Understanding Warne and Nelson: How Tax Court Is Shaping Control, Marketability, and Tiered Discounts

In the past few years, two landmark Tax Court cases have influenced how appraisers think about discounts and ownership structure: (1) Warne v. Commissioner, T.C. Memo 2021-17 (hereinafter Warne); and (2) Nelson v. Commissioner, T.C. Memo 2020-81 (hereinafter Nelson). Warne addresses discounts for lack of control and marketability in connection with majority interests less than 100.0% and clarifies how value is measured in charitable transfers. Nelson addresses whether tiered discounts are appropriate when ownership interests are held through multiple entities. The following sections provide a general overview of the cases, what the courts decided, and ultimately how we as appraisers and you as estate lawyers and financial advisors should apply these decisions to our respective fields. 

Warne involved real estate holding companies that were controlled by a trustee. The LLC agreements gave the trustee, as controlling member, broad operational and liquidation rights over the companies. This case covers two categories of transfers – transfers to individuals or trusts for the benefit of the family and transfers to charitable organizations. 

In the case, both experts for the IRS and the taxpayer agreed that discounts for lack of control (DLOC) and marketability (DLOM) were valid even for majority interests. This creates planning considerations as a wealth advisor in structuring and advising clients on how to maximize their long-term goals. 

The court adopted the taxpayer’s method of identifying the incremental difference in discounts on 50.0-90.0% ownership blocks versus 90.0-100.0% ownership blocks, rather than the IRS’ use of closed-end funds (“CEFs”). The taxpayer’s appraiser calculated this by comparing premiums paid for 50.1% to 89.9% versus premiums paid for 90.0% to 100.0% controlling interests. This was used to reflect the DLOC. It is worth noting the court’s main issue was not the use of CEFs themselves, but the arbitrary application of discounts which did not match the CEFs.

When assessing marketability, the court adopted the taxpayer’s use of restricted stock studies and specifically compared restricted stock transactions to the subject of interest that were identified within the studies. However, the court applied discounts at the lower end of the taxpayer’s range to reflect the majority nature of the interest. This is consistent with prior court opinions that restricted stock studies are useful if the appraiser can connect the discount implied by the studies to the specifics of the company, however general discounts such as the median or average are typically viewed less favorably without supporting that the company is reflective of the median or average. While the court did adopt the taxpayer’s methodology, it appeared to do so because the IRS expert’s conclusions were not supported, rather than a full-throated endorsement of the taxpayer’s selections in their entirety.

Furthermore, both the IRS and the taxpayer agreed that some level of discounts were appropriate for many interests. It was a moot issue for the court, but it did express doubt and did not make a definitive ruling on this issue. Even with the court’s skepticism, there is precedent, but it could be disfavored in future cases. As a further caveat, the IRS did not strongly challenge the application of discounts on a majority interest, because it had already applied DLOCs and DLOMs to the majority of interests donated to charitable organizations. Therefore, the IRS had an interest in discounts on majority interests being allowed.

The second main issue in Warne involved the value of fractional ownership interests when the taxpayer owns a 100% interest. The court reaffirmed that valuation focuses on what the recipient receives, not what the donor gives up. For example, if an estate owns 100.0% of a company worth $100 and donates ten separate 10.0% interests, each 10.0% interest is valued as a minority interest. Assuming a 20.0% discount, each 10.0% interest would be worth $8 ($10 minus 20.0%), for a total charitable deduction of $80. However, the estate tax value is still based on the original 100.0% controlling value of $100. This leaves $20 subject to estate tax despite the taxpayer giving away the entire company. This makes it necessary to pay attention to both the form and function of the transferred interests and creates a preference for donating controlling interests to charitable organizations, in contrast to the common preference for gifting non-controlling interests intergenerationally. 

Ultimately, Warne suggests that DLOCs and DLOMs may apply to majority interests in certain situations. Appraisers should be prepared to defend them and should not assume they will be accepted blindly. Warne is an interesting and cautionary tale about ensuring consistency in the application of discounts. When discounts are not evenly and consistently applied, it creates an opportunity for the IRS to provide their own opinion of what discounts should be, which is typically contrary to the best interests of the taxpayer. This was illustrated by the discounts applied to the charitable gifts which featured a significant discount for lack of marketability more than what was applied to the other interests.

As an estate lawyer, this clarification on charitable giving requires communication with the financial advisor and UHNW to ensure that donations are being made in a tax efficient manner that does not create excess harm to the estate. Similarly, as a financial advisor this necessitates additional communication to the UHNW as well as additional strategizing to effectively execute the intent of the UHNWs estate planning desires.

Nelson involved the transfer of interests in an entity that owned shares in a holding company (the “Holdco”), and the Holdco owned underlying subsidiaries. The main issue of Nelson was whether DLOCs and DLOMs should be applied at multiple levels when ownership is held through tiered entities. In other words, could the taxpayer take discounts at the subsidiary level and then apply additional discounts at the holding company or top entity level. 

In general, the IRS did not argue that multi-tiered discounts were inherently incorrect. Instead, the IRS challenged the magnitude of the discounts and whether they were developed on a controlling or non-controlling basis and the underlying support. The court supported the IRS’s argument regarding the selection of appropriate comparable data, keenly that when determining a peer group for Holdco, it should reflect the company’s nature as a holding company rather than the underlying investments. However, the court agreed that each entity layer should be valued based on its own characteristics and capital structure rather than collapsing the structure into a single level.

What this suggests is that each entity’s discounts are unrelated to the prior discounts applied. This allows for discounts throughout a tiered structure which the IRS tacitly agreed with, and the court upheld the appropriateness of the presence of discounts. The takeaway is the validity of tiered discounts at each investment level provides a degree of increased tax efficiency, especially for more complex ownership structures. Estate planners and appraisers alike should be aware of this because it creates an increased value-add for estate lawyers able to handle heightened complexity and communicate the value of that complexity to clients. 

Warne demonstrates that even majority interests may still face practical limitations on control, and therefore both a DLOM and DLOC are justifiable with proper support.

Additionally, transfers to charitable organizations are valued based on what the recipient receives, not the value given by the donor. Therefore, splitting up a majority interest into minority interests reduces the income tax benefit and creates unnecessary estate tax exposure.

Nelson confirms that tiered discounts are permissible, but only when each entity layer is analyzed based on its own characteristics. Notably, the IRS did not protest against the concept of tiered discounts. Instead, the dispute focused on methodology, comparable selection, and whether the discounts reflected the correct level of control. The court emphasized that a holding company should be compared to other holding companies, not to the operating businesses it owns which creates additional clarity on which entities have the discounts applied (in this case it’s the entities featuring minority ownership). This case reinforces that complex ownership structures can still create valid discounts if each layer is properly supported. This provides opportunities for trust and estate planning.

Together, these cases send a clear message. Discounts are not automatic. They must be earned through strong data, appropriate comparable companies, and consistent methodology. At the same time, ownership structure and transfer design can significantly affect tax outcomes. Firms that understand both valuation and planning are better positioned to deliver accurate results and avoid unnecessary disputes.

Withum’s valuation and advisory teams work alongside attorneys, tax advisors, and family offices to design and support structures that will hold up under IRS scrutiny while maximizing strategic outcomes. As these cases show, technical precision and thoughtful planning are essential to achieving defensible and efficient results.

Authors: Ross Slutsky, ASA | [email protected] and Anthony Venette, ABV, CPA | [email protected]