Valuation of gifts of family limited partnership interests

Wendy Gerzog (Professor of Law, University of Baltimore School of Law) has recently posted on SSRN her article entitled Holman: The FLP’s New Clothes.

Her article discusses Holman v. Commissioner, 130 T.C. No. 12 (2008), a recent Tax Court decision involving the valuation of gifts of FLP interests.  Here is her analysis and conclusion:

Section 2703 was enacted in 1990 as part of Congress’s attempt to eliminate abusive valuation schemes and to tax more accurately inter vivos transfers. The focus of this particular provision was to question the valuation of rights or interests affected by buy-sell agreements, options, or restrictions, particularly those contracted within a family in an estate planning context. The statute was not intended to replace prior case law, but to codify and expand requirements in that area.  One of the specific additions of section 2703 was the requirement that the agreement contain the same terms as comparable buysell agreements between unrelated parties.

In Holman, the court applied section 2703 to the restrictions the taxpayers placed in paragraph 9.3 of their FLP agreement. Unlike in Bischoff and Amlie, the court held that, in contravention of section 2703(b)(1), its restrictions did not assist a bona fide business arrangement of the taxpayers; moreover, the court held that in contravention of section 2703(b)(2), they were a device to transfer property to their children for less than adequate consideration in money or money’s worth. That being the case, the partnership interests were valued without regard to a discount for the restrictions in that paragraph of the FLP agreement. The court, however, did not decide whether the terms of paragraph 9.3 were comparable to those in third-party agreements, the final requirement of section 2703(b)(3), and one specifically added to presection 2703 case law by the statute.

Holman is a very well-reasoned and welcome decision. A particular highlight of the case for me was the court’s quoting the government’s expert. Like the child’s words that shook one fairy tale world back to reality, the witness testified: ‘‘Nobody at arm’s length would get into this deal.’’