IRS factual inquiries in audits of family limited partnerships and sample entity appraisal checklist.

• Author: Sparks, Brian C.

The list of inquiries has been assembled from several sources and is more extensive than any list the author is aware has been sent to any particular taxpayer.

The first part of this month's column is a recitation of the detailed factual inquiries being made by Internal Revenue Service gift and estate tax return examiners in audits of those returns that have reported gratuitous transfers of interests in so-called "family limited partnerships." The remainder of this column contains a sample form of checklist practitioners might wish to consider using in evaluating entity valuation appraisal reports, such as those prepared in connection with gift and estate tax return reporting of transfers of family limited partnership interests.

IRS Family Limited Partnership Audit Factual Inquiries

The proliferation of the use of family limited partnerships in estate planning and the Internal Revenue Service's frequent contention that many of them are mere devices created solely to avoid federal gift and estate taxes have resulted in close scrutiny by gift and estate tax return examiners of those returns reporting gratuitous transfers of family limited partnership interests. Many estate planning practitioners around the country already have assisted clients in audits of those types of returns and in the course of which have been confronted with detailed factual inquiries by the Internal Revenue Service. While those inquiries have not been identical, the examiners at least appear to have been reading from a common script as to the types of facts they want to consider in those audits. The intent of the examiners' factual inquiries appears to be to obtain information so the examiners can determine whether the family limited partnership was formed for valid business reasons or merely to achieve transfer tax savings. Their factual inquiries focus on the subjective "why" and objective "how" the family limited partnership was created and the subjective and objective "how" it has been operated since creation.

Based on the notion that "forewarned is forearmed," practitioners assisting clients in the creation and operation of family limited partnerships would be wise to consider the factual inquiries the Internal Revenue Service might later raise upon audit. For family limited partnership interest transfers that already have been reported to the Internal Revenue Service and that are likely to be audited, in light of these inquiries, practitioners might wish to consider reviewing their files now in anticipation of those audits. Note that the list of factual inquiries below has been assembled from several different sources and is more extensive than any list the author is aware has been sent to any particular taxpayer.

List of IRS Factual Inquiries

1. Partnership documents. Provide copies of the following documents:

   1. All documents filed with state authorities in connection with the formation and operation of the partnership (such as the certificate of limited partnership and any amendments thereto, and annual reports filed with the Florida Department of State).

   2. All partnership governing and management documents, such as the partnership agreement.

   3. If the general partner is a corporation, that corporation's articles of incorporation and shareholders agreement, if any.

   4. Minutes of partnership meetings.

   5. Copies of all documents showing:

1. The dates property was transferred to the partnership;

2. A description of that property; and

3. A list of who transferred what items of property to the partnership.

   II. Other partnership formation and operation information. Provide a statement describing all the facts and circumstances in connection with the formation and operation of the...