Section 2503(b) of the Internal Revenue Code (“IRC”) allows an exclusion from gift tax for annual gifts up to a fixed amount per donee. The annual exclusion amount is inflation adjusted and, for 2012, is $13,000 per donee. In order to qualify for the exclusion, however, the gift must be of a “present interest” in the property transferred to the donee – a requirement that occasionally sparks a dispute between taxpayers and the IRS.
In Wimmer v. Commissioner, T.C. Memo 2012-157 (June 4, 2012), the gift at issue was a limited partnership interest in the George H. Wimmer Family Partnership, L.P. The partnership contained a number of restrictions on the transfer of limited partnership interests, and while many of the restrictions were fairly typical, a couple were especially onerous. The transfer needed to be approved by all of the general partners and by limited partners holding 70 percent of the limited partnership interest. The transferee could only be admitted as a substituted limited partner upon the unanimous consent of all of the general and limited partners. Transfers to current partners and certain related parties were excepted from these restrictions. The gifts at issue in this case were made to related parties and not subject to the transfer restrictions. The IRS nevertheless took the position that, because of all of the transfer restrictions in the partnership agreement, the limited partnership interests were not present interests.
Based on prior case law, the Tax Court said that, in order to be a present interest, the gift must confer on the donee a substantial present economic benefit by reason of the right to use, possess or enjoy the property or income from the property. The court concluded that, because of the transfer restrictions, donees of interests did not receive unrestricted and non-contingent rights to the immediate use, possession or enjoyment of the interest. A limited partner did, however, possess the right to income from the interest. The court based this finding on the fact that the partnership regularly generated – and regularly distributed – income to the partners. If this partnership had held only non-income-producing property, the court likely would have concluded that a gift of a limited partnership interest was not a gift of a present interest in property.