The Tax Court has stated that a U.S. Court of Appeals properly ruled on the valuation of a limited partnership. In 2000, a family formed a limited partnership with the intent of reducing estate taxes, preserving and resisting fragmentation, and being a financial educational media for the children. An internal buy-sell agreement was created to reduce the value of the shares under a right of transfer that was retained in the parents.
The taxpayer argued that the LP was properly valued with discounts for lack of control and marketability. The Appellate Court ruled that the taxpayer failed to establish its burden of proof in achieving the three part test for limited partnerships, and thus assessed a higher value. The Tax Court agreed with the Appeals Court seeing the substance over form argument and ruled that the stock was properly valued by the Appellate Court.
Family Limited Partnerships have their place in tax planning; however, they have very serious limitations as well. The business purpose for forming FLPs has to be legitimate and any buy-sell agreements have to be valid, enforceable, and reasonable to escape skepticism. FLPs are not one size fits all. There are many other valid tax and estate planning vehicles available to achieve the goals taxpayers desire.
By: Basi & Basi at the Center for Financial, Legal and Tax Planning for Transworld M&A Advisors