Tax Court Determines that for Federal Estate Tax Purposes, an Assignee Interest Is a Partnership Interest by Robert S. Horwitz
The Tax Court in Estate of Streightoff v. Commissioner, T.C. Memo 2018-178, here, faced two issues: whether an interest in a family limited partnership was an assignee interest and what discount should be applied. Holding for the Commissioner, it determined that the interest was a partnership interest and not an assignee interest. And since the expert for the Estate’s opinion was based on the assumption that the interest was an assignee interest, the Court sided with the Commissioner on the discount to be applied.
The facts are straight forward: The decedent formed Streightoff Investment, L.P., on October 1, 2008, which held publicly traded securities, municipal bonds, mutual funds and cash. Under the partnership agreement, partners holding 75% of the limited partnership interest were needed to change the general partner and approve the admission of a new limited partner.
The decedent gifted to his daughters, his sons and a former daughter-in-law limited partnership interest totaling 10.01% of the partnership. He transferred 1% to Streightoff Management, LLC, as general partner, with his daughter as manager of the LLC. He retained an 88.99% limited partnership interest, which he assigned to his living trust. His daughter, as his power of attorney, signed all documents on the decedent’s behalf.
The decedent died on May 6, 2011. The estate tax return reported a gross estate, less exclusion, of $5.051 million. On the valuation date, the net asset value of the partnership was $8.212 million. The estate tax return reported the value of his interest as $4.588 million after discounting it by 37.2% for lack of marketability, lack of control and lack of liquidity. After an audit, the IRS issued a notice of deficiency determining that the value of the decedent’s interest in the partnership was $5.99 million. The issues before the Court were 1) whether the Estate had a partnership interest or an assignee’s interest and 2) what the value was of that interest.
The first issue was a question of state law. Under Texas law, an assignee of a partnership interest who has not been admitted to the partnership has the right to receive allocations of income, gain, loss and deduction and the right to receive distributions but does not have a the right to exercise any of the rights or powers of a partner. The Estate argued the Trust was not admitted as a substitute partner and thus had only the rights of an assignee. The Court did not buy the Estate’s argument. The Federal tax effect of a transaction is governed by its substance and not its form and the Court looks beyond the formalities of intra-family partnership transactions. The Court noted that the decedent assigned all his rights associated with his limited partnership interest, which included his right to vote as a limited partner, and all other rights under the partnership agreement and the trust agreed to abide by all provisions of the partnership agreement. The Court held that based on the economic realities, and the fact that there was no significant difference between a limited partner and an assignee of a limited partnership interest, the transfer was of a limited partnership interest.
The Court then turned to valuation. The fair market value standard uses a hypothetical willing buyer and a hypothetical willing seller, both of whom are “presumed to be dedicated to achieving the maximum economic advantage.” Since the Estate acquired an 88.99% limited partnership interest, and thus could remove the general partner and effectively control the partnership, the Court sided with the IRS expert and determined that there was no discount for lack of control. The experts for both sides applied a discount for lack of marketability. The IRS expert used an 18% discount while the Estate’s expert used a 27.5% discount. Since the Estate’s expert assumed that the interest was that of an assignee, the Court adopted the discount used by the IRS expert.
Contact Robert S. Horwitz at email@example.com or 310.281.3200 Mr. Horwitz is a principal at Hochman Salkin Toscher Perez, P.C., former Chair of the Taxation Section, California Lawyers’ Association, a former Assistant United States Attorney and a former Trial Attorney, United States Department of Justice Tax Division. He represents clients throughout the United States and elsewhere involving federal and state administrative civil tax disputes and tax litigation as well as defending criminal tax investigations and prosecutions. Additional information is available at http://www.taxlitigator.com