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Court Rejects Government Attempt to Value Gifts Using Estate Tax Rules

(Parker Tax Publishing October 2021)

A district court denied a government motion for partial summary judgment on the question of whether discounts are appropriate in valuing gifts of partial interests in timberland properties for federal gift tax purposes. The court rejected the government's argument that, if there would be no discount in determining the value of property for purposes of the estate tax, the interests in the property should be aggregated and there should be no discount in determining the value of those interests for gift tax purposes. Buck, 2021 PTC 309 (D. Conn. 2021).


Between 2009 and 2013, Peter Buck purchased $82,853,050 in tracts of timberland in upstate Maine and Vermont. From 2010 to 2013, he gifted interests in these tracts to his two sons, Christopher and William. Each son received a 48 percent interest in each tract, while Buck retained a 4 percent interest for himself.

Under Code Sec. 2501, a gift tax is imposed for each calendar year on the transfer of property by gift by U.S. citizens, U.S. residents, and nonresident aliens. For gift tax purposes, Code Sec. 2512(a) provides that the value of the transferred property on the date of a gift is considered the amount of the gift. Reg. Sec. 25.2512-1 provides that this value is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell, and both having reasonable knowledge of relevant facts.

Each year, from 2010 to 2013, Buck reported and paid gift tax on the transfers to his sons as two separate gifts, each representing the gifted 48 percent interest in given tracts. He valued the gifts using discounts meant to account for the possibility that the interests were less valuable to hypothetical buyers than they might be otherwise. While the combined purchase price of the properties was $82,853,050, Buck declared the discounted value of each 48 percent fractional interest to be $18,496,249, a total of $36,992,498 for the gifts to his two sons. This represented a 55 percent discount from the total purchase price.

The IRS challenged Buck's valuations and issued a deficiency notice with respect to Buck's United States Gift (and Generation-Skipping Transfer) Tax Returns (Forms 709) for tax years 2010 - 2013. For 2010 through 2013, the IRS determined an increase in gift tax, penalties, and interest of approximately $4.3 million, $3.7 million, $775,000, and $774,000, respectively, based on an increase in the value of the gifts. Buck paid the assessment in full and then filed refund claims for the amounts paid. The IRS did not respond to the refund claim.

Buck brought a refund action in district court and asked the court to order the government to refund the alleged overassessment of gift taxes, penalties, and interest. According to Buck, the fractional interests in the tracts of timberland that he gifted to his sons from 2010 to 2013 warranted valuation discounts of at least 40 percent due to the lack of marketability, lack of control, and other factors relevant to those interests. The overarching principle, Buck stated, was that a hypothetical willing buyer, with full knowledge of all relevant facts, would pay significantly less for a minority interest in a tract of timberland where the other interests in the tract are owned by a family whose objective is to hold the tract for the long term and manage it on a break-even basis, and who would vigorously oppose any effort by an outside buyer to partition out the minority interest.

In response, the government moved for partial summary judgment. It asked the court to conclude as a matter of law that no discount should be available for a gift of a fractional interest unless the taxpayer held such interest in fractional form before the gift, rather than viewing several simultaneously gifted portions of the property as fractional interests in the hands of the donor for purpose of valuing the gift. The government argued that gift tax law categorically prohibits such a discount because it is contrary to one of the primary purposes of the gift tax since the value of the property to which the gift tax applies is the fair market value of the properties transferred, minus the portion of each that served to enhance Buck's 4-percent interest. According to the government, it is not appropriate to apply fractional interest discounts in valuing a gift of land to more than one individual; instead the value of each donee's interest is simply the value of the whole times the ownership percentage. Thus, the government suggested that the fractional interests should be combined and valued together, rather than separately.

In support of its position, the government argued that, if the properties at issue passed under a will bequeathing 48 percent interests to each of Buck's sons and 4 percent to a divisee whose bequest would be deductible and thus effectively not taxed, there would be no discounts based on the separate values of the interests received by each son. The government cited three cases, Merrill v Fahs, 324 U.S. 308 (1945), Comm'r v. Converse, 163 F.2d 131 (2d Cir. 1947), and Heringer v. Comm'r, 235 F.2d 149 (9th Cir. 1956), for the proposition that the gift tax and the estate tax are in pari materia and must be construed together so that a transfer of property results in the same tax liability regardless of whether it is a lifetime gift or a transfer at death.


The district court denied the government's motion for partial summary judgment on the question of whether discounts are appropriate in valuing gifts of partial interests in timberland properties for federal gift tax purposes. With respect to the cases cited by the government, the district court said that all they supported was (1) the conclusion that the same words appearing in the gift tax statute and the estate tax statute should be understood to have the same meaning, and (2) the conclusion that a taxpayer should not also be required to pay gift tax where the value of property retained by the taxpayer after purportedly making a gift will be included in the taxpayer's gross estate for estate tax purposes. However, the court said, the cases cited did not provide support for the legal conclusion advocated by the government, i.e., that if there would be no discount in determining the value of property for purposes of the estate tax, the interests in the property should be aggregated and there should be no discount in determining the value of those interests for purposes of the gift tax. Under applicable law, the court stated, the gifts at issue were not a single 96 percent interest but two 48 percent interest given to two different donees, and the gifts must be valued separately at the time of transfer.

The government's justifications for urging the court to ignore a material distinction between the gift tax and estate tax regimes fell flat. First, the court said, the government offered an overbroad reading of the "in pari materia" principle of construction, by mistakenly asserting that the transfer of property must result in the same tax liability regardless of whether it is a lifetime gift or a transfer at death. Second, the court said, the government misread the rule that a gift is measured "by the value of the property passing from the donor," mistakenly asserting that it permits aggregation of gifts for valuation purposes. Noting that the case at hand is a gift tax case, the court found absolutely no support for the government's position that the focus of the case should be on the relationship to the estate tax.

For a discussion of the valuation of gifts for gift tax purposes, see Parker Tax ¶222,700.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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