Estate of Wimmer: A Taxpayer Victory Or Learning From The Mistakes of Others

June 13, 2012
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Normally, any tax case that cites Hackl[1] does not result in a taxpayer victory. The taxpayer and advisors in Wimmer, however, learned from the Hackl case and were successful as a result. Nevertheless, Hackl continues to be a shining example of what happens when taxpayers ignore some of the basic doctrines of tax law in implementing a popular strategy.

Tax Payer

I have simplified the facts for this analysis.  In Wimmer, as in Hackl, the taxpayers created a limited partnership (an “LP”) and sought to qualify gifts of the limited partnership interests to a trust as a gift of a present interest.  What many readers assume to be true however is decidedly not. The gift of an interest in property does not automatically qualify as a gift of a present interest. A present interest is a term of art and means an unrestricted right to the immediate use, possession, or enjoyment of property.  In Hackl the transfer of interests did not convey the immediate use or enjoyment of property because there were no distributions of cash or immediate benefit from the receipt of property.  In fact, the underlying Hackl business was timber, and growing trees requires years of cultivation (translated: losses) before trees can be cut (translated: realize a profit). The recipients therefore received no present benefit from the gifts other than an expectation of a profit many years in the future.

By contrast, in Wimmer, the LP received dividends and made distributions to all partners, in proportion to their respective ownership interests.

Here the estate met its burden that the gifts were of a present interest by satisfying a three-part test.  First, the estate proved the LP would generate income from its portfolio of blue chip stocks.  This is a significant difference from Hackl. Second, the estate proved that income would flow to the partners.  Consider that the forestry and business plan in Hackl showed losses for several years and those losses were allocated to the founders to offset other income. This diminished, in the eyes of the Court, the present value of the interests gifted and relegated the gifts to those of a future interest or expectancy.  Third, the income to be distributed was ascertainable.  In Wimmer, the cash distributions were consistent with ownership percentages and not arbitrary or speculative.   Thus, Wimmer offers renewed hope for investment partnerships as part of a viable gifting strategy.

Why are gifts of a present interest significant? The reason is that a gift of a present interest may be offset by the annual exclusion, which was $10,000 in those years.  Gifts of future interests may not be offset, and they thus eat away at your lifetime exemption.  In the years 1996 through 2000, the federal estate tax exemption was only $600,000, and preserving the exemption was more important than in 2012 where the exemption is now $5,120,000.

As we approach the tax and fiscal cliff in 2013, qualifying as a present interest may once again become important if the exemption falls to $1,000,000 as scheduled.

[1] Hackl v. Comm., 118 T.C. 298 (2002), aff’d, 335 F. 3d. 664 (7th Cir. 2003).