Gifts of LP Interests Under Attack

Steve Akers (Bessemer Trust) recently published his article entitled Tax Court opinion on the case Holman v. Commissioner.

Here is the synopsis of his article:

A retired Dell employee and his wife created an FLP to hold some of their Dell stock, intending to make gifts of limited partnership (or LP) interests, and they made gifts of most of their LP units six days later. They made subsequent annual exclusion gifts about two months later (at the beginning of the next calendar year) and one year after that. The agreement contained commonly used transfer restrictions, restricting transfers of LP interests without approval of all partners, and giving the partnership the right to purchase non-permitted assignments at the fair market value based on the right to share in distributions (i.e., considering discounts) of those assignee interests. The Tax Court rejected the IRS argument that the gift of LP interests six days after the partnership was created was an indirect gift of a proportionate part of the assets contributed to the partnership (i.e., without a discount). The court also concluded that transfer restrictions in the agreement must be ignored under §2703 in valuing the transfers.   

The case was tried well over two years ago. In light of the long delay, planners have been anxiously waiting to see how the Tax Court deals with the IRS’s “integrated transaction ” theory for attacking gifts of LP interests soon after (or in some cases, months after) an FLP has been formed.