Minority interests in a family limited partnership holding marketable securities were entitled to a 40-percent combined discount for lack of marketability and control, the Tax Court ruled in Estate of Elma Middleton Dailey v. Commissioner of Internal Revenue. In the case, which concerned interests in the Dailey Family Limited Partnership, the IRS sought more than $200,000 in gift and estate tax deficiencies and penalties.

Mrs. Dailey established the FLP in 1992 with her son, taking a 1-percent general partnership interest and a 98-percent limited partnership interest for herself and assigning her son a 1-percent limited partnership interest. At the same time, she executed a will and set up a revocable living trust. The will left residuary interests in her estate to the trust and passed principal holdings of the trust to her son.

Later, she contributed marketable securities valued at $1,267,619 to the FLP and divided her 98-percent limited partnership interest among her son, his wife, and the trust. When Mrs. Dailey died in 1997, the FLP had securities valued at $1,047,603.

Though both parties compared the FLP to closed-end mutual funds, which trade at a discount to net asset value, the family and the IRS disagreed on discounts for limitations in marketability and control. The family claimed a combined 40-percent discount, based on Mrs. Dailey’s holdings in the trust at her death, and the IRS argued for an aggregate discount of 15.72 percent in 1992, when Mrs. Dailey transferred the securities to the trust, and of 13.51 percent in 1997, when Mrs. Dailey died.

In upholding the family’s claim for a combined 40-percent discount, the court found the family’s expert more persuasive. He relied on published data and considered the significant amount of unrealized capital gains relating to one of the stocks. The IRS expert, on the other hand, relied in part on an unpublished study that he coauthored and did not consider unrealized gains.