BIANCA GROSS - Another FLP Gift Tax Case & Taxpayer Wins!
This is a great month for the Fiore Family - son Mark and Chelsea Donovan will be married October 25th - on the beach at Stinson Beach, CA, just north of the SF Golden Gate Bridge! Mary Ann and I look forward to a Fiore reunion, including all 6 children and spouses, 12 grandchildren, and my brothers Mike and Kevin and their ladies. No doubt the wedding weekend will be a great time.
Just a couple of weeks ago, the Tax Court, for now the third time this year, issued an opinion on a Family Limited Partnership gift tax case. Once again the FLP as an entity was respected for tax purposes and valuation discounts were allowed - more on this case later in the Newsletter.
Continuing Education Activities.
Fall is a busy time in the cpe area. I recently returned from attending the 28th Annual Southern California Tax & Estate Planning Forum. There were outstanding speakers such as Professors Jeff Pennell, Stan Johanson and Sam Donaldson, as well as practitioners Jonathan Blattmachr, Diana Zeydel, and many others. The uncertainty of the future of the Federal estate tax was covered by several speakers, focusing on the need for planning flexibility and the liklihood that some form of the estate tax will endure. Also, much consideration was given to the Grantor Trust area, with its benefits of no adverse income tax consequences while at the same time providing an estate tax "freeze".
Also, last month I attended a valuation conference, the Summit on the Discount for Lack of Marketability, at USD Law School in San Diego - the result was confirming that appraisers differ among themselves just as do lawyers, CPAs and other planners. But it was clear that "discounts" are real, but require careful work on the valuation assumptions, methodology and application of studies supporting value conclusions.
Finally, the 4th Annual Jerry A. Kasner Estate Planning Institute, sponsored by the Santa Clara University School of Law, was held September 19th in San Jose, CA. This was a wonderful day-long institute concentrating on estate planning with outstanding speakers, including - again on Grantor Trusts - Dick Oshins of Las Vegas, NV, a close friend of Professor Kasner, who passed away nearly 5 years ago. He was a good friend to many tax practitioners and a true leader in the field of estate planning.
Next month I will be a presenter for CPAs and others in Maui at the WesternCPE Resort Conference being held at the Ritz Carlton Kapalua Resort November 10-15. My subjects include FLP/LLC Planning and Defending Such Entities, and also "Hot Topics in Estate Planning." See www.westerncpe.com for more information. Then beginning in January, 2009 I will again present several live webcasts for CPELink, see www.cpelink.com, and from May to November, 2009, I am scheduled to present courses at 7 WesternCPE Resort Conferences.
And Now to the New FLP Gift Tax Opinion of the Tax Court
In prior Newsletters I have discussed the first two (2) 2008 FLP gift tax cases, namely, Jane Astleford v. Comm'r, T.C. Memo. 2008-128, and Holman v. Comm'r, 130 TC ___(2008). Each of these cases adds to the lessons that can be learned from review of judicial opinions in the FLP/LLC area. Now we have the newest Tax Court opinion, issued September 29, 2008, namely, Bianca Gross v. Commissioner, T.C. Memo. 2008-221 - a marketable securities FLP in which the "bottom line" result for gifts of partnership interests to family members was a 35% combined valuation discount!
Both the Holman and the Gross cases were decided by Tax Court Judge Halpern, and as will be seen below, footnotes to the opinion are most illuminating here on the IRS argument of "gift on formation" either via an indirect gift under IRC Sec. 2511 or by means of application of the "step transaction" judicial doctrine. While in both cases, IRS lost on this issue, the fight is by no means over. So let's review the Gross opinion.
1. Findings of Fact. A widow, Mrs. Gross had two adult daughters, and she was a well-organized, savvy investor. Her goal was to "...encourage her daughters to work together and to learn from her experience while preserving her control(as sole general partner) over the partnership's assets."
Dimar Holdings L.P. was formed, albeit with some problems as raised by the Service, and Dimar became the vehicle for holding over $2 million in value of marketable securities, mostly common stocks, so as to facilitate gifting of partnership interests to the daughters. By July 15, 1998, Mrs. Gross and her daughters had agreed orally on the partnership specifics - including that mother would have full control, i.e. "exclusive discretion concerning the timing and the amounts of distributions to partners."
The required Certificate of Limited Partnership for Dimar was filed in the State of New York and publication thereof was made. However, the actual Agreement of Limited Partnership was not signed by the partners until the same day (12/15/98) that the gifts of partnership interests were made!
Minor cash contributions by the daughters were made the end of July and by mother in mid-November, and from October through December 4th, mother transferred the securities to the partnership entity. Then in addition to signing the partnership agreement on December 15th, Mrs. Gross on that day transferred, by "deeds of gift", a 22.25% limited partnership interest in Dimar to each daughter. Capital accounts of the FLP apparently were handled properly to reflect the capital contributions and the gifts. The Service issued its deficiency notice claiming that Mrs. Gross "had made indirect gifts to each of her daughters of securities when she contributed the Dimar securities to Dimar rather than direct gifts of 22.25% interests in Dimar." Note that this was essentially one of the same arguments made by IRS in Holman where only 6 days separated Dell Computer stock capital contributions from the later gifts of limited partnership interests. Here, you will note, 11 days separated the last of the capital contributions of securities to Dimar from the gifts of interests.
2. So the Tax Court, with the background of Holman recently decided, weighed in! The Service believed New York law was not followed properly for there to be a partnership at all, until the agreement was signed in December. The petitioner/donor claimed the limited partnership was formed July 15th even though the written agreement was not signed until December 15th - - note how easy it should have been to avoid this problem: Sign the agreement first, promptly file and publish the Certificate of Limited Partnership, and then contribute the capital, and finally make the gifts!
The Tax Court felt neither litigating party made a good case for its position; however, the court agreed that, if not a limited partnership, at least the evidence at trial showed there was a general partnership properly formed July 15th - that spelled the end of the IRS chances for success.
So, there being a general partnership, and the securities having been contributed and accounted for properly over several months, the remaining issue was whether the "step transaction" doctrine applied since the last capital contribution was made only 11 days before the gifts of partnership interests. No problem here, said Judge Halpern, but as in Holman, he warned in a footnote that where there was less volatility in the capital contributed perhaps more time would be required to have the capital contributions be deemed "separate" from the gifts by reason of the contributing partner's risk-taking. This seems to be a peculiar test, and note that Judge Swift, in Astleford,was not bothered by real estate contributed the same day as the gifts being made! Likely, that was due to there not having been raised the "indirect gift" issue.
3. Lessons here to be learned, from all three (3) of these 2008 Tax Court gift tax cases are to form, fund and operate the entity in the proper ordering of its steps, and perhaps to separate the funding from the gifting by some reasonable period of time, perhaps even months. No doubt in the gift tax area, the Service will continue to use the indirect gift argument where it can, and in addition, as seen in Holman, IRS will go to Sec. 2703 to cut down at least some of the partnership agreement's restrictive provisions.
I hope you enjoyed this Newsletter, and, as always, I welcome your comments.
Owen Fiore
Syringa, ID
