Family limited partnerships and charitable deductions.

• Author: Dickerson, Thomas J.

Husband H and wife W form a family limited partnership, FLP, to which they contribute their marketable securities portfolio in exchange for interests in FLP. Because the portfolio is highly appreciated, it is "built-in gain" property. Thus, H and W have low outside bases in their partnership interests. The couple, who file jointly, have made gifts of limited partnership interests to their children. When evaluating their year-end tax plans, H and W decide that they would like to make a sizable gift to charity using appreciated capital assets, but the charity does not wish to hold an interest in FLP. Since the couple no longer holds any securities directly, they must transfer some of the securities currently held by FLP to the charity.

For H and W to benefit from the entire charitable deduction, the donation should be structured in one of two ways:

1. FLP distributes the securities to H and W, who subsequently donate them to charity; or

2. FLP donates the securities directly to charity.

Partnership's Donation

A partnership does not deduct charitable contributions in determining its taxable income. Instead, the charitable deduction is a separately stated item deducted by the partners (Sec. 702(a) (4), which ensures that the deduction is subject to limits applied at the partner's level. Even though the partnership claims no deduction, each partner's outside basis must be reduced by his share of nondeductible partnership expenditures pursuant to Sec. 705(a) (2) (B). The partners' collective outside basis reduction equals the tax basis of the property donated, not its fair market value (FMV). (See Rev. Rul. 96-11 and "Even Charitable Contributions by Partnerships Can Be Complex!," 8 Journal of Partnership Taxation 80 (Spring 1991).)

Tax attributes associated with charitable deductions must be allocated to the partners. Sec. 704(c) requires partnerships to allocate income, gain, loss and deduction attributable to the pre-contribution increase or decrease in the value of contributed property (the built-in gain or loss) to the contributing partner, as shown below.

Example: Partner A contributes security X to FLP. The security is worth $10 on the date of contribution and has a $2 tax basis. Partner B contributes security Y with a $10 FMV and a $7 tax basis. If FLP immediately donates X to charity, the tax results would be as follows:

Forming the partnership

* A's outside basis is $2 and B's outside basis is $7 (under Sec. 722).

Partnership donation

*...