Litigating Against the IRS: Taxpayer Wins One, Loses One
A taxpayer both won and lost against the IRS in a case involving a Family Limited Partnership (FLP). The case, Holman v. Commissioner is reported and very-well summarized in a post (“Another FLP Fact Pattern: Holman v. Commissioner”) by Kimberly Martinez Lajarza in the Florida Estate Planning Blog.
We sometimes comment on estate planning issues in this blog because of our broad interpretation of “business litigation.” Our business clients and readers have a very strong and personal interest in transferring the fruits of a lifetime of hard work to their chosen beneficiaries.
Lifetime gifts are commonly used to reduce the size and tax liability of an estate large enough to be taxable. But, gifts are subject to the gift tax.
FLP’s provide a way to discount the value of the gifts made in one’s lifetime for gift tax purposes. The discount is important because it allows the taxpayer to take greater advantage of the annual exclusion (now $12,000) and the lifetime exemption (now $1,000,000) from the gift tax. For example, a 20% discount allows assets to be nominally worth $15,000 within the $12,000 annual exemption.
We have not seen the Holman case and rely on the FEPB post for the facts. Apparently, the mainstream elements of the plan (marketability and control discounts) survived the litigation but, the transfer restrictions pushed the envelope a little and did not. Another key element, in favor of the taxpayer, was that the assets were transferred to the limited partnership before gifts were made, even if only by a matter of days.
General lessons to derive better practices: (1) leading-edge planning techniques will be scrutinized and may involve litigation so the potential returns (even larger tax savings) should justify the added risk, (2) careful planning is always in order – - consider how important the timing of the gifts was in this case.
