Estate and Gift Tax Valuation of Closely Held Hangar Entities

Abstract

1. Introduction

A seventy-four year old aviation entrepreneur owns all of a Texas limited liability company whose only meaningful asset is a ground lease from a municipal airport sponsor.

The lease covers 1.8 acres of airside land on which the company has built, at a cost of $3.2 million, a 25,000 square foot corporate hangar generating roughly $310,000 of annual net operating income from creditworthy subtenants. Eighteen years remain on the lease, with one five-year renewal option exercisable only with sponsor consent. The operating agreement grants the sponsor a right of first refusal, prohibits assignment without the sponsor's written approval, and gives the sponsor a repurchase option at appraised improvement value on any ownership transfer. The improvements revert to the sponsor without compensation at expiration.

How should that membership interest be valued for federal estate tax purposes?

The answer requires integrating three bodies of doctrine that rarely appear in the same analysis: aviation ground lease economics, the transfer tax valuation rules of chapters 11 and 14 of the Internal Revenue Code, and the business appraisal development requirements of the Uniform Standards of Professional Appraisal Practice. Each is developed in isolation. Their interaction in the aviation leasehold setting has received little attention.

The gap matters at a scale worth stating. The Federal Aviation Administration's National Plan of Integrated Airport Systems identifies nearly 3,300 public-use airports in the national airport system (Federal Aviation Administration 2025). Corporate hangars and fixed-base operator facilities at those airports represent a substantial stock of privately financed infrastructure, a large share of it held through family limited liability companies or limited partnerships. As those interests pass through estates, practitioners are applying discount benchmarks calibrated to going-concern equity to assets whose economics differ from that population in ways the benchmarks do not capture.

The timing question has changed since the structures now maturing were designed. The temporary doubling of the basic exclusion amount enacted in 2017 was scheduled to expire after 2025, and a generation of family entity planning was built around that deadline. It did not expire. Section 70106(a) of Public Law 119-21, enacted July 4, 2025, substituted a permanent $15,000,000 base in section 2010(c)(3)(A), repealed the temporary provision, and reset the inflation adjustment to begin for decedents dying after 2026. The basic exclusion amount for decedents dying and gifts made in 2026 is therefore a flat $15,000,000, with the generation-skipping transfer exemption tracking it under section 2631(c) and the gift tax annual exclusion at $19,000. The exclusion amount is set by the statute as amended rather than by the annual revenue procedure, which recites it; the annual exclusion is set by the procedure at section 4.42(1). The compression that many hangar entity structures were designed to anticipate did not occur, which changes the cost-benefit calculation of aggressive discounting and makes the defensibility of the discount, rather than its size, the operative question.

This paper proceeds as follows. Section 2 explains why entity ownership dominates corporate and fixed-base operator hangar holdings. Section 3 analyzes the reversion clause and its effect on underlying asset value. Section 4 places the problem within sections 2031, 2703 and 2704 and identifies the position the sponsor's consent right occupies under them. Section 5 examines the standard marketability and control benchmarks and where they break down. Section 6 surveys the litigated record on entity respect and the arguments a hangar entity invites. Section 7 proposes the analytical framework. Section 8 addresses the development and reporting standards and the appraiser penalty regime. Section 9 states the limits of the framework, and Section 10 concludes.

2. Why Family Entities Hold Corporate and FBO Hangars

2.1 The operational logic

Individual direct ownership of corporate hangars and fixed-base operator facilities is uncommon, and the reasons are structural. Airport ground leases routinely require the lessee to maintain substantial insurance, assume environmental remediation liability, fund capital improvements on a fixed schedule, and comply with the sponsor's minimum standards for commercial aeronautical activities. Those obligations carry personal liability exposure that individual ownership is poorly suited to contain. An entity interposes a liability shield between the owner's personal assets and the operational risks of aviation real estate.

For a fixed-base operation the case is stronger. The business sells aviation fuel, which creates spill liability, fire risk and exposure associated with fluorinated firefighting foam. It provides ground handling and aircraft movement, which generates aviation liability claims. It may hold a through-the-fence agreement imposing public access obligations. Concentrating those liabilities in a dedicated entity insulates the owner's other assets and simplifies insurance structuring.

Entity ownership also facilitates co-investment. Construction costs for a quality corporate hangar, plus ground lease premiums and apron and utility infrastructure, frequently exceed what a single owner can justify from its own storage requirement alone. A partnership allows several aircraft owners to share cost, divide tax attributes and collectively support facility quality none would build individually. Entities enable leverage as well: lenders generally prefer a security interest in membership interests to a collateral assignment of the ground lease, which simplifies both underwriting and enforcement.

2.2 Estate planning motivations

Estate planning reinforces the operational logic. A family entity allows a senior generation to transfer economic interests while retaining management through a managing member or general partner position, and while claiming entity-level discounts that reduce transfer tax value below a pro rata share of the underlying asset. The Internal Revenue Service has recognized the prevalence of the structure and devoted sustained enforcement attention to it, which Section 6 addresses.

For aviation assets the continuity rationale carries independent weight. Ground leases at preferred airports are scarce and, once surrendered, may be irreplaceable. A family that has operated from a specific field for decades may attach value beyond income economics to continuous leasehold possession across generations. Entity ownership can preserve that continuity without triggering the sponsor consent that a transfer of the leasehold itself would require, though Section 4.4 explains why that advantage is narrower than it appears.

2.3 Structural variations and their valuation consequences

Three structures recur. The first is a single-purpose entity whose only assets are the ground lease and the improvements built under it, held by one family or operating corporation. The second is tiered: an operating company holds the lease and manages subleasing, and a family limited partnership holds the operating company's membership interest and distributes economic ownership among family members. The third is an integrated fixed-base operator that owns the ground lease alongside the service business assets, including fuel inventory, ground support equipment and customer contracts.

