Gross v. Commissioner Examines Step Transactions in Funding an FLP

At issue in Gross v. Commissioner is whether the petitioner made an indirect gift of public company stock to her daughters, thus negating any discounts for lack of control or marketability.  Judge Halpern at the Tax Court ruled that the step transaction was not applicable and that a 35% discount was justified.  Find out why.

The Gross case was brought before the United States Tax Court (“Court”) on grounds that the petitioner made an indirect gift of public company stock to her daughters, thus negating any discounts for lack of control or marketability. 

[pullquote]”…negating any discounts for lack of control or marketability.”[/pullquote]

The case was tried before Judge Halpern, the same judge who heard the Holman v. Commissioner (May 2008) case.  An earlier issue of Quick Read set forth a summary of the Holman decision, in which the Court found that six days between funding the FLP to distribution of the LP interests was sufficient to disqualify the transfer as an indirect gift, and also negate the applicability of the “step transaction doctrine,” in which a series of intertwined events are treated as one.   

Bianca Gross was a widow living in New York with her two adult daughters.  At the date of valuation, she had a portfolio of $2 million in publicly traded securities and sought to protect the interest of her one daughter who was not deemed a skillful money manager.  Mrs. Gross discussed forming a family limited partnership with her counsel and daughters and on July 15, 1998 created and filed a certificate of limited partnership for Dimar Holdings LP.  The FLP was noted in the New York newspaper on October 14, 1998, and she filed an affidavit of publication wit the New York Department of State.

Petitioner transferred the securities to the FLP between October 15 and December 4, 1998, and accurately recorded the transfer in her capital account.  On December 15, 1998, petitioner transferred a 22.25 percent LP interest to each daughter.  Petitioner’s From 709 Gift Tax Return reflected a 35 percent combined discount for lack of control and marketability.  The IRS assessed a deficiency and claimed that there had been an indirect gift of the full market value. 

The primary issue before the Court was whether the partnership was created on July 15, 1998 or whether the IRS was correct in its argument that all actions were effectively taken on December 15, 1998.  The Court noted that the partnership did involve a series of discussions and actions on July 15 and subsequent dates.  The Court had to determine if under New York partnership law, the filing on July 15, plus the conduct of the petitioner and her daughters “effectively formed a general partnership on that date.”  The Court ruled that the conduct of all parties was consistent with formation of a partnership and that the partnership did exist under New York law on July 15, 1998. 

The IRS also claimed that there was a step transaction and all of the actions were effectively completed on December 15th.  However, the Court noted that 11 days passed between the time of funding and the actual gift of LP interests.  As a result, the step transaction doctrine was not applicable and the 35 percent discount on the LP was upheld.

Bianca Gross v. Commissioner
T.C. Memo 2008-221
September 29, 2008
Judge Halpern

Peter Agrapides, MBA, AVA, is a senior valuator with Houlihan Partners.