IRS continues focus on disallowing annual exclusions for gifts of partnership interests.

AuthorKlahsen, Rick

On January 4, 2010, the Tax Court held, in Price, T.C. Memo. 2010-2, that the taxpayers failed to show that gifts of partnership interests conferred on the donees an unrestricted right to immediately use, possess, or enjoy either the property itself or income from the property. Thus, the taxpayers were not entitled to annual gift tax exclusions under Sec. 2503(b) for the outright gifts of the partnership interests. The decision in Price reinforces the IRS position set forth in Hackl, 335 F.3d 664 (7th Cir. 2003). The Hackl case examined how the partnership's operating agreement and actual operations affect the gift of partnership interests and, more importantly, the availability of annual exclusions. These court decisions challenge tax practitioners to review all aspects when gifting partnership interests.

Background

Generally under Sec. 2503(b), the first $13,000 ($10,000 in the Code, indexed for inflation) of an individual's gifts to any person during the calendar year is excluded from the total gifts for that year. However, in order for the annual exclusion to apply, the gift must be a present interest rather than a future interest in the property. A future interest differs from a present interest because it postpones the right to use, possess, or enjoy the property. It is irrelevant as to when the donee vests in the property, as an immediate vesting does not always coincide with enjoyment.

The Code does not define future interest, but Regs. Sec. 25.2503-3(a) states that "'future interest' is a legal term, and includes reversions, remainders, and other interest or estates, whether vested or contingent, and whether or not supported by a particular interest or estate, which are limited to commence in use, possession, or enjoyment at some future date or time." Regs. Sec. 25.2503-3(b) further adds that a present interest is "an unrestricted right to the immediate use, possession, or enjoyment of property or the income from property (such as a life estate or term certain)." Price and Hackl deny the premise that the mere transfer of partnership interests automatically qualifies as a present interest and thus is entitled to gift tax annual exclusions.

Hackl

  1. J. Hackl bought two tree farms after his retirement to stay connected to the business world and diversify his investments. He then contributed the two farms, valued at $4.5 million and $8 million in cash and securities, to Treeco, LLC, a limited liability company (LLC). Serving as the...

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