Estate of Simplot: The Tax Court Applies a Significant Premium to Voting Privileges

The Simplot case involves the transfer of stock in a family-owned company after the founder’s death. The court ruled that a “premium” should be applied to the transfer of minority voting stock, and that the premium for a controlling interest would be substantially greater. This decision could impact estate and gift tax reduction strategies involving closely held corporations and family partnerships. Mr. Simplot’s estate argued that the voting and nonvoting shares of his company should be valued the same because they didn’t give anyone enough power to control the company. But the IRS said the voting shares should have a higher value because there were so many more nonvoting shares. They said the voting shares should be worth 3-10% more than the nonvoting shares. The Tax Court agreed with the IRS that a premium should be added to the class A voting shares of the company. This premium should be a percentage of the total value of the company. The court stressed that they were not valuing the premium for controlling voting power, but for voting rights. They also acknowledged that their decision was based on the unique facts of the case, such as the ratio of voting shares to nonvoting shares. The court decided that the class A voting shares of the company were more valuable because they have potential control over the company and access to important decision-making. They also considered that a hypothetical buyer of the shares might eventually be able to gain control of the company. The court ultimately decided that a three percent premium should be added to the value of the voting shares. The court in the Simplot case determined that the value of the voting stock in the company was much higher than the nonvoting stock. This could have a big impact on how people give gifts of stock in their family businesses. It might mean that the value of the stock for gift tax purposes could be higher, and this could affect estate taxes as well. A parent owns a company worth $10 million, and they want to give some of it to their kids. They can do this by giving them non-voting shares of the company, which means the kids don’t have a say in how the company is run. This way, the parent can keep control of the company while still sharing its value with their kids. This can also help lower taxes. In a recapitalization, it’s important to balance the number of voting and nonvoting shares. A safe ratio is 1 voting share for every 10 nonvoting shares. This helps avoid paying a higher premium on voting shares. To further avoid this, the senior family member should transfer voting shares in a way that doesn’t give one person complete control. This way, the IRS can’t argue for a higher premium on the transferred shares. So, the senior family member will eventually have to give up control of the voting shares to avoid this. If the IRS applies the same reasoning used in the Simplot case to family limited partnerships, it could mean that when someone gifts or sells their limited partnership interests to their children, a premium could be applied to the transfer of the general partnership unit. This could result in the general partnership interest being subject to a much higher premium, potentially even 300 percent or more. This would not be good news for people who use family limited partnerships for estate planning, as it would reduce the value of the gifts or sales they make to their children. In a family limited partnership, it’s more complicated to plan around the Simplot case because the general partner controls the partnership. To avoid extra taxes, it’s best to transfer all limited partnership interests during life and use a trust to maximize discounts. Also, the senior family member shouldn’t be the general partner individually, but through a company. This will help minimize any extra taxes. So, if you’re thinking of transferring stock or partnership interests to family members, make sure to consider the Simplot case and get advice from a tax professional. In the case of Simplot, the IRS may apply a substantial premium to the transfer of family limited partnership interests, which could have a big impact. This case could also affect limited liability companies in Florida.

David Pratt is a lawyer who specializes in estate planning in Florida. He’s really good at what he does and has a lot of experience and education in tax law.

Source: https://www.floridabar.org/the-florida-bar-journal/estate-of-simplot-the-tax-court-applies-a-significant-premium-to-voting-privileges/