The opinion
T.C. Memo. 2008-221
UNITED STATES TAX COURT
BIANCA GROSS, DONOR, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 9693-06. Filed September 29, 2008.
Kathryn Keneally and Jeffrey M. Marks, for petitioner.
Gerard Mackey, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
HALPERN, Judge: By notice of deficiency dated February 22,
2006 (the notice), respondent determined a deficiency in
petitioner’s 1998 Federal gift tax of $120,583.22.
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for 1998.
The principal issue for decision is whether petitioner’s
transfer of securities to a family limited partnership
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constituted indirect gifts of a portion of those securities to
the other members of the partnership.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
The stipulation of facts, with accompanying exhibits, is
incorporated herein by this reference.
At the time she filed the petition, petitioner resided in
the State of New York.
Background
Petitioner, a widow, has two adult children, Diane Gross
Marks and Marian Gross.
Over the years, petitioner, an investor, has bought and sold
securities. By 1998, she had acquired a sizable portfolio of
publicly traded securities. Earlier, following her husband’s
death in 1996, she had begun to consider her own mortality and
her desire to involve her daughters in managing what someday
would become theirs (i.e., her securities portfolio). Because she
deemed one of her daughters extravagant, she considered a trust
arrangement, but she rejected that because her other daughter
declined to serve as a trustee. She settled on a family limited
partnership, which she believed would encourage her daughters to
work together and learn from her experience while preserving in
her (as sole general partner) control over the partnership’s
assets. She had several discussions with her daughters about the
partnership arrangement, culminating in an agreement among
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petitioner and her daughters by July 15, 1998, to form a limited
partnership. She and her daughters agreed to the following:
-- Each would contribute a small amount of cash to the
partnership ($100 from petitioner and $10 from each
daughter), and petitioner would contribute securities.
-- As the general partner and majority owner, petitioner
would retain ultimate control over management of the
partnership, including the authority to make decisions
about sales, purchases, and other dispositions of the
partnership’s assets, and petitioner would have
exclusive discretion concerning the timing and amounts
of distributions to the partners.
-- The daughters would not be able to transfer their
interests in the partnership without petitioner’s
approval.
-- The daughters could not withdraw from the partnership,
nor were they entitled to a return of their capital
contributions.
-- The daughters could not force a dissolution of the
partnership.
-- Each partner’s interest in the partnership would be
based on the amount of her contribution of capital to
the partnership.
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Dimar Holdings L.P.
On July 15, 1998, petitioner caused a certificate of limited
partnership for “Dimar Holdings L.P.” (the Dimar certificate and
Dimar or the partnership, respectively) to be filed with the New
York Department of State. She also caused notice of the
formation of Dimar as a limited partnership to appear in New York
newspapers, and, on October 14, 1998, she caused an affidavit of
publication to be filed with the New York Department of State.
On July 31, 1998, petitioner’s daughters each drew checks
for $10 to the order of Dimar. On November 16, 1998, petitioner
drew a check for $100 to the order of Dimar.
From the beginning of October 1998 through December 4, 1998,
petitioner transferred ownership of shares of stock from her name
to Dimar’s name (the Dimar securities). The Dimar securities
were mostly, if not all, common shares of well-known, publicly
traded companies. As the redesignated stock certificates were
returned to her, she recorded the transfers in a notebook, titled
“Dimar”, that she maintained to record various transactions with
respect to Dimar. By mid-December 1998, petitioner had recorded
Dimar’s portfolio on a computer program that tracked the
performance of the portfolio on a continuous basis. The fair
market value of the portfolio on December 15, 1998, was
$2,158,646, while the value of all of Dimar’s assets on that date
was $2,158,766. The $120 difference was due to the cash
contributions from petitioner and her two daughters.
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Dimar filed a Form 1065, U.S. Partnership Return of Income,
for 1998 signed by petitioner as general partner. The return
shows that Dimar commenced business on July 15, 1998.
The Deeds of Gift
Petitioner and her daughters assembled for a family holiday
either on or shortly before December 15, 1998. At that meeting
(the December 15 meeting), petitioner and each of her daughters
executed a document styled “Deed of Gift”. Among other things,
each such document provides that petitioner is transferring to
the named daughter a 22.25-percent interest as a limited partner
in Dimar.
