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Family Limited Partnerships and Valuations and Estate Tax Consequences Recent Cases Part 2

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Published: 08Jan2011
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Over the last two and one-half years or so, there have been several cases decided involving Family Limited Partnerships and Limited Liability Companies and valuation issues or inclusion in the federal gross estate pursuant to Section 2036 (retain enjoyment or control). These cases have raised several issues worthy of study and review of which practitioners must be aware.

Valuation Cases

C.T. McCord, Jr., 120 T.C. No. 13 (filed May 14, 2003)

Issues involved the effect of a defined valuation formula and whether or not an interest transferred to a donee will be treated as an assignee interest rather than a full Limited Partnership interest for valuation purposes.

Strangi v. Commissioner, 115 T.C. 478 (2000) (Strangi I)

Issues involved whether Limited Partnership should be disregarded for federal tax purposes, whether the Limited Partnership is a restriction on the sale or use of the property that should be disregarded under Section 2703(a)(2), whether the transfer of assets to the Limited Partnership was a taxable gift and if, in fact, the Limited Partnership is not disregarded, the fair market value of the Partnership interests. Gulig v. Commissioner, 293 F.3d 279 (5th Cir. Filed June 17, 2002), Affirming. in part and reversing in part Strangi 1

The Court upheld Tax Court rulings that partnership should not be disregarded for transfer purposes, that partnership should not be disregard under Section 2703, and that there was no gift on the formation of the partnership.

Kerr v. Commissioner, 292 F.3d 490 (5th Cir. Filed June 10, 2002), affirming 113 T.C. 449(1999).

Issues involved whether transferred interests were assignee interests or Limited Partnership interests and assuming they were Limited Partnership interests were they still to be valued as assignee interests because a willing buyer would have no guarantees that he/she would be admitted as a limited partner. Final issue dealt with whether restrictions on the right to cause a liquidation of the Limited Partnership and to withdraw from the Limited Partnership were to be ignored for valuation purposes under Section 2704(b).

Dunn v. Commissioner, 2002 U.S. app. (5th Cir. Filed Aug. 1, 2002), reversing and remanding T.C. Memo. 2000-12

The Fifth Circuit reversed Tax Court's decision with respect to valuation of 63% interest in a C corporation. The Court allowed a 34% federal income tax on a built-in gain in the corporation's assets to be subtracted from the value. The Court allocated a 15% weight to asset purchase approach and 85% to income approach and was highly critical of the IRS and Tax Court.

Senda v. Commissioner, TCM 2004-160 (July 12, 2004)

The Court held that the taxpayer's transfer of property to a Partnership followed by gifting of Partnership Units to children were essentially indirect gifts of the underlying property and not the Partnership Units and, therefore, discounts were inapplicable. The Court found that there was no reliable evidence that the taxpayers contributed the shares to the Partnership before they transferred the Partnership interests to the children. The Court also found the taxpayer's testimony "evasive" and that the taxpayer's "were more concerned with insuring that the beneficial ownership of the stock was transferred to the children in a tax advantaged form than they were with the formalities of FLPs." The Court noted that the taxpayer, as general partner, did not maintain any books or records other than brokerage statements and that the Tax Returns were prepared months after the transfers of the Partnership interest. The case is a reminder that the formalities are important in achieving the desired tax consequences when the goal is to gift interests in the entity and not the underlying assets.

It should be clear from the documentation and the actions of the parties involved that the underlying assets were transferred to the entity in exchange for interests in the entity and then the interests in the entity were gifted to the donees. Although it should not matter whether there is any time period between the transfer to the entity and the gift of interest in the entity, as long as it is clear that the transfer to the entity came first and was in exchange for an increased interest in the entity, prudence may dictate waiting a day before making the gifts.

Jeffrey R. Matsen of Wealth Strategies Counsel helps people structure their personal and business assets in the best way possible to protect, preserve and transfer them in the most efficient and tax saving manner. For more information go to http://www.WealthStrategiesCounsel.com

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