The Watts case illustrates the difference between the going concern value and the liquidation value. (e) Difference Between Going Concern Value and Liquidation Value. The nature of the underlying partnership assets and/or the business conducted by the entity will determine which valuation method will be most persuasive to the courts. The only value to them in currently owning a partnership interest is their right to receive the distribution of earnings, which is often substantially less than the net asset value of the partnership. This approach properly recognizes that the members do not have the ability to unilaterally liquidate the LLC-P or LP. The going concern value of a LLC-P or LP is determined by capitalizing its past and projected net earnings. The IRS usually takes the position that the appropriate valuation approach is the one that produces the highest value. Courts have favored a valuation that uses a combination of both analyses. The pre-discounted value is typically determined based on the вЂњgoing concern valueвЂќ or the вЂњnet asset valueвЂќ or perhaps a combination of both.

However, since that rarely occurs, the appropriate starting point is the determination of the value of the entire partnership on a pre-discounted basis. The best evidence of value would be previous armвЂ™s-length sales of the entire partnership interest or partial interests. (c) How is Fair Market Value Determined? In determining value, the Treasury Regulations for transfer taxes require that the fair market value of a business interest be determined on the basis of all relevant factors, including a fair appraisal of all the business assets and the demonstrated earning capacity of the business. In either case, the вЂњadjustedвЂќ value reflects вЂњtrue economic valueвЂќ as opposed to pro-rational (liquidation value) value relative to the underlying assets. The manner in which this is accomplished involves creating a structure to which a business appraiser can properly apply either вЂњpercentage discountsвЂќ or from which he or she can determine a вЂњcapitalization rateвЂќ in order to approximate what an investorвЂ™s return on invested capital might bring in that particular enterprises. The objective of the estate planner in achieving valuation adjustments is to create an entity, such as a LLC-P or LP, that permits the membership interests to be valued for their вЂњdistributable cash flowвЂќ value (sometimes expressed as the вЂњgoing concern valueвЂќ) rather than the вЂњliquidation valueвЂќ of the underlying assets.

Thus, the value of the transfer is the вЂњvalue of the property which is actually transferred as contrasted with the interest held by the decedent before death or the interest held by the legatee after death.вЂќ See Estate of Bright v. (b) What is Fair Market Value? The value of lifetime gifts and bequests at death are measured by the same standard. Estate taxes are imposed on what was held by the decedent at the time of his death and passed to his estate, not on what was transferred to his beneficiaries. Gift taxes are imposed on the donor based on the value of what is received by the transferee.

Treas.Regs В§В§20.2031-1(b), 20.2031-3, for transfer tax purposes using the hypothetical вЂњarmвЂ™s lengthвЂќ transaction between a вЂњwilling buyerвЂќ and a вЂњwilling sellerвЂќ, neither of whom is acting under any compulsion to buy or sell, and each of whom has reasonable 25.2512-1, United States v. All property is valued knowledge of all relevant facts. Hypothetical Willing Buyer, Willing Buyer.(a) Key Concepts for Valuation Discounts вЂ“ Valuation for estate and gift tax purposes is based upon three fundamental concepts. LLC-P and LP Asset Valuation Discounting Strategies Why and how do we use LPвЂ™s (limited partnerships) and LLC-PвЂ™s (limited liability companies taxed as a partnership) for estate planning? Estate Planning Strategies Using LLCвЂ™s, Part Two

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