Valuation Discounts After Estate of Nowell v. Commissioner: A Clear Formula for Reducing Estate Taxes

In Estate of Nowell v. Commissioner, the Tax Court considered the issue of valuation discounts on property for purposes of calculating federal estate and gift tax liability. In its memorandum opinion, the court held that transferred property is valued without considering other similar property held by either the transferor or transferee for estate and gift tax purposes. The Nowell decision provided two important rules. First, a family may transfer property to various trusts and then claim that the total value of all trusts is worth less than the value of the underlying property because each trust owns only a partial share of the property. This is true even when the family still owns and controls the trusts and, therefore, owns and controls all the property. Second, Nowell provides an additional valuation discount when an interest in a limited partnership is transferred and the transferee is treated as an assignee as opposed to a substitute limited partner. This discount is available even when the transferee owns one hundred percent of the remaining partnership, making the distinction between an assignee and a full partner irrelevant. Part II of this note will discuss the relevant law as it existed at the time Nowell was decided. Parts III and IV will then describe the circumstances surrounding the case and how it came to be heard by the court. Next, Part V will offer an explanation of the Tax Court\u27s analysis, which will then be critiqued and supported in Part VI. Part VII will conclude this note by discussing a method by which to use the Nowell case to obtain maximum valuation discounts in estate planning