The Dimar Partnership Agreement
Also at the December 15 meeting, petitioner and her
daughters executed a document styled “Limited Partnership
Agreement of Dimar Holdings L.P.” (the Dimar agreement). Among
other things, the Dimar agreement provides that petitioner is the
general partner, the daughters are limited partners, the purposes
of the partnership include managing the partnership’s investments
in securities, limited partners are restricted both in disposing
of their partnership interests and in withdrawing capital from
the partnership, distributions are at the discretion of the
general partner, the powers of the partnership are to be
exercised by or under the direction of the general partner, and,
except as specifically provided in the agreement or as required
by law, the limited partners are to take no part in the
management of the business and affairs of the partnership.
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The Gift Tax Return
Petitioner filed a Form 709, United States Gift (and
Generation-Skipping Transfer) Tax Return, for 1998 (the Form 709)
on which she reported December 15, 1998, gifts of a 22.25-percent
limited partnership interest in Dimar to each of her daughters.
Petitioner reported that the value of each of those gifts was
$312,500. A schedule attached to the Form 709 contains
information pertinent to the gifts. It includes a list of the
Dimar securities under the heading “Securities Contributed to
Partnership on 12/15/98”. It states that the market value of
those securities on December 15, 1998, was $2,158,646. It
includes computations of the partners’ capital accounts, showing
initial contributions of $100, $10, and $10 for petitioner and
her daughters, respectively. It shows that petitioner’s capital
account was credited in the amount of $2,158,646 because of her
contribution of the Dimar securities to the partnership and was
then debited in the amount of $960,598 because of her gifts
($480,299 each) to her daughters, whose capital accounts were
credited because of the gifts in the amount of $480,299 each.
The schedule also shows that the reported value of each gift
results from applying an approximately 35-percent discount to a
prediscount value of $480,299 for each gift.1 The 35-percent
1
The pre-discount value of $480,299 for each gift
apparently is derived by applying 22.25 percent to the reported
fair market value of the Dimar securities on Dec. 15, 1998
($480,299 = 22.25% x $2,158,646).
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discount is attributed to “minority interest”, “lack of control”,
and “lack of marketability”.
The Notice
Following an examination of the Form 709, respondent issued
the notice. The notice explains that respondent’s adjustments
giving rise to the deficiency in tax resulted from his
determination that petitioner made indirect gifts to each of her
daughters of securities when she contributed the Dimar securities
to Dimar rather than direct gifts of 22.25-percent interests in
Dimar. The notice claims that the value of each indirect gift
was $480,299.
OPINION
I. Introduction
We must determine whether petitioner made indirect gifts of
securities to her daughters. Respondent’s theory of the case
begins with his supposition that, on December 15, 1998, three
events occurred: (1) Petitioner and her daughters formed Dimar
(a family limited partnership), (2) each daughter acquired a
22.25-percent limited partnership interest in Dimar, and (3)
petitioner then contributed the Dimar securities to the
partnership (with 22.25 percent of the value of the contribution,
$480,299, being credited to each daughters’ capital account). On
that basis, respondent concludes that petitioner made an indirect
gift of $480,299 worth of securities to each daughter.2
2
Taking account of petitioner’s and the daughters’ cash
contributions of $100, $10, and $10, respectively, respondent
(continued...)
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Petitioner’s theory of the case differs from respondent’s
principally with respect to the timing of the key events. She
argues that Dimar was formed on July 15, 1998, the Dimar
securities were all contributed by December 4, 1998, and the
gifts (which were of partnership interests) occurred long enough
thereafter (on December 15, 1998) that no indirect gift of
securities can be supposed. Petitioner also relies on a
stipulation that, if the Court finds that, on December 15, 1998,
petitioner made direct gifts of limited partnership interests to
the daughters, then, taking into account applicable discounts,
the value of each gift was $312,500, as petitioner reported on
the Form 709.
We shall first describe the indirect gift theory. We shall
then discuss whether it has any application to the facts before
us and resolve any remaining valuation questions.
