The fact pattern in Wimmer v. Comm’r, TC Memo 2012-157, proved that the Wimmers’ annual exclusion gifts were present interest gifts and not future interest gifts. Thus, the gifts were qualified for the annual gift tax exclusion under Section 2503(b).
Background
George H. Wimmer (“Decedent”) and his wife (jointly the “Wimmers”) formed the George H. Wimmer Family Partnership, L.P. (“Wimmer FLP”) under California law in 1996 and then reorganized under Georgia Law in 1997. The Wimmers were the initial general and limited partners. Both the initial and restated partnership agreements generally restricted transfers of partnership interests and limited the ability of a transferee becoming a substitute limited partner. However, the partnership agreement allowed for the transfer of a partnership interest by gift or result of a partner’s death without prior written consent of the general partners if the transfer is to or for the benefit of an incumbent partner or related party1. In addition, the partnership agreement provided that the general partners possess full and exclusive power to manage, control, administer, and operate the partnership’s business and affairs, subject to fiduciary duties to limited partners and the continuing duty to advance the partnership’s purposes and best interests.
When the Wimmer FLP was formed, its assets consisted of publicly traded and dividend paying stock2. According to the partnership agreement, partnership profits and distributions are to be allocated to the partners according to their proportional partnership interests. Gifts of limited partnership interests were made to related parties in 1996 through 2000 through a trust for the benefit of the Wimmer grandchildren (“Trust”).
Wimmer FLP began receiving dividends from its stock holdings in December 1996, and on a quarterly basis thereafter. Its initial distribution policy was to make distributions just to cover Federal income tax, but in February 1999, it began distributing all available cash. All distributions were made on a pro rata basis.
At issue was whether the gifts of limited partnership interests were present interest and thereby qualified for the annual gift tax exclusion under Section 2503(b)3.
Court Discussion
Section 2053(b) states that a present interest is “an unrestricted right to immediate use, possession, or enjoyment of property or the income from property.” Hackl v. Comm’r4 defines the term’s use, possession, or enjoyment as the right to substantial present economic benefit. Therefore, to qualify as a present interest, a gift must bestow on the donee a substantial present economic benefit by reason of use, possession, or enjoyment of the property or income from the property. The IRS argued that the donees’ rights were limited due to the restrictions in the partnership agreement. In order to satisfy the criteria for a present interest under Section 2503(b), the estate must prove the following: (1) the partnership would generate income; (2) some portion of that income would flow steadily to the donees; and (3) that portion of income could be readily ascertained. These three tests were later reaffirmed in Price v. Comm’r5. Each facet of this provision, as it applies to Wimmer FLP, is discussed in more detail below.
- The partnership would generate income. Wimmer FLP held publicly traded and dividend-paying stock and received quarterly dividends beginning in 1996. Wimmer FLP then made multiple gifts of limited partnership interests in 1996 through 2000. Thus, the estate has proven that on each date that Wimmer FLP made a gift of a limited partnership interest, Wimmer FLP expected to generate income.
- Some portion of that income would flow steadily to the donees. Since the Trust’s only asset was a limited partnership interest in Wimmer FLP, distributions of partnership income to the trustee were necessary due to the fiduciary relationship between the general partners and the trustee of the Trust. The partnership agreement provided that distributions of net cash flow shall be made to the partners in proportion to their respective percentage interests. Because distributions must be pro rata, any distribution to the trustee triggered proportionate distributions to the other partners, thus proving that some portion of partnership income was expected to flow steadily to the limited partners.
- A portion of income could be readily ascertained. The partnership held publicly traded, dividend-paying stock and was thus expected to earn dividend income in each year. Because the stock was publicly traded, the limited partners could estimate their allocation of quarterly dividends on the basis of the stock’s dividend history and their percentage ownership in the partnership.
The Court decided that the estate satisfied the criteria for a present interest under Section 2503(b). Thus, the gifts of limited partnership interests in Wimmer made in 1996 through 2000 qualify for the Federal gift tax annual exclusion.
FINAL COMMENTARY
The fact pattern in this case was plain and simple. Wimmer FLP’s lone asset was an interest in a dividend-paying publicly traded stock, one of the donees was a Trust, and Wimmer FLP had a history of making pro rata distributions to all of its partners. This differed from Hackl in that Hackl owned non-income producing timber land, had not made historical distributions, and had negative cash flows which were projected to remain negative for the foreseeable future. On the other hand, Price was similar to Wimmer in that Price owned income producing real estate and had a history of making pro-rata distributions.
Given the minimal tax court precedence on Section 2503 (b) issues, Wimmer adds another viewpoint on how the IRS may try to penetrate your clients’ annual exclusion gift planning.
1A “related party” means a partner’s “descendants and ancestors, or an estate or trust the sole beneficiaries of which are one or more descendants or ancestors of a partner, a QTIP trust or similar irrevocable trust for a partner’s spouse, provided that the remainder beneficiaries of the trust consist exclusively of the partner’s descendants or ancestors.”
2In September 1996, the Wimmers contributed First Commerce Bancshares class A and class B stock. Wells Fargo Bank acquired First Commerce in June 2000, and as part of the acquisition, First Commerce stock was exchanged for Wells Fargo stock.
3We note that the parties stipulated to the taxable amounts of the gifts if they qualify for the annual exclusion.
4Hackl v. Commissioner, 118 T.C.
5Price v. Commissioner, T.C. Memo. 2010-2.