Limited Partnerships in Corporate Distribution Planning

Limited partnerships have been widely used in recent years in estate and gift planning; with applicable valuation discounts, the fair market value (FMV) of partnership interests are less than the FMV of the partnership's underlying assets. May this type of planning also be used to reduce gain recognition in corporate distributions?

In Pope & Talbot, Inc., TC Memo 1997-116, aff'd, 162 F3d 1236 (9th Cir. 1999), a publicly held corporation owned business properties in Washington state. Pursuant to a "Plan of Distribution," the company transferred its Washington properties to a newly formed limited partnership. On the transfer of the Washington properties, the company's shareholders received a pro rata distribution of partnership units.

In a case of first impression, the court determined what "property" interest is to be valued for purposes of Sec. 311(d). Is it the entire property interest (which is being taken out of corporate solution), or is it the fractional interests received by the shareholders? The court held that the company's gain for Sec. 311(d) purposes is determined as if the company sold its entire interest in the Washington properties for their FMVs on the date of distribution.

By distinguishing the facts of the case, an argument can be made that Pope & Talbot does not establish a rule that the value of a limited partnership's underlying assets must be the value for Sec. 311(d) purposes. In this case, the property distributed was the corporation's entire interest in the Washington properties. Additionally, the property was transferred to the partnership after the adoption of the "Plan of Distribution;" the property remained intact and, theoretically, the partnership could sell it at FMV and distribute the proceeds to its partners (i.e., the corporation's shareholders).

The court said that the quantity and quality of property distributed by a corporation on behalf of its shareholders are essential factors to be considered when making an FMV determination.

What was not before the court was the theoretical possibility that the value of the property distributed within the meaning of Sec. 311(d) might be greater than the value of the property received by shareholders under Secs. 301 and 302. However, the court did recognize that there could be a potential lack of symmetry between Secs. 311(d) and 301 or 302.

From John L. Wright, CPA, MST, Gaither Rutherford & Co., LLP (an independent member of the BDO Seidman Alliance), Evansville, IN