Tax Court Whacks Family Partnerships
January 14, 2010
In one of its first volleys of 2010, the Tax Court recently knocked down one of the historic advantages which have motivated folks to use family limited partnerships as gifting tools.
In the Price case, the Court held that a married couple’s gifts of interests in a limited partnership to their adult children did not qualify for gift tax annual exclusions, because they were gifts of future (as opposed to present) interests. The Court found that there were restrictions preventing the donees from presently realizing any substantial financial or economic benefit from the partnership units.
Recall that the gift tax annual exclusion allows an individual to give up to $13,000 in value to any number of donees each year without paying gift tax. But in order to qualify, the law has long held that only gifts of “present” interests qualify for the annual exclusion.
In Price, the Court found that the donees had no unilateral right to withdraw their capital accounts, nor could they sell, assign or transfer their partnership interests to third parties or from otherwise encumbering or disposing of their interests without the written consent of all partners. And citing another, earlier decision, the Court sided with the IRS in contending that the transferred partnership interests represent future interests because the partnership agreement bars transfer to third parties and does not require income distributions to limited partners.
And in another recently-released decision (yes, the Tax Court has been busy, already this year), the Court held that a settlement payment to a taxpayer for depression as a result of alleged employment related retaliation was not excludable from gross income.
The law does allow for exclusion from income of non-punitive damages received by a taxpayer in a suit or agreement as compensation for personal physical injury or sickness. But in the Wells case, wherein the taxpayer had alleged gender-based employment discrimination and stress due to altercations with her supervisor led to her “depression,” the Court ruled: “no way” in concluding that the lady in question didn’t actually sustain any physical injury or sickness, regardless of what she thought was the situation.
And finally, this week, for all of you “flat taxers” out there (who seem to think that tax simplification would come with the stroke of a pen) consider one of the most litigated tax issues in the most recent year, as reported by the National Taxpayer Advocate. Number 4 on the list is simply “gross income.” Think about it–precisely because there are so many nuances in the definition of exactly what constitutes “gross income,” the courts are mired in cases dealing with this one topic. How will a flat tax change that, we ask.
CONSULT YOUR TAX ADVISOR – This article contains general information about various tax matters. You should consult your CPA regarding the implications to your own particular situation.
Jeff Quinn, the author of this article, is a shareholder in Ashley Quinn, CPAs and Consultants, Ltd., with offices in Incline Village and Reno. He is also a contributor to the recently published 13th edition of Tax Savvy for Small Business, published by Nolo. He can be reached at 831-7288, and welcomes comments below.