In this case, the Tax Court held that a contribution of a tenancy-in-common interest in a personal residence to a qualified personal residence trust was entitled to a 17% marketability discount from its full fair market value.

Husband and wife purchased real property in Hawaii as tenants in common. Husband and wife then created separate qualified personal residence trusts and transferred their one-half undivided interests to the trusts. On their gift tax returns, husband and wife valued their separate one-half undivided interests in the property at a 30% discount. The IRS allowed discounts of only 15%.

In its decision, the Tax Court noted its dissatisfaction with the appraisals prepared by both the taxpayers and the IRS. The Tax Court ultimately decided to discount the tenancy in common interest to reflect the cost of partition and the lack of marketability caused by the buyer’s inability to sell the property quickly for its full fair market value. Based on its calculations, the Tax Court determined that a discount of approximately 17% should apply.