Family limited partnership rebuts IRS charge of indirect gifts

In a partial victory for the family limited partnership (FLP), an entity much loathed by the IRS for successfully avoiding billions in income, estate and gift taxes over the years, the Tax Court has ruled that a transfer of limited partnership interests in an FLP was not an indirect gift of stock held by the FLP to the taxpayer's children.

In cases that typically have found there to be an indirect gift of stock, the transfers were made on the same day, or the stock was contributed to the FLP after the transfer of limited partnership interests to children.

In this case, however, a little patience was shown and amply rewarded. The transfers were made six days after the FLP's initial funding. The court also found that the step transaction doctrine did not apply to the taxpayers' case because the six days separating the contribution of stock to the FLP and the taxpayers' gift of limited partnership interests subjected the taxpayers to a real economic risk of a significant change in the value of the limited partnership interests.

The FLP did lose, however, on the valuation discount issue, as the court rejected substantial valuation discounts that the taxpayers claimed for federal gift tax purposes. The Tax Court adjusted the value of the gifts of the limited partnership interests, reducing the marketability discount claimed by the taxpayers from 35 percent to 12.5 percent.

While not getting everything it wanted, however, all told, the use of the FLP within this family setting proved successful and proves that, with a little patience and setting realistic goals, the FLP remains a powerful planning tool.

(T.H. Homan, Jr., TC No. 12)