Table 1. Ownership structures and their valuation consequences

Source: Author's classification.

Each variation creates distinct problems. The single-purpose entity is analytically cleanest. The tiered structure introduces two layers of entity discount analysis that the appraiser must avoid double-counting, a point on which examination reports focus. The integrated operator requires a preliminary business enterprise valuation with real property segregated before entity-level discounts are applied, and it raises the separate question of how much of the enterprise's earning power is transferable at all.

3. Reversion Without Compensation

3.1 The clause and its federal footing

The economic feature that separates an airport ground lease from a conventional commercial ground lease is the reversion-without-compensation clause. In a standard commercial ground lease governing a pad site, a bank branch or a net-leased industrial facility, the tenant either retains the right to remove improvements at expiration or receives compensation from the landowner for structures that cannot practically be removed. Airport ground leases routinely provide neither. A representative clause reads: all improvements constructed by lessee on the leased premises shall, on expiration or earlier termination of this agreement, become the property of the sponsor without compensation to the lessee.

The consequence is direct. The improvement residual, the terminal value contribution from the building that would ordinarily anchor a portion of the property's value, is zero. In a discounted cash flow valuation of a leasehold with fifteen years remaining, terminal value would ordinarily represent a meaningful fraction of indicated value. Under a reversion clause it is eliminated.

The clause is not a negotiating artifact that a sophisticated lessee can routinely bargain away, and the reason is federal. Grant Assurance 38, Hangar Construction, provides:

If the airport owner or operator and a person who owns an aircraft agree that a hangar is to be constructed at the airport for the aircraft at the aircraft owner's expense, the airport owner or operator will grant to the aircraft owner for the hangar a long term lease that is subject to such terms and conditions on the hangar as the airport owner or operator may impose.

The assurance obliges the sponsor to grant a long-term lease and simultaneously preserves the sponsor's authority to attach terms of its choosing to the hangar. Reversion is one of those terms, and it is imposed against a background in which the sponsor's own latitude is constrained in the opposite direction by Grant Assurance 22, economic nondiscrimination, and Grant Assurance 24, which requires a fee and rental structure that makes the airport as self-sustaining as possible (Federal Aviation Administration 2025a). The sponsor is therefore not free to waive reversion casually where doing so would transfer airport value to a private party, which is why the clause persists across sponsors of very different sophistication.

3.2 Three amplifying features

Three structural features amplify the lease-term effect in the aviation setting beyond what conventional ground lease theory predicts.

First, the reversion clause eliminates the improvement residual that mitigates terminal value risk in other ground lease types. A retail ground lease expiring in fifteen years on a premium urban parcel retains residual value because the tenant can sell its leasehold interest, or a franchisor's real estate affiliate can exercise a purchase option, at a price reflecting the location premium. No comparable private market exists for an aviation leasehold, because the building sits on controlled airport property carrying grant assurance obligations that restrict it to aeronautical use.

Second, the hangar is a single-purpose asset. Clear-span structure, oversized bifold or hydraulic doors, floor slabs designed for aircraft wheel loads and airside access requirements make it efficient for aviation and close to non-convertible for anything else. A retail or industrial building approaching the end of a ground lease retains option value associated with adaptive reuse. A hangar approaching the end of an airport ground lease has none. It cannot be repurposed and cannot be moved economically. Its value derives from continued aeronautical use at that specific location.

Third, the sponsor occupies a monopsony position at renewal. It is the only potential lessor for the tenant's existing location. The tenant cannot credibly threaten to relocate without abandoning a reversion-bound building and incurring full replacement construction cost elsewhere, which for a multi-million dollar hangar is prohibitive relative to any achievable rent saving. That asymmetry compresses the economic value of a renewal option and grows more severe as the remaining term shortens.

3.3 Implications for net asset value

For the estate valuator the operative implication is that the net asset value underlying any entity-level discount analysis must reflect a leasehold value carrying the zero terminal value constraint, not a fee simple value and not a conventional leasehold value. A valuator who derives net asset value from a capitalization rate calibrated to conventional industrial real estate, without adjusting for the reversion clause and its amplifying features, will overstate the base on which discounts are then applied. The compound error, an inflated base multiplied by an under-stated discount, produces a reported value that overstates fair market value in both of its components.

Net asset value for a hangar entity should proceed in three steps. Value the leasehold using a discounted cash flow with terminal value set to zero, or to any contractually specified compensation, and a discount rate reflecting the term-sensitive risk the lease structure creates. Subtract obligations a hypothetical purchaser of the leasehold would assume, including ground rent arrears, deferred maintenance, and environmental remediation exposure, which in a fuel-handling context includes fluorinated foam liability. Then apply entity-level discounts to the resulting net asset value for the marketability and control impairments the entity structure creates. Each step carries aviation-specific considerations addressed below.

4. The Statutory Overlay: Sections 2031, 2703 and 2704

Entity-level discount analysis is frequently presented as a purely appraisal question. It is not. Chapter 14 of the Internal Revenue Code directs that certain restrictions be disregarded in determining transfer tax value, and an operating agreement provision that an appraiser treats as a marketability impairment may be a provision the statute instructs the appraiser to ignore. A framework that does not address chapter 14 is incomplete, and this is where the airport setting produces a result that differs from the ordinary family entity case.

