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In the Estate of George H. Wimmer v. Commissioner of Internal Revenue, the U.S. Tax Court held that gifts of limited partnership interests made over a series of years qualified for the Federal gift tax annual exclusion under Code section 2503(b) notwithstanding the partnership transfer restrictions imposed by the partnership agreement.
The Wimmer family created a family limited partnership to invest family assets, control the distribution of such assets, and restrict outsiders from acquiring such assets. As is typical with family limited partnerships, the partnership agreement imposed strict transfer restrictions and limitations on who may become a substitute limited partner, reserving an exception, however, for related parties including irrevocable trusts for certain family members. Under this exception, gifts of limited partnership interests were made annually to related parties over a period of five years. From the time the partnership was formed, its assets consisted only of publicly traded and dividend-paying stock. As it received dividends, the partnership distributed them in proportion to the partnership interests. In addition, the limited partners had access to their respective capital accounts and in fact made regular withdrawals from such accounts.
In order to qualify for the gift tax annual exclusion under Code section 2503(b) (which exempts the first $13,000 of gifted property), the gift must be of a “present interest” in property, meaning the donee must receive a meaningful current economic benefit. Section 25.2503-3(b) of the Gift Tax Regulations provides that a present interest is an “unrestricted right to immediate use, possession, or enjoyment of property or the income from property.” A gift of a future interest in property, such as a remainder interest in a trust or real estate, does not qualify for the gift tax annual exclusion.
The issue in the Wimmer case was whether or not the gift of a limited partnership interest constitutes a present interest gift. Because of the transfer restrictions imposed by the partnership agreement, the Court determined that the donees did not receive unrestricted rights to immediate use, possession or enjoyment of the limited partnership interests themselves. However, the Court found that the donees did receive immediate use and enjoyment of the income from the limited partnership interests. In reviewing the partnership history, the Court determined that the partnership always generated income, some portion of that income always flowed to the limited partners, and the amount of income was readily ascertainable since it was derived substantially from dividend-paying publicly traded stocks.
While Wimmer is a victory for the taxpayer, the Court made its ruling based primarily on the income producing nature of the partnership assets and the frequent income distributions the partnership made to its partners. If, however, the gifts are of a limited partnership interest which owns only non-income producing property (such as vacant real estate), not even Wimmer and a prayer will get you an annual exclusion.