorsBingham Dana LLP
- Code Sections
- Subject Area/Tax Topics
- Index Termsgift tax, valuation
- Jurisdictions
- LanguageEnglish
- Tax Analysts Document NumberDoc 2001-30114 (57 original pages)
- Tax Analysts Electronic Citation2001 TNT 241-27