4.1 The standard

The governing standard is fair market value: "the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts" (Treas. Reg. § 20.2031-1(b); § 25.2512-1). Revenue Ruling 59-60 supplies the analytical factors for a closely held interest, including the nature and history of the enterprise, the economic outlook for the specific industry, book value and financial condition, earning capacity, dividend-paying capacity, goodwill and other intangible value, prior sales of the stock and the size of the block, and the market prices of comparable publicly traded companies (Rev. Rul. 59-60). The ruling was written for stock but applies in substance to membership and partnership interests.

4.2 Section 2703: restrictions disregarded

Section 2703(a) provides that the value of property is determined without regard to any option, agreement or other right to acquire or use the property at a price less than fair market value, and without regard to any restriction on the right to sell or use the property. That is the rule. Section 2703(b) is the exception: the restriction is respected if it is a bona fide business arrangement, is not a device to transfer property to members of the decedent's family for less than full and adequate consideration, and has terms comparable to similar arrangements entered into by persons in an arm's-length transaction. All three prongs must be satisfied. Treasury Regulation § 25.2703-1(b)(3) supplies a safe harbor: a right or restriction is treated as meeting all three requirements if more than fifty percent by value of the property subject to it is owned, directly or indirectly, by individuals who are not members of the transferor's family.

The order of the two subsections is frequently inverted in practitioner writing. Subsection (a) is the rule of disregard and subsection (b) is the exception, not the reverse. The consequence for a hangar entity is that a right of first refusal running to family members, a supermajority approval requirement, or a formula price in the operating agreement is presumptively disregarded unless the three-prong test is met on the facts.

4.3 Section 2704: applicable restrictions

Section 2704(b) disregards an applicable restriction on the ability to liquidate the entity in valuing a transferred interest among family members, where the family controls the entity and the restriction either lapses after the transfer or can be removed by the transferor or the family. The Treasury proposed regulations in 2016 that would have broadened the provision substantially, reaching transfer restrictions and a wider set of liquidation limits (81 Fed. Reg. 51413). Those proposed regulations were withdrawn on October 20, 2017 (82 Fed. Reg. 48779), and the pre-2016 regulatory framework governs. That withdrawal is now eight years old and is settled ground rather than a pending development, but it continues to be reported as open in practitioner materials.

4.4 Why the Sponsor’s Consent Right Occupies a Different Position

The sponsor’s consent right is not an applicable restriction, and there are two independent reasons rather than one.

The first is textual and disposes of the question on its own. Section 2704(b) reaches a restriction that “effectively limits the ability of the corporation or partnership to liquidate.” A consent requirement limits transfer, not liquidation. It was the 2016 proposed regulations, withdrawn in 2017, that would have created a category of disregarded restrictions reaching limits on liquidating an individual interest. Because they were withdrawn, the transfer restriction is outside section 2704(b) entirely.

The second is an express exception that applies even to a restriction recharacterised as reaching liquidation. Section 2704(b)(3) provides that the term applicable restriction “shall not include ... any restriction imposed, or required to be imposed, by any Federal or State law,” and the regulation repeats it: “A restriction imposed or required to be imposed by Federal or State law is not an applicable restriction.” The same regulation confines an applicable restriction to a limitation on liquidation “more restrictive than the limitations that would apply under the State law generally applicable to the entity.”

The federal predicate is documentary rather than inferred. FAA Order 5190.6C directs at paragraph 12.3.b(7) that the reviewer ask whether “the airport sponsor maintained the right to approve in advance an assignment (a sale or transfer of the lease) or sublease by the tenant,” and states that the sponsor should retain approval rights to intervene where a dominant operator acquires competitors or a tenant subleases to non-aeronautical users. The agency does not merely permit the consent right. It directs sponsors to keep it, and reviews leases for its presence.

Section 2703 reaches the same result by a third route. A restriction contained in an arm’s length lease with an unrelated governmental counterparty satisfies the requirement that the terms be comparable to a fair bargain among unrelated parties on its face, because they are one.

The caution in Section 9 stands. No decision addressing an airport ground lease consent right in a transfer tax valuation was located, and the argument above is a reading of the statute rather than an application of precedent.

4.5 The Provision Written for Wasting Interests

One federal transfer tax rule speaks directly to an interest that decays with elapsed time, and this literature has not applied it to a ground leasehold.

Section 2032 permits an executor to elect valuation six months after death, or at the date of disposition where the property is disposed of sooner. The election is available only where it decreases both the gross estate and the sum of the chapter 11 and chapter 13 tax, is made on the return, is irrevocable, and may not be made on a return filed more than one year after its due date including extensions.

The provision that matters here is section 2032(a)(3): “Any interest or estate which is affected by mere lapse of time shall be included at its value as of the time of death (instead of the later date) with adjustment for any difference in its value as of the later date not due to mere lapse of time.” The regulation repeats it and enumerates the category: “patents, estates for the life of a person other than the decedent, remainders, reversions, and other like properties, interests, or estates.”

The regulation works a patent example that is worth following, because the arithmetic is the point. A patent worth $78,000 at death with ten years of life remaining is sold six months later for $60,000. The alternate value is not $60,000. It is $63,157.89, being $60,000 divided by 0.95, because six months of a ten-year term is five percent of the remaining life and that decay is added back.

A ground leasehold with a fixed remaining term and a reversion without compensation is functionally the same instrument. Its decline over six months is a pure function of elapsed term. An executor electing section 2032 for a hangar entity should expect an examiner to argue that the value must be adjusted back under section 2032(a)(3) to strip out the term decay, which is the same quantity the framework in Section 7.3 isolates as the wasting-asset increment. The framework and the alternate valuation rule measure the same thing from opposite directions.

One question is open and worth stating as open. Section 2032(a)(3) plainly reaches a directly held term interest. Whether it reaches an entity interest whose underlying asset is the wasting leasehold is unresolved, and no authority applying it through an entity was located. An executor electing section 2032 on a hangar entity is electing into an unanswered question.

