Price v. Commissioner of Internal Revenue, T.C. Memo. 2010-2 (U.S.T.C. 1/4/2010)
Decision Date | 04 January 2010 |
Docket Number | No. 9642-06.,No. 9611-06.,9611-06.,9642-06. |
Parties | WALTER M. PRICE, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. SANDRA K. PRICE, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. |
Court | U.S. Tax Court |
Trent D. Reinert and David S. Houghton, for petitioners.
Albert B. Kerkhove, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
The issue for decision in these consolidated cases is whether gifts that petitioners made of limited partnership interests to their adult children during 2000, 2001, and 2002 qualify for annual exclusions as provided by section 2503(b).1
The parties have stipulated some facts, which we incorporate herein. When they petitioned the Court, petitioners resided in Nebraska. They have been married for many years and have three children, all of whom were of adult age at all times relevant to these cases.
In 1958 Walter M. Price (Mr. Price) began his career in equipment finance and distribution at Caterpillar Tractor Co. He later worked for a dealer in Omaha, Nebraska. In 1976 he started his own company, Diesel Power Equipment Co. (DPEC), which eventually distributed and serviced about 40 lines of equipment and had about 90 employees.
Petitioners' children had no career interest in working for DPEC. Consequently, when a group of long-term employees made an offer in the late 1990s, petitioners decided to sell the business as part of a careful financial plan which involved first placing the DPEC stock in a limited partnership.
On September 11, 1997, petitioners formed Price Investments Limited Partnership (the partnership) as a limited partnership under Nebraska law. When the partnership was formed, Price Management Corp., a Nebraska corporation, was its 1-percent general partner; the Walter M. Price Revocable Trust and the Sandra K. Price Revocable Trust were each 49.5-percent limited partners. Mr. Price was president of Price Management Corp., and Mr. and Ms. Price, through revocable trusts, held the shares in Price Management Corp.
When the partnership was formed, its assets consisted of the DPEC stock and three parcels of commercial real estate leased under long-term leases to DPEC and another equipment company. On January 5, 1998, the partnership sold the DPEC stock and invested the sale proceeds in marketable securities.
During 1997 through 2002 each petitioner gave each of their three adult children interests in the partnership as shown below.2
Partnership Gift Interests Total Transferred by Each Partnership Children's Petitioner to Each Gift Interests Cumulative Year Child Each Year Interests 1997 8.5% 51% 51% 1998 1 6 57 2000 0.5 3 60 1999 0.5 3 63 2002 0.85 5.1 68.1 2001 5.15 30.9 99
On Forms 1065, U.S. Return of Partnership Income, for taxable years 1997 through 2002, the partnership reported income from rental activities and losses, gains, and other income from investment activities. Each year except 1997 and 2001 the partnership made cash distributions in equal amounts to each child, as shown in the table below.
Total Partnership Distributions Year to Children 1997 - 1998 $7,212 1999 343,800 2000 100,500 2001 - 2002 76,824
The limited partnership agreement (the partnership agreement) states that the partnership's primary purpose is to achieve a reasonable rate of return on a long-term basis with respect to its investments.3 The partnership agreement generally prevents any partner from withdrawing capital contributions. The partnership agreement also restricts transfer and assignment of partnership interests as follows:
11.1 Prohibition Against Transfer. Except as hereinafter set forth, no partner shall sell, assign, transfer, encumber or otherwise dispose of any interest in the partnership without the written consent of all partners; provided, however, a limited partner may sell or otherwise transfer his or her partnership interest to a general or limited partner, or to a trust held for the benefit of a general or limited partner. * * *
11.2 Assignment. Any assignment made to anyone, not already a partner, shall be effective only to give the assignee the right to receive the share of profits to which his assignor would otherwise be entitled, shall not relieve the assignor from liability under any agreement to make additional contributions to capital, shall not relieve the assignor from liability under the provisions of the partnership agreement, and shall not give the assignee the right to become a substituted limited partner. * * * The partnership shall continue with the same basis and capital amount for the assignee as was attributable to the former owner who assigned the limited partnership interest. * * * The partnership agreement further provides that in the event of any voluntary or involuntary assignment of a partnership interest, "the partnership and each of the remaining partners shall have the option to purchase the partnership interest for its fair market value" from the assignee. The partnership agreement provides detailed rules for exercising the purchase option and for determining the fair market value of the partnership interest.4 The partnership agreement provides generally that the partnership will terminate after 25 years but may be dissolved sooner if there is written consent or affirmative vote "by at least two-thirds (2/3) in interest of the partners."
