In Lappo v. Commissioner, a September 2003 Tax Court decision, the taxpayer contributed marketable securities and real estate to a limited partnership, and later gifted limited partner interests representing 98.7% of the outstanding units to her daughter and trusts for her grandchildren. This decision is particularly significant because the only dispute presented to the Tax Court was the valuation discounts applicable to the limited partnership interests transferred. All other issues initially raised by the Internal Revenue Service (“IRS”), i.e., lack of economic substance to the partnership, gift on formation of the partnership, and lack of business purpose, were withdrawn by the IRS before trial. The result in this case is another victory for taxpayers who establish family limited partnerships.
The discounts proposed by the taxpayer’s and IRS’s agents, and the decision by the Tax Court, are set forth on the following table:
Discount
| EXPERT
Taxpayer’s IRS
| Tax Court
|
Lack of control:
Marketable securities
Real estate
| 7.5%
35.0%
| 8.5%
8.5%
| 8.5%
19.0%
|
Lack of marketability
| 35%
| 8.3%
| 24%
|
Combined
| 50.4%*
| 15.9%*
| 35.4%*
|
* the discounts are applied sequentially, therefore they do not total
The decision in this case should provide comfort to readers contemplating establishing family limited partnerships before the end of 2003 and making gifts of limited partnership interests to avail themselves of either annual or lifetime gift tax credits at significant discounts to fair market values.
There have been a considerable number of decisions the past few years relating to family limited partnerships. Readers who have established such partnerships, whether for asset protection or estate tax planning, are advised to have their partnership agreements reviewed to be certain that the original structure is consistent with recent decisions in the taxpayers’ favor. Please do not hesitate to call us if you want to initiate such a review.