5. Marketability and Control Discounts in an Aviation Leasehold Entity

5.1 The standard benchmarks

Practitioners approach the discount for lack of marketability through three established routes. The restricted stock studies compare the price of restricted shares of a public company to the price of the same company's freely traded shares. The Internal Revenue Service's own compilation reports that those studies exhibit a mean of 31.4 percent and a median of 33 percent, and observes that many analysts consequently use a figure of roughly 35 percent (Internal Revenue Service 2009). Pre-initial-public-offering studies compare private transaction prices to subsequent offering prices; the same compilation reports a mean of 46 percent across nine such studies. Quantitative models, including the Longstaff upper bound and the Finnerty average-strike put option model, derive a theoretical discount from the cost of synthetically manufacturing liquidity (Longstaff 1995; Finnerty 2012; Silber 1991).

The Service's compilation is persuasive background rather than authority. It states on its face that it is not an official position and may not be cited as authority for any legal position, and that it is current only as of its issuance date in 2009. A report that presents it as governing overstates it.

The discount for lack of control draws on closed-end fund discount literature and on control premium databases. Acquisition premiums in the range of roughly 20 to 40 percent imply corresponding minority discounts of roughly 17 to 29 percent, by the arithmetic that a discount of d corresponds to a premium of d divided by one minus d. Those benchmarks are commonly applied to a family entity interest on the reasoning that a minority member who cannot force distributions, liquidate the entity or compel a sale of the underlying asset is economically analogous to a minority holder in a closely held operating company.

Table 2. Standard benchmark sources and the assumption each carries

Source: Internal Revenue Service (2009); Silber (1991); Longstaff (1995); Finnerty (2012); author's compilation of the embedded assumptions.

5.2 Where the benchmarks break down

Every benchmark in Table 2 carries the same embedded assumption, stated in the final column: the underlying asset has positive terminal value. A restricted shareholder holds, beneath the trading restriction, an interest in a going concern whose equity residual is expected to be positive and growing. A pre-offering investor holds an interest that, if the offering proceeds, becomes tradable at a price reflecting going-concern value. The restricted-stock discount measures the cost of the trading restriction. It does not measure degradation of the underlying asset over time, because in that population the underlying asset is not degrading.

A hangar entity interest holds, beneath the entity-level restriction, an asset that declines by construction. Each year of the ground lease that passes is a year of income taken without terminal value recovery. The marketability restriction is not only a temporal impediment to trading; it coincides with a structural wasting of the underlying collateral, and the two interact.

Consider the mechanics from the buyer's side. A hypothetical purchaser of a thirty percent membership interest in an entity whose lease has fifteen years remaining faces the ordinary illiquidity of a closely held interest, meaning no redemption right, a thin buyer pool and no public price discovery. The purchaser also faces a term that will be shorter at every future exit date. If the realistic liquidity horizon is five years, the lease will have ten years remaining at the earliest exit, at a point on the term structure where the required return is higher than it is today. The purchaser must therefore price both present illiquidity and anticipated future value erosion. No standard marketability study measures the second component, because no standard study population exhibits it.

The control analysis is distorted in a related way. Standard minority discount theory assumes the controlling interest, the benchmark from which the discount is measured, is stable or growing. In a hangar entity even the controlling interest is subject to the wasting constraint. The managing member cannot compel the sponsor to renew, cannot extract improvement value at expiration, and faces the same monopsony at renewal as any other leaseholder. The control premium attached to managing member status is correspondingly smaller than the premium attached to control of a going concern. Applying a full minority discount derived from acquisition premium studies to an interest in a wasting-asset entity risks counting the same control-related value reduction twice.

5.3 The pass-through question

A hangar entity is almost always a pass-through, which raises the question whether the income stream should be reduced by an entity-level tax charge in the discounted cash flow. The Tax Court's earlier position was hostile to the practice. Three decisions since 2019 have accepted tax affecting on developed records. In Kress v. United States, 372 F. Supp. 3d 731 (E.D. Wis. 2019), the district court accepted valuations applying a corporate tax rate to an S corporation's earnings. In Estate of Jones v. Commissioner, T.C. Memo. 2019-101, the Tax Court accepted a tax-affected valuation of limited partnership and S corporation interests. In Estate of Cecil v. Commissioner, T.C. Memo. 2023-24, it did so again while noting that the result rested on the specific record before it.

The point is not that tax affecting is settled. It is that the analysis must be performed and supported rather than assumed in either direction, and that for a hangar entity the question interacts with the wasting-asset problem. An entity whose asset is consumed over a finite term distributes what amounts to a return of capital alongside a return on capital, and the tax character of the distribution over the remaining term is a fact the valuator should establish from the entity's own returns rather than assert from a default.

5.4 The three required adjustments

Reconciling the standard benchmarks with the aviation leasehold setting requires three adjustments, each of which should be addressed expressly in the written report.

First, the marketability discount should be adjusted for the wasting-asset increment, the additional discount attributable to decay in underlying asset value over the expected holding period for the subject interest. The increment is a function of the remaining term, the holding period, and the slope of the relationship between remaining term and required return over that interval. Section 7.3 sets out how to compute it and what evidence is required to support it.

Second, the control discount should reflect that the managing member's control over the entity's principal asset is partial. The managing member cannot compel a favorable renewal, cannot prevent the reversion and cannot extract improvement value at expiration. To the extent control premium studies capture the value of actions a hangar entity's managing member cannot take, including asset liquidation, major capital restructuring and lease restructuring, those components should be removed from the baseline against which the minority discount is measured rather than left in it and then discounted twice.