Pursuant to the partnership agreement, partnership profits are shared by the partners according to their proportional partnership interests. Partnership profits are to be distributed to the partners "in the discretion of the general partner except as otherwise directed by a majority in interest of all of the partners, both general and limited." The partnership agreement states that neither the partnership nor the general partner has "any obligation" to distribute profits to enable the partners to pay taxes on the partnership's profits.
The partnership agreement provides that it is to be governed, construed, and interpreted according to the law of the State of Nebraska. The partnership agreement is binding upon "all the parties hereto, their heirs, successors, assigns, and legal representatives forever."
On their separate Forms 709, United States Gift (and Generation-Skipping Transfer) Tax Return, for 2000, 2001, and 2002 each petitioner identically reported gifts, annual exclusions, and taxable gifts as follows:
Reported Reported Total Reported Value of Total Annual Taxable Year Each Gift Gifts Exclusions Gifts 2000 $14,905 $44,715 $30,000 $14,715 2001 20,770 62,310 30,000 32,310 2002 118,405 355,215 33,000 322,315
For each year petitioners reported zero gift tax due after applying unified credits.
Petitioners attached to their gift tax returns valuation reports supporting the reported gift values. Each valuation report indicates substantial discounts for lack of control and lack of marketability of the transferred partnership interests, stating: "Unless a partner owns or controls two-thirds of the partnership interests, his/her investment is illiquid until at least the scheduled termination date."
Respondent issued each petitioner a notice of gift value determination for 2000 and separate notices of deficiency for 2001 and 2002. Each of these notices disallowed annual gift tax exclusions for each transferred partnership interest for each year on the ground that the gifts were of future interests in property. Respondent determined that petitioners had these gift tax deficiencies for 2001 and 2002:
Year Petitioner Deficiency 2001 Walter M. Price $21,763 2002 Walter M. Price 14,741 2001 Sandra K. Price 20,480 2002 Sandra K. Price 14,602OPINION
The parties disagree as to whether petitioners' gifts of partnership interests to their children are properly characterized as present interests so as to qualify for annual gift tax exclusions under section 2503(b). Petitioners bear the burden of proving that their gifts qualify for annual exclusions.5 See Rule 142(a); Hackl v. Commissioner, 118 T.C. 279, 294 (2002), affd. 335 F.3d 664 (7th Cir. 2003); see also Stinson Estate v. United States, 214 F.3d 846, 848 (7th Cir. 2000).
Section 2501 generally imposes a tax on the transfer of property by gift. Section 2503(b) provides an inflation-adjusted annual exclusion of $10,000 per donee.6 The annual exclusion applies to "other than gifts of future interests in property". Sec. 2503(b)(1).
The statute does not define the term "future interests". The regulations provide:
"Future interest" is a legal term, and includes reversions, remainders, and other interests or estates, whether vested or contingent, and whether or not supported by a particular interest or estate, which are limited to commence in use, possession, or enjoyment at some future date or time. The term has no reference to such contractual rights as exist in a bond, note (though bearing no interest until maturity), or in a policy of life insurance, the obligations of which are to be discharged by payments in the future. But a future interest or interests in such contractual obligations may be created by the limitations contained in a trust or other instrument of transfer used in effecting a gift.
* * * An unrestricted right to...
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