II. Indirect Gifts
Section 2501(a) imposes a tax on an individual’s transfer of
property by gift during the year. The tax is imposed on the
value of the gifts made during the year. See sec. 2502(a). The
value of a gift of property is the value thereof on the date of
transfer. Sec. 2512(a). The value of a gift of property is
determined by the value of the property passing from the donor
and not necessarily by the measure of enrichment resulting to the
2
(...continued)
calculates the indirect gift to each daughter to be $480,315.
But in the notice, he calculated the indirect gifts to be
$480,299, and he does not assert an increased deficiency.
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donee from the transfer. Sec. 25.2511-2(a), Gift Tax Regs.
Where property is transferred for less than adequate and full
consideration in money or money’s worth (hereafter, simply,
adequate consideration), then the excess of the value of the
property transferred over the consideration received is generally
deemed a gift. Sec. 2512(b). The gift tax applies whether the
gift is direct or indirect. Sec. 2511(a). Section
25.2511-1(h)(1), Gift Tax Regs., illustrates an indirect gift
made by a shareholder of a corporation to the other shareholders
of the corporation. The shareholder transfers property to the
corporation for less than adequate consideration. The regulation
concludes that, generally, such a transfer represents gifts by
the shareholder to the other individual shareholders to the
extent of their proportionate interests in the corporation.
Similarly, if a partner transfers property to a partnership for
less than adequate consideration, the transfer generally will be
treated as an indirect gift by the transferor to the other
partners. See, e.g., Shepherd v. Commissioner, 115 T.C. 376, 389
(2000), affd. 283 F.3d 1258 (11th Cir. 2002). Indeed, in
affirming the Tax Court, the Court of Appeals said: “[G]ifts to a
partnership, like gifts to a corporation, are deemed to be
indirect gifts to the stakeholders ‘to the extent of their
proportionate interests’ in the entity. See * * * [sec.
25.2511-1(h)(1), Gift Tax Regs.].” Shepherd v. Commissioner, 283
F.3d at 1261.
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III. Discussion
A. Introduction
Whether petitioner made indirect gifts of securities to her
daughters depends on whose version of events we accept: Did all
of the relevant events occur on December 15, 1998, as respondent
claims, or was Dimar formed and funded a substantial time before
as petitioner claims? We begin by examining New York partnership
law. Respondent’s position is that execution of a partnership
agreement is a condition precedent to the formation of a limited
partnership under New York law, and, since the Dimar agreement
was not executed until December 15, 1998, Dimar did not come into
existence until that date. Petitioner counters that Dimar was
properly formed as a limited partnership on July 15, 1998, when
petitioner caused a certificate of limited partnership for Dimar
to be filed with the New York Department of State, or,
alternatively, if Dimar did not qualify as a limited partnership
until December 15, 1998, then it was a general partnership under
New York law as of July 15, 1998.
While the parties skirmish over the date or dates on which
petitioner contributed the Dimar securities to Dimar, we think
that, if petitioner is right that Dimar was established on July
15, 1998, she is also right that the securities were contributed
by December 4, 1998. Because we think that she is right on both
counts, we conclude that petitioner did not make indirect gifts
of securities to her daughters. We also agree with petitioner’s
valuation conclusion. Our reasons follow.
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B. Formation of Dimar
1. Introduction
New York limited partnerships formed after July 1, 1991, are
subject to the Revised Limited Partnership Act. N.Y. Pship. Law
secs. 121-101 through 121-1300 (McKinney 1998). In pertinent
part, N.Y. Pship. Law sec. 121-201, “Certificate of limited
partnership”, provides:
(a) In order to form a limited partnership the
general partners shall execute a partnership agreement,
and a certificate of limited partnership shall be
executed in accordance with section 121-204 of this
article. The certificate * * * shall be filed with the
department of state in accordance with section 121-206
of this article * * *
* * * * * * *
(b) A limited partnership is formed at the time of
the filing of the initial certificate of limited
partnership with the department of state or at any
later time not to exceed sixty days from the date of
filing specified in the certificate of limited
partnership. The filing of the certificate shall, in
the absence of actual fraud, be conclusive evidence of
the formation of the limited partnership as of the time
of filing or effective date if later, except in an
action or special proceeding brought by the attorney
general.
