blogger visitor

Saturday, April 10, 2010

FAMILY PARTNERSHIP HOLDING ONLY DELL STOCK SUBJECTED TO LIMITS ON VALUATION DISCOUNTS

A recent case family limited partnership case involved a partnership whose principal asset was publicly traded shares of stock of Dell. The highly liquid nature of those assets was used by the IRS and the reviewing courts to limit the amount of applicable discounts that were sought based on transfer restrictions in the partnership agreement and for lack of marketability.

In regard to transfer restrictions that were in the partnership agreement, the IRS claimed that these restrictions could not be used to reduce the value of gifted limited partnership interests pursuant to Section 2703(a)(2). Section 2703(a)(2) provides that “any restriction on the right to sell or use [the subject] property” are disregarded, unless the safe harbor requirements of Section 2703(b) are met. One of these safe harbor requirements is Section 2703(b)(1) which requires that the restriction “is a bona fide business arrangement.” The IRS argued that since the partnership owned only liquid shares of Dell, there was no “business” and thus no “bona fide business arrangement” under 2703(b). The Tax Court and the 8th Circuit Court of Appeals agreed. While the appeals court noted that at times shares of stock in a partnership can be a “business” for this purpose, such as where the stock is closely held and the arrangement is to maintain close control, this arrangement did not allow for a finding of a business. The courts found that the primary purposes of the arrangements were to protect the recipients of the gifts from dissipating the assets and to teach the children how to handle their money and did not relate to a business arrangement.

The second principal issue in the case related to the liquid nature of the Dell stock and the lack of marketability discount for the limited partnership interests. The IRS’ appraiser made an interesting argument that the fact that all the partners could agree to terminate the partnership, and that the partnership asset was a highly liquid asset, combined to put a limit on the lack of marketability discount since at some level of discounting the parties could find a mutual basis upon which it made sense to instead liquidate the partnership. This seems a little odd under the willing buyer – willing seller standard since who is to say when and why the other partners would consent to such a liquidation (that is, why it would ever be in their interests to consent to the liquidation), but both the Tax Court and the appellate court bought into the argument and thus limited the lack of marketability discount based on this theory.

HOLMAN v. COMM., 105 AFTR 2d 2010-XXXX, (CA8), 04/07/2010

Post a Comment