Stock transfers to FLP and FLP interest transfers to donor's children are indirect gifts.

In Mark W. Senda, 8th Cir., 1/06/06, aff'g TC Memo 2004-160, the Eighth Circuit held transfers of static to two family limited partnerships (FLPs)--coupled with the transfers of FLP interests to the donor's children on the same day--to result in indirect gifts of stock to the children, because the donors did not present reliable evidence that they contributed the stock to the FLPs before transferring the FLP interests to their children. According to the court, the sequence of the transfers is critical; a contribution of stock after the transfer of partnership interests is an indirect gift of the stock to the partners (to the extent of their proportionate interest in the partnership) as opposed to a gift of the partnership interest. The finding of on indirect girl of stock severely restricts (or eliminates) the availability of valuation discounts. In Senda, the girls were valued at the full undiscounted value of the stock transferred. If the girl had been determined to be of FLP interests, the taxpayer and the IRS had agreed to allow combined discounts of between 39% and 45% in valuing the FLP interests.

This case is a reminder to practitioners of the dangers of sloppy FLP implementation. The Eighth Circuit noted (among other matters) that the general partner did not maintain any records, the certificates of transfer were not recorded in a timely manner, the donor's testimony was evasive as to the timing of the transfers and there was a failure of after-the-fact paperwork (i.e., gift tax returns) to provide reliable evidence on the timing of the transfers. Further, to properly document the establishment of a FLP and the transfers of interests, same time should elapse between the contribution to the partnership and the girl of the limited interests--at least until the contribution is recorded on the partnership's books and the contributing partner's capital account has been properly credited. An AICPA FLP administration checklist that highlights these and other concerns and which may be helpful can be found at http://tox.aicpa.org/Resources/Trust+Estoto+and+Gift/Family+ Umited+Partnerships/MCPA+Checklist+on+FamJly+Umited+Partnerships.htm.

Eileen Sherr, CPA, MT, AICPA Technical Manager--Taxation, Washington, DC, and Vinu Satchit, CPA, BDO Seidman LLP, High Point, NC