We wanted to share with you a topic discussed at last week’s live Q&A session, which was held during one of this spring’s Fundamentals of Flow-Through® Partnership, LLC & S Corporation Tax Seminars. FYI: As noted below, there are two more spring programs coming up shortly!
Many of us are advisors to clients who have created family limited partnerships (“FLPs,” generally formed as LLCs), which hold marketable securities and often have been used to make “discounted” gifts to family members. Presumably, when such an FLP has been formed, the investment company rules of §721(b) have been properly navigated to avoid gain recognition on the contribution of any appreciated securities to the FLP. Very generally, gain will be recognized on the contribution of appreciated property to a partnership when, post-contribution, more than 80% of the value of the partnership’s assets consists of stock and securities (even if non-marketable) and the contributor obtains “diversification.”
What sometimes has been overlooked is that the rule is NOT that a contribution of stock or securities to an investment company can be taxable, rather a contribution of any property to an investment company where the contributor obtains diversification is taxable to the contributor. For example, assume there is an FLP that holds exclusively stock and securities with a value of $1.8 million, which FLP is owned by non-grantor trusts created for family members. Parent decides to contribute to the FLP a parcel of appreciated real estate (held in a single-member LLC) having a value of $200,000 in exchange for a 10% FLP interest with a view to making gifts of the 10% FLP interest at a later date. This contribution will be taxable to the parent, because (1) post-contribution the FLP is an investment company by virtue of more than 80% of its assets consisting of stock and securities, and (2) parent has obtained diversification by reason of “exchanging” 100% ownership of the real estate for a 10% interest in the real estate and a 10% interest in the stock and securities owned by the FLP.
It is easy to avoid this trap. Just form a new FLP (that is a recognized entity) and make gifts to the same trusts that had received gifts of interests in the securities FLP. The cost of a new and virtually identical FLP agreement should not be too costly, and the cost of filing an additional partnership tax return likely is relatively small.
Have a large number of extended tax returns?
Register now for our May or June Fundamentals programs to provide guidance for any tax issues related to those 2023 extended flow-through returns.
These special spring Fundamentals sessions are perfect to help learn or to sharpen the tax concepts you – and your team – might need to facilitate the correct preparation of your clients’ returns. Relevant topics include: making §704(b), §704(c) and §752 allocations correctly; bifurcating capital gain and §751 ordinary income on the sale or redemption of a partnership interest; properly applying the §1402(a)(13) SE tax exclusion; and determining gain on the repayment of reduced basis S corporation shareholder loans.
Choose from the following dates:
| May 21-23, 2024 (Tu-Th) | 11:15am – 6:00pm CDT |
| June 4-6, 2024 (Tu-Th) | 10:15am – 5:00pm CDT |
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Last, but not least, please do not hesitate to call any of us at 800-286-4760 or email either of us if you have questions about any flow-through tax matters or want to learn more about our 2024 Tax Planning Forum® or Fundamentals of Flow-Through® seminars – which are available for registration – and now have May & June Fundamentals sessions to help you and your team get ahead of your clients’ 2023 extended returns.
Chuck Levun: clevun@lgclaw.com
Michael Cohen: mjcohen@lgclaw.com
Scott Miller: skmiller@lgclaw.com
