IRS's Current Position on FLPs

Mary Lou Edelstein, the IRS National Coordinator for Family Limited Partnerships (FLPs) at the Office of Appeals (Appeals), spoke to the AICPA Tax Divisions Trust, Estate, and Gift Tax Technical Resource Panel in Washington DC, on Oct. 29, 2002, about the latest developments, including possible initiatives. Since April 1999, the IRS has been treating FLP cases as an Appeals coordinated issue, to reduce inconsistencies in settlement offers across the nation.

The Scoop

Valuation discounts. Across the nation, there are 42 estate and gift tax Appeals Officers. Currently, they have to discuss the facts of each case (both pre- and post-conference) with Ms. Edelstein, before making a settlement offer. Ms. Edelstein then recommends the amount of discount allowable. Appeals maintains a log of FLP cases around the nation, which includes statistics on discounts, settlement offers and final outcomes.

Appeals classifies FLPs holding assets such as cash, marketable securities, closely held stock and real estate (triple-net lease) as passive-asset FLPs. Passive-asset FLPs holding cash and/or marketable securities currently are settling at approximately a 25% discount. Those holding closely held stock and/or real estate are reaching settlements with discounts in the 25%40% range. FLPs formed within six months of death are subject to additional scrutiny. Ms. Edelstein did not share any statistics on settlement offers on such FLPs.

Valuation reports. The IRS is warning taxpayers against relying solely on the various marketability discount studies currently available, as it believes some of them are flawed. According to Ms. Edelstein, information published by Partnership Profiles, Inc., is a more persuasive source of valuation information.

Built-in capital gains. There is no consensus to date on allowing discounts for the tax attributable to built-in gains (BIG). The IRS is monitoring the issue; many Appeals Officers currently determine discounts for BIG based on the probability of liquidation of the entity.

Possible Future Initiatives

The IRS has been considering the adoption of a safe-harbor discount initiative and a settlement initiative. It holds monthly conferences with examiners and Appeals Officers to discuss issues and to emphasize allowance of reasonable discounts at the Examinations level.

From Vinu Satchit, High Point, NC