Third, the combined discount should reflect the sponsor's consent right as a distinct impairment, analyzed separately from the operating agreement's own transfer provisions for the statutory reason given in Section 4.4. The consent right is a veto held by a party with its own economic incentives to restrict transfers that might produce below-market renewal terms or a use inconsistent with the airport's development plan.

6. The Litigated Record and Examination Risk

6.1 Entity respect under section 2036

The Service has pursued entity-level discount positions in estate tax matters since the early 1990s, on two tracks: attacks on the entity's respect as a separate person, principally under section 2036(a), and challenges to the magnitude of the discounts the taxpayer's appraiser applied.

The section 2036 line is more developed than the older literature reflects. Estate of Strangi v. Commissioner, 115 T.C. 478 (2000), later proceedings T.C. Memo. 2003-145, affirmed 417 F.3d 468 (5th Cir. 2005), and Estate of Bongard v. Commissioner, 124 T.C. 95 (2005), established the two-prong bona fide sale exception: a legitimate and significant nontax purpose for the transfer, and adequate and full consideration. Holman v. Commissioner, 130 T.C. 170 (2008), affirmed 601 F.3d 763 (8th Cir. 2010), applied it to a partnership holding marketable securities and found the nontax purpose wanting.

Three later decisions moved the line and are frequently missing from practitioner analyses that stop at 2008. Estate of Powell v. Commissioner, 148 T.C. 392 (2017), a reviewed opinion, held that the decedent's ability, acting with others, to dissolve the partnership was a right under section 2036(a)(2), and raised the prospect of duplicative inclusion. Estate of Cahill v. Commissioner, T.C. Memo. 2018-84, denied summary judgment to the taxpayer on sections 2036, 2038 and 2703 in an intergenerational split-dollar arrangement. Estate of Moore v. Commissioner, T.C. Memo. 2020-40, found retained enjoyment where the decedent continued to direct the transferred assets. A hangar entity analysis that cites only Strangi, Bongard and Holman is citing the state of the law as it stood before the developments that reshaped it.

For a hangar entity the framework presents an opportunity and a distinctive risk. On the opportunity side, these entities usually possess substantial nontax business rationale: liability containment for aviation operations, co-investment, financing structure, and continuity of a scarce leasehold. An entity that actively subleases hangar bays, manages tenant relationships, complies with the sponsor's minimum standards and maintains proper books is unlikely to be disregarded. The business reality is evident on the face of the operations.

6.2 Arguments the hangar setting invites

Three arguments available to the Service in this setting have no direct analogue in the standard family partnership case law.

The first is circularity. A Service expert can argue that applying a marketability discount derived from going-concern study populations to an interest in an entity whose asset is a fourteen-year wasting leasehold produces a discount larger than a market participant would demand, because the term-sensitive risk is already reflected in the discount rate used to derive net asset value. The argument has force where the valuator has not distinguished the two effects, and the framework in Section 7 is designed so that the report can show they are separate.

The second concerns the sponsor's right of first refusal as a value floor. Where the operating agreement or the ground lease gives the sponsor a right of first refusal at appraised value on any transfer, the Service can argue that the right establishes a floor on transfer value, because the hypothetical buyer knows a willing purchaser exists at that price. The counterargument is that an appraised-value right of first refusal is not an unconditional standing bid, that the sponsor's exercise is discretionary and budget-dependent, and that the appraisal contemplated is of improvement value rather than of the membership interest. The point should be addressed in the report rather than left to examination.

The third involves the valuation premise. In contested estate valuations the Service has argued that the appropriate premise for a closely held entity holding wasting assets is liquidation rather than going concern. For an entity with fewer than ten years remaining on an unrenewable lease, the liquidation premise is not unreasonable: a hypothetical buyer might rationally assume wind-down at expiration rather than relocation. If the liquidation premise is adopted, the discount analysis changes in kind, because the marketability discount for a liquidating entity is a function of the liquidation timeline and cost rather than of going-concern operating restrictions.

6.3 Defined value transfers

Because a hangar entity's value is contested by construction, practitioners frequently use a formula or defined value clause to fix the transferred amount. The governing decision is Estate of Nelson v. Commissioner, T.C. Memo. 2020-81, affirmed 17 F.4th 556 (5th Cir. 2021), which held that the transfer documents there conveyed a fixed dollar amount determined by appraisal rather than by fair market value as finally determined for tax purposes, with the result that a later increase in value increased the percentage transferred rather than being absorbed by the clause. The drafting distinction is narrow and consequential, and it matters more for a hangar entity than for a marketable securities partnership precisely because the underlying valuation is more likely to be adjusted.

6.4 Managing examination risk

Practitioners representing hangar entity interests should anticipate these arguments and address them affirmatively in the written report. A report that applies standard benchmarks without acknowledging the wasting-asset context, or that does not identify the reversion clause as a primary value driver, is exposed. Defensible practice requires explicit quantification of the wasting-asset increment, explicit analysis of the sponsor consent right's effect on marketability, explicit treatment of which restrictions are family-imposed and which are not, and explicit consideration of the valuation premise given the remaining term and the renewal structure.

Over-discounting carries equal exposure in the opposite direction. The Tax Court has consistently rejected marketability positions not grounded in specific, quantifiable impairments to the subject interest. An aviation-specific increment must be tied to identified features of the leasehold, meaning the remaining term, the reversion clause, the consent standard and the transfer restriction language, rather than to a general assertion that aviation real estate is illiquid.

7. What the Decided Cases Awarded

Section 6 describes the litigated record. This section gives the numbers, because in a discount case the distance between the taxpayer’s value, the Service’s value and the value found is the only reliable guide to what a position is worth.

