Page 53 - Business Valuation for Estates & Gift Taxes

the asset transfer to the FLP was merely an indirect gift to the beneficiary, not a means of funding the
FLP. In short, where assets are transferred strictly for the purpose of tax avoidance, the Tax Court may
eliminate the middle steps (setting up FLP and then distributing assets to beneficiaries) and simply look
at the end results as if the middle steps never occurred. This allows the court to prevent form over sub-
stance transactions from achieving tax consequences not intended by the tax laws.

That is not to suggest that all transfers of interests in FLPs to beneficiaries shortly after receiving assets
will result in a diminished or eliminated valuation discount. An example of where taxpayers prevailed
can be seen in Thomas H. Holman, Jr. v. Commissioner, 130 T.C. No. 12. In this case, the taxpayers
created and funded an FLP on November 2, 1999, and within several days made gifts of stock to trusts
for their children. The IRS claimed that because the transfers were made so quickly after the funding,
they were indirect gifts. In this case, however, the court ruled that there was a risk of loss of value in be-
tween the date of the funding and the date of the gift and ruled in favor of the taxpayers.

Conclusion

As FLPs have grown in popularity, they have drawn more and more scrutiny from the IRS. The IRS fre-
quently uses the valuation of FLP interests as its point of attack. Therefore, it is crucial that the correct
valuation methods are used to value FLP interests and that the methods are properly applied.

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