## Facts

- Webster E. Kelley, his daughter, and his son-in-law formed a Texas family limited partnership (Kelley-Louden, Ltd.) and a Texas LLC (Kelley-Louden Business Properties, LLC) in 1999.
- Kelley contributed approximately $1.1 million in cash and certificates of deposit to the partnership; the daughter and son-in-law later contributed $50,000.
- At Kelley’s death (Dec. 8, 1999), he held a 94.83% limited partnership interest and a one-third membership interest in the LLC; the LLC’s only asset was a 1% interest in the partnership.
- On the date of death, the partnership’s assets were cash and certificates of deposit totaling $1,226,421, with no liabilities.
- The estate’s appraiser valued the interests using a weighted net asset value/income approach and applied combined discounts of about 53.5% (25% lack of control/minority and 38% lack of marketability).
- The IRS issued a notice of deficiency asserting the estate’s discounts were excessive and proposed a combined discount of about 25.2% (12% lack of control/minority and 15% lack of marketability).
- The sole dispute was the fair market value of the decedent’s interests for federal estate tax purposes.

## Issues

1. What is the fair market value, for federal estate tax purposes, of the decedent’s 94.83% interest in a cash-and-CD family limited partnership and his one-third interest in an LLC holding a 1% partnership interest.
2. What lack-of-control (minority) and lack-of-marketability discounts are appropriate where the entities’ underlying assets are highly liquid and readily valued.

## Decision

- The Tax Court used net asset value as the valuation base because the entities primarily held cash and certificates of deposit.
- The court rejected the estate’s larger claimed discounts as excessive for interests in entities holding highly liquid assets.
- The court also declined to adopt the IRS’s full position on marketability.
- The court determined a 12% lack-of-control (minority) discount and a 23% lack-of-marketability discount and directed recomputation of the estate tax liability consistent with those findings.

## Legal Principles

- Estate tax valuation is based on fair market value: the price a hypothetical willing buyer and willing seller would agree upon, with neither under compulsion and both informed of relevant facts.
- For entities holding predominantly liquid, marketable assets (cash equivalents), net asset value is typically the primary valuation method, and very large discounts require strong support.
- Lack-of-control and lack-of-marketability discounts may apply to closely held entity interests, but the size of discounts must reflect the entity’s asset composition, transfer restrictions, and empirical market evidence.
- Valuation analyses relying on selectively chosen comparables that inflate discounts may be discounted in favor of broader, methodologically sound datasets.

## Conclusion

The Tax Court valued the decedent’s interests in a cash-only family limited partnership and related LLC by reference to net asset value and allowed moderate discounts—12% for lack of control and 23% for lack of marketability—reducing the estate’s claimed discounts while not fully adopting the IRS’s lower marketability adjustment.


Estate of Kelley v. Comm’r, T.C. Memo. 2005-235 (2005)