Table 4. Reported values in discount cases

Figures as stated in the opinions; several are rounded. Source: the cited decisions.

Two patterns bear on a hangar entity.

The Service’s opening position is frequently three to five times the taxpayer’s and the result usually sits nearer the taxpayer. That is not a reason for an aggressive filing position. It is a reason to file a number the appraiser can defend, because the cases where the Service was sustained outright are the cases where the taxpayer’s position had a structural defect rather than an aggressive discount.

Marketability discounts in litigated real-property-holding entities cluster between nineteen and thirty percent, with control discounts between five and twenty. The paper’s framework should be read against that band rather than against the survey studies, because a court applying a survey study still lands inside it.

7.1 The Tiered Structure Has an Adverse Rule

Section 2.3 presents the tiered structure and treats double counting at both tiers as an appraiser error to avoid. There is a rule of decision that runs against the structure itself, and it should be confronted rather than left out.

The leading case allowed tiered discounts on a real estate partnership holding an interest in a lower-tier real estate partnership, at roughly thirty percent combined below and seventeen and twenty-two percent above. But the rule extracted from it is that tiered discounts are disallowed where the lower-level interest is a significant portion of the parent entity’s assets, or where the lower-level interest is the parent’s principal operating subsidiary. Courts have disallowed the upper-tier discount on that basis in at least two reported decisions.

That rule is adverse to the tiered hangar structure as ordinarily built, because the operating company’s membership interest is usually the family partnership’s principal and often sole asset. A tiered hangar structure is not a reliable route to a second discount, and an appraisal that assumes one without addressing the point is exposed at exactly the place an examiner will look.

8. A Proposed Analytical Framework

8.1 Architecture

The framework proceeds in four stages.

Stage one establishes the leasehold net asset value using a discounted cash flow with terminal value set to the contractual reversion outcome, which is ordinarily zero, discounted at a rate that reflects the term-sensitive risk of the subject lease.

Stage two scores transfer restriction severity across two separately tracked groups: the operating agreement's own provisions, which are subject to section 2703 and section 2704, and the sponsor's consent and preemption rights, which for the reasons in Section 4.4 are not.

Stage three calculates the wasting-asset increment as the expected decay in leasehold value over the holding period the hypothetical buyer would assume.

Stage four combines the standard marketability and control benchmarks, adjusted for restriction severity, with the wasting-asset increment, and reconciles to a single entity-level conclusion with each component separately disclosed.

8.2 Transfer restriction severity

Transfer restrictions in these operating agreements cluster around four provisions. Three are ordinary: a right of first refusal exercisable by existing members at fair market value or a formula price; a requirement that transfers be approved by all or a supermajority of members; and a prohibition on transfers to persons outside the family without managing member consent. The fourth is aviation-specific: a requirement that the sponsor consent to any transfer of the entity interest or the underlying leasehold.

The first three are the restrictions section 2703(a) presumptively disregards. They are transfer restrictions rather than liquidation restrictions, so section 2704(b) does not reach them: that subsection is confined to a restriction which “effectively limits the ability of the corporation or partnership to liquidate,” and the 2016 proposed regulations that would have extended it to restrictions on liquidating an individual interest were withdrawn in 2017. They therefore stand or fall on section 2703(b) alone. They should be analyzed against the three-prong test of section 2703(b) and the fifty percent safe harbor of Treas. Reg. § 25.2703-1(b)(3) before any discount is attributed to them, and where the test is not met the report should say so rather than claim a discount the statute removes.

The fourth requires separate treatment and separate weight. The sponsor's consent standard ranges from a notification requirement, which adds friction without conferring a veto, to a substantive approval standard under which the sponsor may withhold consent if the proposed transferee does not meet its operational and financial criteria. Many ground leases adopt a deliberately broad standard, permitting the sponsor to reject a transferee it determines may not operate the facility consistently with the airport's minimum standards or its long-term development plan. Under such a standard the sponsor holds a practical veto on ownership transfers. A valuator assigning severity should identify which standard the specific lease adopts, quote it, and assess its effect on the size of the hypothetical buyer pool rather than treating consent as a uniform category.

8.3 The wasting-asset increment

The increment quantifies the additional discount attributable to leasehold value decay over the expected holding period. The construction is straightforward. Let T be the remaining lease term at the valuation date and H the holding period a hypothetical buyer would assume, commonly three to seven years for a private real estate holding and potentially longer in a family context. The increment is the difference between the present value of the leasehold with T years remaining and the present value of the same leasehold with T minus H years remaining, expressed as a percentage of current leasehold value.

Computing it requires one input the appraiser must supply and must support: the relationship between remaining lease term and required return over the interval from T to T minus H. That relationship is the term structure of leasehold risk, and its slope drives the entire result.

This paper does not supply that term structure, and the distinction between the method and its parameters should be stated plainly. No published empirical study estimating the relationship between remaining ground lease term and capitalization rates for airport hangar properties was located. The general ground lease literature addresses the problem qualitatively (Whalen 2023), and the airport leasing literature documents the lease provisions that generate the risk, including term, reversion and improvement ownership, without estimating their pricing effect (National Academies 2024). Work on single-tenant retail finds a relationship between remaining term and capitalization rate in an adjacent asset class, though on a different property type and with different reversion mechanics, so it supports the direction of the effect rather than its magnitude in aviation (Zhou 2023). The appraiser must therefore build the term structure from the evidence available for the subject market: observed leasehold transactions where they exist, matched-pair analysis of properties differing principally in remaining term, lender loan-to-value and amortization constraints as a function of term, and where necessary a documented judgment with the reasoning disclosed.

