A gift is taxed according to its fair market value, i.e., the amount someone would be willing to pay to buy or sell it.  Suppose dad has a stock portfolio worth $100,000.  A gift to son of 10% of that portfolio would be valued at $10,000 because, immediately after death the gift, son could sell the stock to another investor for $10,000.

        Suppose, however, that dad transferred the $100,000 stock portfolio to a partnership and then gave son a gift of a 10% share in the partnership, with dad keeping 90%.  In that situation, a buyer would be reluctant to pay $10,000 for the partnership interest because dad still controls the partnership and may make decisions that are contrary to the buyer’s minority interest.  Therefore, the buyer will only agree to the deal if he gets a discount from the value of the underlying assets.

     For example, if the buyer insists on a 30% discount, then he will pay only $7,000 for a 10% share in the partnership even though 10% of the partnership’s assets are worth $10,000.  Therefore, the value of a gift of the partnership interest is only $7,000 for gift tax purposes because that is what a hypothetical buyer would be willing to pay.  However, son still has rights to the same $10,000 worth of assets through his share in the partnership.

     Prior to the IRS ruling, no minority discount could be taken if the partnership was controlled by the family of the minority owner.  The new ruling now allows a minority discount to be taken when a family is in control, even if one person owned 100% of the partnership before the gift was made.

     What does this mean from a gift tax standpoint?  Without the ruling, a gift of a 10% share in a limited partnership with assets of $100,000 would be considered a gift of $10,000 under the gift tax laws.  However, by discounting the shares by 30% under the new ruling, a gift of a 14.3% share in the same partnership would be considered a gift of $10,000 for tax purposes.