The Internal Revenue Service lost a recent case in the United States Tax Court, putting an end to challenges on qualifying gifts in limited partnerships.
In Estate of George H. Wimmer, TC Memo 2012-157, the IRS challenged that the gifts of limited partnership interests made by George Wimmer did not qualify under the annual exclusion gift tax law
. The federal tax agency asserted that because the partnership was funded with publicly traded stocks that paid dividends quarterly, they are considered “future interests.” Current tax law relating to gifts requires that they be of “present interests” in order to qualify.
The U.S. Tax Court reaffirmed its stance in previous cases and noted that donors must prove three scenarios in order for the transfer of a limited partnership interest to qualify for the annual gift tax exclusion. First, the partnership must generate income; second, some portion of the income must flow to donees; and third, income must be readily ascertainable.
The federal tax court found that the first and third stipulations were easily met in this case. Regarding the second stipulation, the court explained that the general partners have a fiduciary responsibility to the donee limited partners. Because one of the donees was set up as an irrevocable trust with no other assets, the court asserted that the only way it would be able to pay its income tax was if the partnership made steady distributions of income.
Therefore, the tax court ruled that due to the legal requirement to make steady distributions to the trust, all stipulations were met and the estate’s gifts qualified as annual exclusion gifts.