The mechanics are worth setting out with the inputs labeled as assumptions rather than as findings. Suppose a leasehold with seventeen years remaining, a five-year holding period, net operating income of $300,000, and an assumed term structure under which the required capitalization rate rises by forty basis points between seventeen and twelve years remaining. On a direct capitalization basis that increment alone reduces indicated value by a low single-digit percentage of current leasehold value, before any effect from the five years of remaining term consumed during the hold. Change the assumed slope and the result changes proportionally, which is the point: the increment is only as defensible as the term structure behind it, and a report that states the increment without stating and supporting the slope has not supported the increment.

8.4 The integrated discount matrix

Table 3 organizes suggested entity-level discount ranges by remaining lease term. It is a structured starting point for analysis, not an empirical result and not a formula. The ranges reflect the author's judgment about how the impairments identified in Sections 3 through 5 compound as the term shortens, informed by the benchmark literature in Table 2 and by the lender behavior documented in the airport leasing literature. They are not derived from a study of aviation leasehold transaction prices, because no such study was located. Section 9 restates that limitation, and a report relying on the matrix should disclose it rather than present the ranges as market evidence.

Table 3. Proposed entity-level discount ranges by remaining lease term

Source: Author's proposed framework. The ranges are analytical judgments, not observed transaction discounts.

The ranges assume a minority interest of twenty to forty-nine percent, a consent-required transfer restriction, and no exceptional feature that would independently anchor value, such as a pending renewal negotiation or a documented offer from the sponsor at a stated price. Each of those factors modifies the applicable range and should be analyzed in the report. Departures from the matrix are expected and should be documented with specific supporting evidence; adherence to it is not itself support.

9. Development, Reporting and the Appraiser's Own Exposure

9.1 Standard 9 and the competency question

Standard 9 of the Uniform Standards of Professional Appraisal Practice governs the development of a business appraisal and requires the appraiser to identify the business enterprise, ownership interest or security being appraised, identify the interest to be valued and the effective date, identify relevant characteristics of the subject, define the value being developed, and determine a scope of work sufficient to produce credible assignment results. Standard 10 governs reporting. The current edition took effect January 1, 2024 and has no stated expiration date, the Appraisal Standards Board having moved away from biennial editions (Appraisal Standards Board 2024). A hangar entity membership interest falls under Standard 9 because the subject is a business ownership interest whose value is determined by reference to the entity rather than to the real property directly.

The competency rule does the heavy lifting in this setting. An appraiser accepting a Standard 9 engagement on an entity whose principal asset is an aviation ground leasehold needs competency in three areas: business appraisal methodology including entity-level discount analysis, leasehold valuation including airport ground lease analysis, and aviation real estate market conditions. That is a demanding combination. A business appraiser without aviation competence cannot credibly estimate the net asset value on which the discounts operate. A real property appraiser without business appraisal competence cannot credibly apply entity-level marketability and control analysis. Neither, acting alone outside their competency, produces a credible opinion on a hangar entity interest without either acquiring the missing competency or engaging a qualified associate and disclosing the arrangement.

9.2 Scope of work

A credible scope of work for a hangar entity interest includes, at minimum: review of the ground lease in full, including the reversion clause, renewal option terms and consent requirements; review of the operating agreement with attention to transfer restrictions and managing member authority, and classification of each restriction as family-imposed or third-party-imposed; inspection of the improvements and assessment of remaining economic life against the lease term rather than against a published depreciation schedule; review of subleases and subtenant creditworthiness; analysis of the airport's competitive position, minimum standards and the sponsor's stated development plans; a discounted cash flow on the leasehold with terminal value set per the reversion clause; and entity-level analysis with the wasting-asset increment and restriction severity addressed separately and each supported.

A scope omitting any of these is likely inadequate for a complex entity, though a smaller or simpler holding may justify a narrower scope with appropriate assignment conditions. Any material limitation must be disclosed with an explanation of why the omission does not compromise credibility.

9.3 Adequate disclosure and the penalty regime

The transfer tax rules impose their own requirements, and they are not the charitable contribution rules. Treasury Regulation § 1.170A-17, which defines a qualified appraisal and a qualified appraiser, governs charitable contribution deductions and is not the operative authority for an estate or gift tax valuation. Citing it in a transfer tax report signals that the wrong regime has been consulted.

For gifts, the governing provision is the adequate disclosure regulation. Treasury Regulation § 301.6501(c)-1(f)(2) requires that a gift be reported on the return in a manner adequate to apprise the Service of the nature of the transfer, including a description of the transferred property and any consideration received, the identity of and relationship between the transferor and each transferee, a description of the method used to determine fair market value including any financial data, any restrictions on the transferred property considered in determining value, and a statement describing any position taken contrary to proposed, temporary or final regulations or published rulings. Where those requirements are met, the period of limitations runs. Where they are not, it does not.

Subsection (f)(3) supplies an appraisal safe harbor that satisfies the valuation method requirement. It requires an appraisal prepared by an appraiser who holds himself out to the public as an appraiser or performs appraisals regularly, who is qualified to make appraisals of the type of property being valued, and who is not the donor, the donee, a member of the family or an employee of any of them. The requirement that the appraiser be qualified to appraise the type of property at issue is where the competency point in Section 8.1 acquires legal consequence for a hangar entity.

Two penalty provisions bear on the analysis. Section 6662(g) imposes an accuracy-related penalty for a substantial estate or gift tax valuation understatement. Section 6695A imposes a penalty on the appraiser where the appraiser knew or reasonably should have known the appraisal would be used in connection with a return and the claimed value results in a substantial or gross valuation misstatement. The appraiser's exposure is direct and personal, which is a further reason to document the wasting-asset increment and the restriction analysis rather than to assert either. The Service's own development guidance for business valuations is set out at Internal Revenue Manual § 4.48.4.

