On June 10, 2020, the Tax Court issued a Memorandum Opinion in the case of Nelson v. Commissioner (T.C. Memo. 2020-81). The primary issue before the court in Nelson was whether the limited partnership interests, transferred on December 31, 2008, and January 2, 2009, were fixed dollar amounts or percentage interests, which in turn affected whether the gifts were complete when transferred, which in turn affected inclusion on the petitioners’ income tax returns for certain years.
Background to Longspar
Longspar Partners, Ltd. was formed in October 2008, as a Texas limited partnership. It was formed as part of a tax planning strategy to (1) consolidate and protect assets, (2) establish a mechanism to make gifts without fractionalizing interests, and (3) ensure that petitioner-wife’s father’s holding company (owning 7 subsidiary Caterpillar dealerships) remained in business and under family control. The petitioners are Longspar’s sole general partners, each owning 50% of a 1% interest in Longspar as general partners.
The Succession Plan and Transfers
Petitioners created a trust and made two transfers of limited partnership interests in Longspar into the trust. The petitioners hired an appraiser to complete an appraisal of Longspar in connection with the transfers, and, relying on the FMV of the holding company’s stock, the appraiser arrived at figures of 6.14% and 58.65% of the petitioners’ limited partnership interests were transferred to the trust
General Gift Tax Principles
When property is transferred for “less than an adequate and full consideration,” the amount by which the value of the property exceeded the value of the consideration shall be deemed a gift. IRC § 2512(b). The gift tax is not applicable to a transfer for a full and adequate consideration in money or money’s worth, or to ordinary business transactions. Treas. Reg. § 25.2511-1(g)(1). The regulations define a transfer “in the ordinary course of business” as a bona fide and arm’s-length transaction, free from any donative intent. Treas. Reg. § 25.2512-8; see Weller v. Commissioner, 38 T.C. 790, 805-806 (1962).
Thus, if a transfer meets the three “ordinary course of business” factors, it will be considered to have been made for an adequate and full consideration in money or money’s worth. Treas. Reg. § 25.2512-8. A transaction between family members, however, is subject to special scrutiny, and there is a presumption (which can be overcome by the taxpayer) that a transfer between family members is, ipso facto, a gift. See Frazee v. Commissioner, 98 T.C. 554, 561 (1992); Harwood v. Commissioner, 82 T.C. 239, 258 (1984).
When a Transfer is Complete
A transfer is complete once the donor executes transfer instruments (if any) or otherwise “parts with dominion and control” over the property. See Burnet v. Guggenheim, 288 U.S. 280, 286 (1933); Carrington v. Commissioner, 476 F.2d 704 (5th Cir. 1973), aff’g T.C. Memo. 1971-222; Estate of Metzger v. Commissioner, 100 T.C. 204, 208 (1993), aff’d, 38 F.3d 118 (4th Cir. 1994); Treas. Reg. § 25.2511-2(b). Although the petitioners and the IRS agreed that the petitioners transferred the limited partnership interests in Longspar, and such transfer was complete, the parties disagree as to whether the petitioners transferred Longspar limited partner interests of $2m and $20m, as the petitioners contend, or percentage interests of 6.14% and 58.65%, as respondent contends.
The Tax Court looks to the transfer documents rather than subsequent events to decide the amount of property given away by a taxpayer in a completed gift. See Estate of Petter v. Commissioner, T.C. Memo. 2009-280, *12; Succession of McCord v. Commissioner, 461 F.3d 614, 627 (5th Cir. 2006); Commissioner v. Procter, 142 F.2d 824 (4th Cir. 1944). The petitioners argue that the transfer instruments show that petitioner-wife transferred specific dollar amounts, not fixed percentages, citing a series of cases that have respected formula clauses as transferring fixed dollar amounts of ownership interests. In each of those cases the Tax Court respected the terms of the formula, even though the percentage amount was not known until fair market value was subsequently determined, because the dollar amount was known. Wandry v. Commissioner, T.C. Memo. 2012-88, *4; Hendrix v. Commissioner, T.C. Memo. 2011-133, *5-*9; Estate of Petter, T.C. Memo. 2009-208, *11-*16.
Saving clauses, however, are treated with less deference, because they rely on conditions subsequent to adjust the gifts or transfers; thus, the size of the transfer could not be known at the time the transfer was complete. One court, for example, rejected a clause adjusting part of a gift, because the adjustment would be triggered only by a final judgment or order that any part of the transfer was subject to gift tax. Procter, 142 F.2d at 827.
However, in another case, the court upheld a gift of an interest in a partnership expressed as a dollar amount rather than a percentage interest that was determined in agreements subsequent to the gift, holding that a gift is valued as of the date that it is complete. Succession of McCord, 461 F.3d at 618. The court noted, however, that if subsequent occurrences affected the value/size of the transfer, the gift would not be complete. Id. at 626. Stated simply, the value of the gift must be ascertainable as of the date the gift was “complete.” Id. at 627.
The Text, not the Parties’ Intentions, Control
In Nelson, the Tax Court looked to the clauses in the transfer instruments that provided the gifts. FMV is defined both as a dollar amount and “as determined by a qualified appraiser within one hundred eighty (180) days of the effective date” of the transfer. The Tax Court found that the transfer clauses “hang on the determination by an appraiser within a fixed period.”
The Tax Court differentiated this condition subsequent from those that it had previously upheld qualifications of value based on final determination for gift tax purposes, for example, because such clauses did not speak to the value of the transfer, just the size. Estate of Christiansen v. Commissioner, 130 T.C. 1, 14-18 (2008), aff’d, 586 F.3d 1061 (8th Cir. 2009); Estate of Petter, T.C. Memo 2009-208, *11-*16. A subsequent determination of size, the Tax Court reasoned, does not implicate the value (or valuation) of the underlying shares being transferred, only on how much cash (or cash equivalent) is ultimately not subject to Federal gift tax.
Because the clauses in Nelson required the determination of an appraiser within a fixed period to ascertain the value of the interests being transferred, the Tax Court conclude that petitioner-wife transferred percentage interests in Longspar rather than fixed dollar amounts. This makes conceptual sense, because the value of a five-dollar bill remains constant, while the value of shares in a limited partnership owning corporate interests, etc. can and do fluctuate.Add to favorites