Stock transfers to FLP and FLP interest transfers to donor's children are indirect gifts.

• Author: Sherr, Eileen
• Position: News Notes

In Mark W. Senda, 8th Cir., 1/06/06, aff'g TC Memo 2004-160, the Eighth Circuit held transfers of static to two family limited partnerships (FLPs)--coupled with the transfers of FLP interests to the donor's children on the same day--to result in indirect gifts of stock to the children, because the donors did not present reliable evidence that they contributed the stock to the FLPs before transferring the FLP interests to their children. According to the court, the sequence of the transfers is critical; a contribution of stock after the transfer of partnership interests is an indirect gift of the stock to the partners (to the extent of their proportionate interest in the partnership) as opposed to a gift of the partnership interest. The finding of on indirect girl of stock severely restricts (or eliminates) the availability of valuation discounts. In Senda, the girls were valued at the full undiscounted value of the stock transferred. If the girl had been determined to be of FLP interests, the taxpayer and the IRS had agreed to allow combined discounts of between 39% and 45% in valuing the FLP interests.

This case is a reminder to practitioners of the dangers of sloppy FLP implementation. The Eighth Circuit noted (among other matters)...