Question or Topic 

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The Question:  Executive Introduction to the Present Interest requirements subsequent to Hackl v. IRS.

Objectives - overview the Hackl Case before studying the commentary included on this site.

Related Articles

Present Interest Rules After March 2002

The Answer

In March 2002, the Internal Revenue Service was successful in challenging a family limited partnership agreement's language based upon the "Present Interest" element of a gift for gift tax purposes.  The Court has stated without question which elements must be included and acted upon by the general partner of a family limited partnership, or the managing member of a family limited liability company.

The Court has stated the transferee must receive distributions from the family LP or LLC.  Moreover, the transferee must possess "title" in the true and strict sense of "possess".  The Court frowned seriously upon any restrictions on the sale or transfer of the interest in the family LP or LLC.

To summarize the Decision in this United States Tax Court Case:

The referenced authorities [Title 26 Subtitle B Chapter 12 Subchapter A §2503(b)] require a taxpayer claiming an annual exclusion to establish that the transfer in dispute conferred on the donee an unrestricted and noncontingent right to the immediate use, possession, or enjoyment (1) of property or (2) of income from property, both of which alternatives in turn demand that such immediate use, possession, or enjoyment be of a nature that substantial economic benefit is derived therefrom.  In other words, taxpayers and the language of the FLP Agreement must prove from all the facts and circumstances that in receiving the FLP units, the donees thereby obtained use, possession, or enjoyment of the units or income from the units within the above-described meaning of section 2503(b).  Nonetheless, the simple expedient of paper title does not in and of itself create a present interest for purposes of section 2503(b) unless all the facts and circumstances establish that such possession renders an economic benefit presently reachable by the donees.

Commentary

The Internal Revenue Service was successful in March 2002 in challenging the language in a Family Limited Partnership Agreement.  Therefore, all clients and legal counselors having an interest in this topic are receiving this notice.

Successful Internal Revenue Service Arguments

The Internal Revenue Service argued successfully the transfers of the LLC units did not meet the essential elements of the “Present Interest” doctrine.  The Internal Revenue Service used the language in the Operating Agreement (as could be done with any Limited Partnership Agreement) to win its case.  The Court (obviously) agreed the language in the instrument fell short of conferring on the donees the requisite immediate and unconditional rights to the use, possession or enjoyment of property or the income from property.  Lack of freedom to transfer the units, or to compel cash distributions from the entity prevented them from receiving any such benefit because of the transfers.  The Internal Revenue Service argued successfully, the gifts postponed any economic benefit and were therefore of future interests. 

Solutions

Solutions are dependent upon facts & circumstances, law and the objectives.  These elements vary from one time to another, from one circumstance to another and from person or entity to another.

Kit to Prepare for Your Adviser

  All taxpayers involved in family LP or LLC entities, should contact Bob Parrish CPA, PC and their legal counsel immediately.

You will need to have the following available:

The current and preceding year tax return

Family LP or LLC agreement

Financial Statements if available - including the balance sheet, income statement and cash flow.

 Engagement Status Letter ~ WARNING!

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