Additionally, subsection (c) of N.Y. Pship. Law sec. 121-201
contains a publication requirement that must be satisfied within
120 days after the filing of the certificate of limited
partnership.
2. Discussion
Petitioner caused the Dimar certificate to be filed with the
New York Department of State on July 15, 1998, and neither party
argues that the publication requirement found in N.Y. Pship. Law
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sec. 121-201(c) is unsatisfied. Petitioner and her daughters did
not, however, execute the Dimar agreement until December 15,
1998. As stated, respondent argues that execution of a
partnership agreement is a condition precedent to the formation
of a limited partnership pursuant to New York partnership law.
See N.Y. Pship. Law sec. 121-201(a). He argues, therefore, that
Dimar did not come into existence until December 15, 1998.3
Petitioner argues that New York partnership law attaches no
limitation to the time in which the partnership agreement must be
executed, and she directs us to the language in N.Y. Pship. Law
sec. 121-201(b) providing that, except in circumstances not
applicable here: “The filing of the certificate shall * * * be
conclusive evidence of the formation of the limited partnership
as of the time of filing or effective date if later”. Noting
that the publication requirement found in N.Y. Pship. Law sec.
121-201 cannot be satisfied until after the certificate of
limited partnership is filed, petitioner argues: “The Act thus
contemplates that a limited partnership may be formed before all
statutory formalities are completed.” Continuing that the Dimar
certificate did not contain a delayed effective date, petitioner
3
Respondent argues on brief that, because the Dimar
agreement was signed more than 60 days after the Dimar
certificate was filed, see N.Y. Pship. Law sec. 101-201(b)
(McKinney 1998), it “is * * * questionable whether Dimar was
validly formed under New York law.” The argument that Dimar was
not formed is inconsistent with the basis of respondent’s
adjustment in the notice that petitioner made an indirect gift to
her daughters when she contributed the Dimar securities to the
partnership. Nor has respondent pled an alternative basis for
the deficiency he determined. We do not further consider the
argument that Dimar was not validly formed.
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argues that Dimar was formed on July 15, 1998, the date the
certificate was filed.
Neither party makes a compelling argument for their
interpretation of New York partnership law, and we have found no
persuasive authority on our own. Since we agree with petitioner
that, were we to conclude that the Dimar agreement was not timely
executed so as to constitute Dimar a limited partnership on July
15, 1998, we must consider whether New York law would deem
petitioner and her daughters to have formed a general partnership
on that date, we shall proceed to that consideration.
Under New York law, when parties seeking to form a limited
partnership do not satisfy the requirements necessary to form a
limited partnership, they may be deemed to have formed a general
partnership if their conduct indicates that they have agreed,
whether orally and whether expressly or impliedly, on all the
essential terms and conditions of their partnership arrangement.
Peerless Mills, Inc. v. AT&T Co., 527 F.2d 445, 449 n.1 (2d Cir.
1975); Canet v. Gooch Ware Travelstead, 917 F. Supp. 969, 994
(E.D.N.Y. 1996). We agree with petitioner that the record
contains sufficient evidence for us to conclude that, at the time
petitioner caused the Dimar certificate to be filed on July 15,
1998, she and her daughters had agreed to form a partnership
essentially on the terms set forth in the Dimar agreement.
Petitioner and her daughters gave uncontradicted testimony that
they had agreed upon the essential terms and conditions of their
partnership arrangement just before the filing of the Dimar
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certificate. We have set forth those terms and conditions in our
findings of fact, and they are consistent with the terms and
conditions of the Dimar agreement. The daughters made their $10
cash contributions on July 31, 1998, and petitioner began
contributing securities to the partnership no later than November
10, 1998, and made her $100 cash contribution on November 16,
1998. She contributed the bulk of the Dimar securities to the
partnership by the end of November 1998. Petitioner kept a
record of her contributions in a notebook titled “Dimar”, and she
kept computer records of the performance of the Dimar portfolio.
Petitioner signed an income tax return for Dimar on April 5,
1999, reporting that Dimar commenced business on July 15, 1998.
