W. Michael Van Haren
10/6/2008
Summary of Recent FLP Tax Court Case - Gross v Commissioner. The IRS lost its assertion that a gift after formation was a step transaction under a recent case with the Tax Court. In that case, minimal cash contributions were made by the partners at the time of the filing of a certificate of limited partnership 5 months before the gift. The limited partnership agreement was signed the date of the gift and almost all partnership assets (marketable securities) were contributed in the two months before the gift, some as late as 11 days before the gift. The partners credited their contributions to capital accounts and had a verbal agreement regarding partnership terms. The court held that the gift was a gift of interests in a partnership (whether limited or general). The IRS lost its claim that the assets contributed 11 days prior was the gift.
Interestingly the IRS and the taxpayer agreed by stipulation that a 35% discount as claimed on the gift tax return (apparently without an appraisal report) was appropriate for the valuation of partnership interests. The taxpayers expert testified that if the terms of the partnership agreement applied (a holding the court did not need to reach due to the stipulation) that the discount was 42.2%.
Given the facts of this case, it would not surprise me if the IRS appealed, I think the IRS thought they had a slam dunk winner but I believe the court was correct in its holding.