Vince Nardone: Tax and Controversy

Gifts of Partnership Interests Did Not Qualify for the Annual Gift Tax Exclusion

Guest Author: M. Pilar Puerto, Esq., Columbus, Ohio

 

 

In Walter M. Price v. Commissioner, TC Memo 2010-2, the Tax Court held that gifts of partnership interests were not eligible for the annual gift tax exclusion because they were gifts of future interests. The court characterized the gifts of partnership interests as gifts of future interests because those interests were subject to various restrictions that prevented the donees from having the present right to the use, possession, or enjoyment of those interests. 

 

Under the Internal Revenue Code (the “Code”), donors of gifts can take advantage of an annual gift tax exclusion of $13,000 (as indexed for 2010) per donee so long as the gift is that of a present interest.  See Code § 2503(b).  For a gift to qualify as a present interest, the donor must confer upon the donee an unrestricted and noncontingent right to the immediate right to the use, possession, or enjoyment of the property or income from the property, such that the donee derives a present and substantial economic benefit from the property. See Treas. Reg. § 25.2503-3(a) and (b); Hackl v. Commissioner, 118 T.C. 279, 293 (2002).

 

In Walter, the partnership agreement had various restrictions that prevented the children donees from deriving a present and substantial economic benefit from the partnership interests gifted by their parents.  The two major restrictions that the court focused on were: (i) the inability to sell the partnership interest to third parties without the consent of all partners; and (ii) distributions of income from the partnership being subject to the discretion of the general partner.  Thus, the donees were unable to presently realize a substantial financial or economic benefit from the partnership interests and the court held they were gifts of future interests not eligible for the gift tax exclusion.

 

When forming a limited liability company or a partnership, if one anticipates gifting these interests, it is important to plan ahead to allow the owners to take advantage of the annual gift tax exclusion. For example, there could be fewer restrictions given in the partnership or operating agreement to allow the donees to have a present and unrestricted right to use, possession, or enjoyment of these interests.  This, however, may come with a price of having less control over the ownership and sale of these interests.  Another idea would be to have a provision in the agreement similar to that of a Crummey power in a trust, which would allow the donee a limited right to demand the income or principal from the business.

 

Attached please find Walter M. Price v. Commissioner, TC Memo 2010-2. Download Walter vs. Commissioner

Gifts of Partnership Interests Did Not Qualify for the Annual Gift Tax Exclusion

Guest Author: M. Pilar Puerto, Esq., Columbus, Ohio

 

 

In Walter M. Price v. Commissioner, TC Memo 2010-2, the Tax Court held that gifts of partnership interests were not eligible for the annual gift tax exclusion because they were gifts of future interests. The court characterized the gifts of partnership interests as gifts of future interests because those interests were subject to various restrictions that prevented the donees from having the present right to the use, possession, or enjoyment of those interests. 

 

Under the Internal Revenue Code (the “Code”), donors of gifts can take advantage of an annual gift tax exclusion of $13,000 (as indexed for 2010) per donee so long as the gift is that of a present interest.  See Code § 2503(b).  For a gift to qualify as a present interest, the donor must confer upon the donee an unrestricted and noncontingent right to the immediate right to the use, possession, or enjoyment of the property or income from the property, such that the donee derives a present and substantial economic benefit from the property. See Treas. Reg. § 25.2503-3(a) and (b); Hackl v. Commissioner, 118 T.C. 279, 293 (2002).

 

In Walter, the partnership agreement had various restrictions that prevented the children donees from deriving a present and substantial economic benefit from the partnership interests gifted by their parents.  The two major restrictions that the court focused on were: (i) the inability to sell the partnership interest to third parties without the consent of all partners; and (ii) distributions of income from the partnership being subject to the discretion of the general partner.  Thus, the donees were unable to presently realize a substantial financial or economic benefit from the partnership interests and the court held they were gifts of future interests not eligible for the gift tax exclusion.

 

When forming a limited liability company or a partnership, if one anticipates gifting these interests, it is important to plan ahead to allow the owners to take advantage of the annual gift tax exclusion. For example, there could be fewer restrictions given in the partnership or operating agreement to allow the donees to have a present and unrestricted right to use, possession, or enjoyment of these interests.  This, however, may come with a price of having less control over the ownership and sale of these interests.  Another idea would be to have a provision in the agreement similar to that of a Crummey power in a trust, which would allow the donee a limited right to demand the income or principal from the business.

 

Attached please find Walter M. Price v. Commissioner, TC Memo 2010-2. Download Walter vs. Commissioner