Effect of Holman v. Commissioner on Limited Partnership Valuation Discounts

Alden Koste (J.D. Candidate, May 2010, The Catholic University of America, Columbus School of Law) has published a note entitled The IRS Fished Its Wish: The Ability of Section 2703 to Minimize Valuation Discounts Afforded to Family Limited Partnership Interests in Holman v. Commissioner, 59 Cath. U. L. Rev. 289 (2010).

The following is a summary of the article:

Twenty-six million: the dollar amount that decedent A saved in estate taxes by transferring assets into a limited partnership structure. Fifty-two million: the dollar amount by which decedent B’s estate tax increased after the Internal Revenue Service (IRS) successfully used section 2036(a) of the Internal Revenue Code (IRC) to recapture the partnership’s interests back into the decedent’s gross estate.

Family limited partnerships (FLP) have become an integral estate planning tool because they provide both generous tax advantages and organizational structure to one’s transferred property. In Holman v. Commissioner, husband and wife petitioners established an FLP–the Holman Limited Partnership–with the intention of safeguarding the family’s assets while simultaneously educating their four children on wealth management. Petitioners then transferred a substantial amount of Dell stock to their newly created FLP and proceeded to make large gifts of limited partnership interests in 1999 and subsequent smaller gifts in 2000 and 2001. When valuing those gifts for federal gift tax purposes, the lack of marketability and the minority interest status were asserted as bases for tax discounts. The IRS challenged the petitioners’ discount calculations, arguing that, for valuation purposes, section 2703 of the IRC disallowed restrictions contained in the partnership agreement.

This Note addresses the IRS’s attempt to minimize valuation discounts for limited partnership interests in FLPs. First, this Note examines the origins of FLPs and evaluates the potential benefits of using FLPs as estate planning mechanisms. Second, this Note explores the IRS’s prior attempts to minimize the valuation discounts afforded to limited partnership interests. Third, this Note delves into the Holman case and considers how the IRS successfully employed section 2703(a). Lastly, this Note predicts the future implications that the Holman decision may have on valuation discounts in FLPs and suggests that the decision may not be as detrimental to taxpayers as predicted.