Together, petitioner’s and her daughters’ testimony and their
conduct indicate to us that, on July 15, 1998, they agreed to all
the essential terms of their partnership arrangement, and we so
find. If they failed to satisfy the requirements necessary to
form a limited partnership, we deem them to have formed a general
partnership on that date and on those terms.
3. Conclusion
Dimar was formed as a partnership on July 15, 1998.
C. Contribution of the Dimar Securities
We have found that, from the beginning of October 1998
through December 4, 1998, petitioner transferred the Dimar
securities from her name to Dimar’s name. Respondent can have no
quarrel with that finding since it is based on a stipulation.
Nevertheless, respondent argues that, since Dimar was not formed
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until December 15, 1998, petitioner could not have contributed
the securities to an entity that did not yet exist. Respondent
buttresses his argument by pointing out that a schedule attached
to the Form 709 includes a list of Dimar securities under the
heading “Securities Contributed to the Partnership on 12/15/98”.
Petitioner relies on the argument that Dimar was formed on July
15, 1998, whether as a limited or general partnership, and the
schedule in question was included with the Form 709 solely in
support of the valuation of the partners’ capital accounts on
December 15, 1998. Petitioner argues that the schedule was
clearly intended to be a list of the securities (all contributed
by petitioner before December 15, 1998) held by Dimar on that
date and was not intended to show that the securities had, in
fact, been contributed on that date. Considering the Form 709 as
a whole, petitioner is convincing as to the purpose of the
schedule, and we have already concluded that Dimar was formed on
July 15, 1998.4 We conclude that petitioner contributed the
Dimar securities to Dimar during a period commencing in early
October 1998 and ending on December 4, 1998.
4
In further support of his claim that the Dimar securities
were not contributed to the partnership until Dec. 15, 1998,
respondent points out that a schedule attached to the Form 709
filed by petitioner shows that as of Dec. 15, 1998, petitioner’s
capital account reflected the full value of the Dimar securities
notwithstanding that the partnership had enjoyed $41,107 of net
appreciation in its portfolio that should in part have been
reflected in the values of the daughters’ capital accounts.
Petitioner responds that, after petitioner’s contribution of the
Dimar securities and before she made gifts of limited partnership
interests to the daughters, the daughters’ combined interest in
the appreciation was slight (less than 0.1 percent), and the
failure to allocate the appreciation may be ignored. We agree.
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D. Indirect Gifts
1. Introduction
Respondent argues that petitioner made indirect gifts to her
daughters because she contributed the Dimar securities to Dimar
for inadequate consideration. She received inadequate
consideration, respondent argues, because, proportionate to her
interest in the partnership, only 55.50 percent of the value of
the securities was credited to her capital account. She made
indirect gifts to her daughters, respondent continues, because,
proportionate to their interests in the partnership, the
remaining value of the securities was credited to their capital
accounts (22.25 percent apiece). Respondent assumes that
petitioner’s transfer of interests in Dimar to her daughters
either preceded her contribution of the Dimar securities to Dimar
or should be deemed to have preceded that contribution under the
step transaction doctrine. Petitioner argues that she made no
indirect gift of any portion of the Dimar securities to her
daughters since (1) 100 percent of the value of the Dimar
securities was credited to her capital account well in advance of
her gifts of interests in Dimar to her daughters, and (2) no
grounds exist to reorder those steps under the step transaction
doctrine.
2. Indirect Gifts in Fact
In Estate of Jones v. Commissioner, 116 T.C. 121, 123-127
(2001), the decedent had formed two family limited partnerships
with his children and had contributed assets to the partnerships
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in exchange for substantially all of the limited partnership
interests in the partnerships. His contributions were credited
to his capital accounts. On the day the partnerships were
formed, petitioner gave to his children substantially all of his
interests in the partnerships. The decedent reported the gifts
for Federal gift tax purposes, discounting the values of the
gifts substantially on account of lack of marketability and for
other reasons. In the case before us (the estate tax case), the
Commissioner argued that the sizable discounts applied to the
gifts indicated that the decedent had made taxable gifts upon
contributing his property to the partnerships (the gifts being
equal in value to the difference between the value of the
property contributed and the value of the limited partnership
interests received). We found that the contributions of property
were properly reflected in the capital accounts of the decedent,
and the value of the other partners’ interests was not enhanced
by the decedent’s contributions. Id. at 128. Therefore, we
held, the contributions did not constitute taxable gifts. Id.
