In a September 2008 opinion entitled Gross v. Commissioner, the Tax Court allowed a 35% discount for gifts of family limited partnership interests consisting solely of marketable securities.
The donor and her two daughters agreed to form a limited partnership to hold the donor’s stock portfolio. They agreed the daughters would be limited partners, mother would be the sole general partner, and mother would be in full control of the FLP operation: she would have “...exclusive discretion concerning the timing and amounts of distributions to partners.” The donor and her daughters agreed that the donor would contribute $100 to the partnership, the two daughters would each contribute $10, and the donor would also contribute securities having a value of $2,158,646.
After the contribution, the donor then transferred a 22.25% interest as a limited partner to each of the daughters. The donor’s capital account was then debited with $960,598 to reflect the gifts, and each of the daughter’s capital accounts was credited with $480,299. The gifts were reported on the gift tax return as $312,500 for each daughter, reflecting a 35% discount from the fair market value of $480,299 of the securities. The IRS audited the gift tax return and took the position that the gift was an indirect gift of the securities valued at $480,299 for each daughter.
The Tax Court accepted the donor’s valuation of the gifts. The Tax Court also rejected the IRS’s contention that the formation of the partnership and the gifting of the limited partnership interests were simultaneous, thereby resulting in an indirect gift of securities. Please call us if you would like to discuss the Gross case or need advice about transferring your wealth at reduced tax cost.