IRS Unsuccessful in Attack on Gifts of Family Limited Partnership Interests

by Gray Reed & McGraw
Contact

[authors: Jennifer Gurevitz and Norm Lofgren, Looper Reed & McGraw]

The United States Tax Court recently established new parameters for qualifying gifts as annual exclusion gifts. Under current law, a person has a right to give away up to $13,000 of assets each year, to as many people as the donor sees fit, free of gift tax. This is commonly referred to as the "annual exclusion." In order to be considered a gift eligible for the annual exclusion, the gift has to be a gift of a "present interest," and not just a future right or benefit.

Courts have held that in order to qualify as a present interest, the gift must confer a present economic benefit by reason of (i) the use, possession or enjoyment of the property or (ii) the use, possession or enjoyment of income from the property.

A question has lingered over whether gifts of family limited partnership interests are "present interests" that qualify for the annual exclusion. Most partnership agreements provide restrictions on transfers on partnership interests to ensure that the property remains in the family. Depending upon the restrictions contained in the partnership agreement, the IRS and some courts have viewed these transfer restrictions as preventing the recipient from having an immediate right to use or enjoy the limited partnership interest in a meaningful way and therefore finding that the gift of a limited partnership interest does not qualify as the gift of a present interest.

In Estate of George H. Wimmer, TC Memo 2012-157, the United States Tax Court recently considered this issue again. Reiterating its holding in prior cases, the Tax Court held that in order for the transfer of a limited partnership interest to qualify for the annual gift tax exclusion, the donor must prove three things:

  • That the partnership would generate income,
  • That some portion of the income would flow steadily to the donees, and
  • That such income is readily ascertainable.

The partnership at issue in Wimmer was funded with publicly traded stocks which paid dividends quarterly. The Tax Court therefore easily found that requirements one and three, above, had been met.

With respect to requirement two, the court found that despite the fact that the partnership agreement granted discretion to the general partners as to whether or not distributions would be made to the partners, the general partners owed fiduciary duties to the donee limited partners as a matter of law. Because one of the donees was an irrevocable trust with no other assets, the only way such trust would be able to pay its share of income tax would be for the partnership to make distributions of income. Based on these unique facts, the court held that in order to carry out its fiduciary duties, the general partner would be legally required to ensure a steady flow of income to the donees.

Obviously limited partners in many family partnerships will have personal assets from which income may be derived in addition to the partnership interest. Additionally, in Texas, general partners owe a "duty of care and loyalty" to limited partners (analogous but not identical to the "fiduciary duty" in the Wimmer case). Therefore, the second requirement might or might not be met in a given case, depending upon the terms of the partnership agreement as well as the unique financial circumstances of the donee limited partners. Moreover, family limited partnerships frequently hold unimproved real estate or other assets which do not generate regular income or whose income may not be readily ascertained, regardless of fiduciary obligations or the financial needs of the partners.

Therefore, to ensure gifts of limited partnership interests qualify for the annual exclusion and to mitigate the risk of an IRS challenge, we offer the following suggestions:

For gifts of limited partnership interests to be made in the future, we recommend either of the following:

  •  "Put" Right for Limited Period. Along with the assignment of the partnership interest, give the donee-partner the right for a limited period of time to sell the limited partnership interest back to the donor for its fair market value (limited to the annual exclusion amount), determined without regard to the existence of the put right. This provision (similar to the Crummey power frequently used in connection with the creation of life insurance trusts and other estate planning vehicles) could be included in the assignment document or could be included in the body of the partnership agreement itself. It should require the donor to substitute income producing property or cash equal in value to the value of the donated partnership interest at the election of the donor.

      -OR-

  • Withdrawal Power From Partnership. Provide in the limited partnership agreement that the donee-partners have a withdrawal power with respect to gifts of limited partnership interests to require the partnership to redeem limited partnership interests for a limited period of time after each gift for an amount of money equal to the fair market value of such interests.

For gifts of limited partnership interests made in the past:

File Gift Tax Return for Year of Gift. If a gift tax return has not already been filed, consider filing such a gift tax return now to commence the running of the normal three-year statute of limitations period. If the IRS does not challenge the gift within the three-year statute period, the gift's status as a "present interest" should in most cases be free from challenge. In case the IRS does challenge the gift, it will be easier to defend it now than at some indeterminate time in the future (probably in connection with an estate tax return for a deceased donor).

If you have any questions concerning this new case, please contact Looper Reed and McGraw attorneys Norm Lofgren or Jennifer Gurevitz.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Gray Reed & McGraw | Attorney Advertising

Written by:

Gray Reed & McGraw
Contact
more
less

Gray Reed & McGraw on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.