In Shepherd v. Commissioner, 115 T.C. at 379-381, the
taxpayer transferred real property and stock to a newly formed
family partnership in which he was a 50-percent owner and his two
sons were each 25-percent owners. Rather than allocating
contributions to the capital account of the contributing partner,
the partnership agreement provided that any contributions would
be allocated pro rata to the capital accounts of each partner
according to ownership. Because the contributions were reflected
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partially in the capital accounts of the noncontributing
partners, the value of the noncontributing partners’ interests
was enhanced by the contributions of the taxpayer. Therefore, we
held, the transfers to the partnership were indirect gifts by the
taxpayer to his sons of undivided 25-percent interests in the
real property and stock. Id. at 389.
We have concluded supra in section III.B.2. and C. of this
report that Dimar was formed as a partnership on July 15, 1998,
and that petitioner transferred the Dimar securities to Dimar
during a period commencing in early October 1998 and ending on
December 4, 1998. Petitioner testified, and her daughters
confirmed, that, as she contributed the Dimar securities to
Dimar, her percentage interest in the partnership increased and
theirs decreased. A schedule attached to the Form 709 shows that
petitioner’s capital account was increased because of her
contribution of the Dimar securities to the partnership and was
then decreased because of her gifts to her daughters, whose
capital accounts were increased on account thereof. The parties
agree that petitioner made gifts to her daughters on December 15,
1998.
The contributions of property in the case at hand are
similar in form to the contributions in Estate of Jones and are
distinguishable in form from the gifts in Shepherd. Petitioner
made a series of contributions of securities to Dimar and
received increasing partnership interests in return. All of the
contributions were reflected in her capital account, and the
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value of her daughters’ capital accounts was not enhanced because
of her contributions. After she contributed the Dimar securities
to the partnership, she made gifts of interests in the
partnership to her daughters.
Before concluding that form and substance agree, however, we
shall consider respondent’s step transaction argument.
3. Indirect Gifts Under the Step Transaction Doctrine
The step transaction doctrine embodies substance over form
principles; it treats a series of formally separate steps as a
single transaction if the steps are in substance integrated,
interdependent, and focused toward a particular result. Where an
interrelated series of steps are taken pursuant to a plan to
achieve an intended result, the tax consequences are to be
determined not by viewing each step in isolation, but by
considering all of them as an integrated whole. Holman v.
Commissioner, 130 T.C. __, __ (2008) (slip op. at 26) (citations
and quotation marks omitted).
Holman is a family limited partnership case in which the
taxpayers made the first of a series of gifts of limited
partnership interests 6 days after forming and funding the
partnership with shares of a publicly traded company. Id. at __
(slip op. at 27-28). We described the Commissioner’s argument
with respect to that gift as being that the taxpayers’ “formation
and funding of the partnership should be treated as occurring
simultaneously with * * * [the gift] since the events were
interdependent and the separation in time between the first two
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steps (formation and funding) and the third (the gift) served no
purpose other than to avoid making an indirect gift under section
25.2511-1(h), Gift Tax Regs.” Id. at __ (slip op. at 27).
Without intending to draw any bright lines, we rejected the
Commissioner’s argument because of our conclusion that the
taxpayers bore a real economic risk of a change in value of the
partnership for the 6 days that separated their transfer of the
shares to the partnership and the gift. Id. at __ (slip op. at
30). We concluded: “[W]e shall not disregard the passage of
time and treat the formation and funding of the partnership and
the subsequent gifts as occurring simultaneously under the step
transaction doctrine.” Id. at __ (slip op. at 31).
