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Sunday, May 18, 2008


Family limited partnership cases typically involve the valuation of partnership interests for estate tax purposes. The same valuation principles are generally involved for gift tax purposes when the subject of a gift is a limited partnership interest.

In Astleford, the Tax Court in a memorandum decision addressed limited partnership valuation issues, in the context of gift taxes. While the case has no groundbreaking precedents, it did address some valuation issues that often come up in the partnership context.

One issue that came up was whether a transferred general partnership interest (which was transferred by the taxpayer to a limited partnership controlled by the taxpayer), should be valued as a partnership interest or as a less valuable "assignee" interest which is valued at less than a full interest due to lack of management rights. The partnership agreement suggested that an assignee had less than full management rights, but nonetheless the Court applied a substance over form analysis to hold that the successor owner (a family limited partnership) held all or almost all of the ownership rights of the transferred general partnership interest and thus should not be valued as a mere assignee interest.

The Court noted that the taxpayer effectively retained the control rights over the transferred interest because the taxpayer was general partner of the transferee partnership. However, if the interest itself did not have control attached to it, under the willing buyer - willing seller valuation standard presumably a buyer would have paid less for the missing control element so this reasoning may be questionable.

Also questionable is that the Court also noted that the transfer documents for the partnership interest did not refer to the transferred interest only as an "assignee" interest. Since the transferee could only receive what the transferee received, and that is what is being valued, the fact that the assignee nature was not specified by the parties should not really impact value.

The Court also allowed a "tiered" discount. First, it allowed a discount for value for the general partnership interest that was transferred to the limited partnership. Then, it allowed a further discount for the value of the limited partnership interests transferred by the taxpayer. Such tiering of discounts is often sought after as a method of creating larger value reductions through a multiple partnership ownership structure than would be the case with only one partnership involved. However, the general partnership had been in existence for more than 20 years before the transfer to the limited partnership - there is a reasonable likelihood that the Tax Court if faced with a similar arrangement but with recently created multiple tier partnerships would not be so generous in allowing for tiered discounts.

Astleford, TC Memo 2008-128.

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