The Tax Court has ruled that transfers of stock into an FLP were indirect gifts to children. In the present case, a couple created two Family Limited Partnership interests. The ownership interest of the FLP was split between the husband, wife, and children.
When the husband transferred a large volume of stock to the FLP in exchange for a portion of the FLP, the exchange was merely seen as lacking economic effect, and therefore was a gift and not an effective exchange of property.
Corporate records are critical. Here, the family lacked corporate records beyond annual tax returns. Without the substantiation of corporate records, the transactions were dubious. This type of transaction occurs everyday and is effective for estate and tax planning. Had this couple maintained records and obeyed corporate formalities, the IRS Tax Court would have likely ruled in their favor. Remember, if you want to obtain tax benefits from a transaction, complete all aspects of the requirements necessary to accomplish the overall objective. Work with tax professionals, not general practitioners to be sure you are fully complying with the tax laws.
By: Basi & Basi at the Center for Financial, Legal and Tax Planning for Transworld M&A Advisors