We reach the same result here, where (1) 11 days passed
between petitioner’s conclusion of her transfer of the Dimar
securities to the partnership and her gifts of interests in the
partnership to her daughters, and (2) the Dimar securities were
mostly, if not all, common shares of well-known companies.5 The
step transaction doctrine does not cause us to change the actual
order of the transactions before us and conclude that petitioner
made indirect gifts of 22.25 percent of the value of the Dimar
5
We caution, however, in terms similar to those as we used
in Holman v. Commissioner, 130 T.C. , n.7 (2008) (slip op.
at 31): The real economic risk of a change in value arises from
the nature of the Dimar securities as heavily traded, relatively
volatile common stocks. We might view the impact of a 11-day
hiatus differently in the case of another type of investment;
e.g., a preferred stock or a long-term Government bond.
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securities to each of her daughters.6 The form of the
transactions here in question accords with their substance.
4. Conclusion
On December 15, 1998, petitioner made gifts of interests in
Dimar to her daughters and did not make indirect gifts of
portions of the Dimar securities that she had contributed to the
partnership.
6
We have deemed that, if petitioner and her daughters
failed to satisfy the requirements necessary to form a limited
partnership, they formed a general partnership on July 15, 1998.
Sec. III.B.2. of this report, supra. Respondent’s position is
that Dimar came into existence, as a limited partnership, when
petitioner and her daughters signed the Dimar agreement on Dec.
15, 1998. The parties have not explored the tax consequences of
the Dimar agreement being effective to convert Dimar from a
general to a limited partnership. Sec. 708(b)(1) provides the
circumstances under which a partnership will be considered as
terminated. If Dimar were considered as terminated as a general
partnership before being reconstituted under the Dimar agreement
as a limited partnership, then respondent might argue that
petitioner received the Dimar securities from the terminated
general partnership before contributing them to the reconstituted
limited partnership while, at the same time, making gifts of
limited partnership interests to her daughters. See Senda v.
Commissioner, 433 F.3d 1044 (8th Cir. 2006) (relying on the step
transaction doctrine in affirming the Tax Court’s finding that
taxpayers made indirect gifts of shares of stock to partners in
family limited partnerships since transfers of securities to
partnerships and gifts of partnership interests were integrated
and simultaneous transactions), affg. T.C. Memo. 2004-160.
Respondent has perhaps not made that argument because he has
ruled that, generally, a partnership does not terminate upon its
conversion from a general to a limited partnership. Rev. Rul.
84-52, 1984-1 C.B. 157; see also Rev. Rul. 95-37, 1995-1 C.B. 130
(treating the conversion of an interest in a domestic partnership
into an interest in a domestic L.L.C. that is classified as a
partnership as a partnership to partnership conversion).
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E. Valuation
The parties have stipulated that, if petitioner is found by
the Court to have made gifts of limited partnership interests in
Dimar to her daughters on December 15, 1998, then petitioner was
correct in reporting the value of each of those gifts as $312,500
on the Form 709. We have found only that, on December 15, 1998,
petitioner made gifts of interests (not necessarily limited
partnership interests) in Dimar to her daughters. Petitioner’s
expert witness gave uncontradicted testimony that, if Dimar were
a general rather than a limited partnership, and petitioner and
her daughters had agreed that the daughters would be subject to
the same limitations as set forth in the Dimar agreement, viz,
neither daughter could dispose of all or any portion of her
interest in the partnership, neither would have the right to
withdraw either her capital or participation in the partnership
or to receive distributions from the partnership, and neither
would have control of management or the business and affairs of
the partnership, then the fair market value of a 22.25-percent
interest in the partnership received by each of the daughters
would be worth the same as a 22.25-percent limited partnership
interest in a limited partnership governed by the Dimar
agreement. He pegged that value as $277,868. Petitioner states,
however, that she is not claiming a value for the gifts any less
than the value ($312,500) reported on the Form 709.
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We have found that, by the time petitioner caused the Dimar
certificate to be filed on July 15, 1998, she and her daughters
had agreed to form a partnership essentially on the terms set
forth in the Dimar agreement. On the basis of petitioner’s
expert witness’s uncontradicted testimony, we find that, if, on
December 15, 1998, Dimar was a general partnership, the fair
market value of the interest in the partnership that petitioner
gave to each of her daughters was $312,500.
IV. Conclusion
To reflect the foregoing,
Decision will be entered
for petitioner.