Litigation + Valuation Perspectives

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IRS Challenges Gifts of Interests from FLP Owning Publicly Traded Stock: Decedent’s Estate Prevails

Henry & Horne has valued hundreds of Family Limited Partnerships (FLP’s) owning publicly traded stock such as the one described in the following case.  The Tax Court’s decision in favor of the decedent’s estate should be very encouraging to U.S. taxpayers.

In the case of Wimmer v. Commissioner, TC Memo 2012-157 the IRS asserted that gifts of limited partnership interests made by the decedent, George H. Wimmer, during his lifetime did not qualify for the Federal annual gift tax exclusion under Code Section 2503 (b).   In order to qualify for the annual exclusion the gifts must be of present interests, rather than future interests, in the property. The IRS considered that the publicly traded, dividend paying stock owned by the FLP was a future interest, not a present interest.  Under Reg. §25.2503-3(b) a present interest is “an unrestricted right to immediate use, possession, or enjoyment of property or the income from property”.

The Tax Court determined that with respect to the limited partnership interests themselves, the donees’ rights were limited and therefore didn’t qualify as present interests.  However, they concluded that the gifts could still qualify for annual exclusions if the donees’ received certain rights to the income generated by the assets of the FLP.

To qualify for the annual exclusion the estate had to prove the following three conditions:

1)      The partnership would generate income;

2)      Some portion of the income would flow steadily to the donees’; and

3)      That portion of income could be readily ascertained.

As the estate was able to prove all three points, the Court determined that the donees’ received a substantial present economic benefit rendering the gifts as gifts of present interests on the date of each gift.  All gifts made by the decedent qualified for the gift tax annual exclusion under Code Section 2503 (b).  Click Here to view the entire case.

Cindy Andresen