IRS allows married taxpayers to "rearrange ownership" of stock.

• Author: Nager, Ross
• Position: Arrangements before contributions to family limited partnerships

Taxpayers considering the use of family partnerships to assist in financial planning can take heart in Letter Ruling 9811022, which permitted married taxpayers to "rearrange ownership" of stock prior to contributing it to a family limited partnership (FLP) without incurring any taxable gain.

A married couple, along with their children, were the sole owners of an FLP. The husband was the sole owner of common stock in a corporation; as part of the proposed transaction, he wanted to transfer 500,000 shares of the stock to himself and his wife as tenants-in-common. Immediately following this transfer, the husband and wife would then transfer their interests in the stock to the FLP. Following that transfer, they would then give FLP interests to their two children.

According to the Service, the stock transfer would not be a transfer of property to a partnership that would be treated as an investment company under Sec. 351 if the partnership were incorporated. Consequently, Sec. 721(b) would not apply to the stock transfer and neither the FLP nor the husband and wife would recognize gain or loss on the transfer.

The IRS reviewed Sec. 721(a), which provides that neither a partner nor a partnership will recognize gain or loss on a...