The practical structure that satisfies all of this is a collaboration between a credentialed business appraiser and an aviation real estate specialist with documented ground lease experience, with the report identifying each professional's contribution, credentials and scope of responsibility. That structure satisfies the competency rule, addresses the qualified-appraiser element of the adequate disclosure safe harbor for each component of the valuation, and provides the clearest record in the event of examination.

10. Limitations

10.1 The Authority That Does Not Exist

Three searches produced nothing, and each absence is worth stating because a practitioner will otherwise assume the gap is filled.

No federal estate or gift tax authority addressing the valuation of a ground leasehold with a reversion to a public landlord was located. Not a case, not a ruling, not a private letter ruling. The nearest federal analogue is the alternate valuation rule discussed in Section 4.5, which treats an interest affected by mere lapse of time as valued at death with adjustment only for changes not attributable to elapsed term, and which enumerates patents, remainders and reversions. It has never been applied to a ground leasehold.

The Service has no aviation real estate valuation guidance of any kind. Its audit technique guide for the aviation industry addresses aircraft leases, excise tax and air transportation, and mentions hangars once, as a passthrough expense in a time-sharing arrangement. The aerospace guide is manufacturer-side. The technical guidelines for estate and gift tax issues direct examiners on discounts, buy-sell agreements and when to make an engineering referral, and contain nothing on leasehold interests or ground leases.

And the one litigated valuation of an aircraft hangar leasehold located in any tax context is a state ad valorem decision rather than a federal transfer tax one. A 30,000 square foot hangar with 9,900 square feet of office at a Colorado airport, built by the lessee on subleased land, was assessed at $2,871,708, and the court held the lessee-builder was the proper taxpayer notwithstanding the eventual reversion because it held significant incidents of private ownership. That is the only judicial treatment of a hangar leasehold’s ownership incidents against its reversion, and it comes from the wrong body of law.

Four limitations bear on how this framework should be used, and a report relying on it should disclose them.

The matrix is a proposed structure, not an empirical finding. The ranges in Table 3 are analytical judgments about how the identified impairments compound as the term shortens. They are not derived from observed transaction discounts in aviation leasehold interests, because no dataset of such transactions was located and, given that these interests transfer privately and infrequently and are frequently subject to sponsor consent, none is likely to exist in accessible form. The matrix should be used to structure an analysis and to identify what must be supported, not as evidence of market behavior.

The term structure is supplied by the appraiser, not by this paper. The wasting-asset increment in Section 7.3 is a method. Its output depends entirely on the assumed relationship between remaining term and required return, and no published estimate of that relationship for airport hangar properties was located. The adjacent-asset-class evidence supports the direction of the effect and not its magnitude. An appraiser adopting the method must build and support the parameter.

The chapter 14 reading is reasoned, not settled. The conclusion in Section 4.4 that an airport sponsor's consent right occupies a different position under sections 2703 and 2704 than a family-imposed restriction follows from the text and structure of those provisions and from the arm's-length commercial character of the ground lease. No decision addressing an airport ground lease consent right in a transfer tax valuation was located. The position should be advanced as a reading, with the supporting reasoning disclosed.

Figures move. The basic exclusion amount, the annual exclusion and the applicable rate schedule are adjusted by statute and by annual revenue procedure. The valuation premise question addressed in Section 6.2 remains unsettled for wasting-asset entities. Confirm the operative figures and the state of the authorities as of the valuation date rather than carrying them forward.

11. Conclusion

Estate and gift tax valuation of a closely held hangar entity sits at the intersection of real property appraisal, business appraisal and aviation law, and the intersection produces results that none of the three disciplines predicts on its own. The entity structures that organize corporate and fixed-base operator hangar ownership carry as their principal asset a ground leasehold that differs from conventional commercial real estate in ways that matter economically: the reversion clause eliminates the improvement residual, the single-purpose building eliminates adaptive reuse option value, and the sponsor's monopsony position eliminates the competitive discipline that ordinarily constrains a ground lessor. Those features amplify the lease-term effect beyond what conventional ground lease theory predicts, and they make discount benchmarks drawn from going-concern populations difficult to apply without adjustment.

The paper has proposed four responses. A net asset value methodology that carries the zero terminal value constraint explicitly rather than burying it in a capitalization rate. A restriction severity analysis that separates the family's own transfer provisions, which chapter 14 may disregard, from the sponsor's consent right, which on the reading advanced here it does not. A wasting-asset increment that isolates the value decay expected over the holding period from the illiquidity the standard studies measure. And an integrated matrix that organizes the result by remaining term while disclosing that it is a framework rather than market evidence.

The gap that remains is empirical, and it is worth naming precisely, because it is the same gap in both the framework and the litigation posture. No estimate exists of the relationship between remaining ground lease term and required return for airport hangar properties. Until one does, the wasting-asset increment rests on the appraiser's own supported judgment, and a Service expert can contest it on that basis. Constructing that estimate, from transaction evidence, from lender term sheets, or from matched-pair analysis across airports, is the research this area needs, and it would improve the defensibility of every valuation in the category.

The practical stakes will grow. The first generation of aviation entrepreneurs who built the corporate hangar market of the 1980s and 1990s is approaching estate settlement, and the volume of hangar entity interests passing through estates will rise with it. The permanent exclusion enacted in 2025 does not reduce the need for defensible work; it shifts the question from how much to discount toward whether the discount taken can be supported on examination.

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This paper is research and general information for professionals evaluating aviation real estate. It is not appraisal, legal, or tax advice, and it does not create an engagement. Statutory amounts and rates are stated as of May 2026 and are adjusted annually; confirm the operative figures as of the valuation date.