                           T.C. Memo. 2010-2



                        UNITED STATES TAX COURT



                 WALTER M. PRICE, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent

                 SANDRA K. PRICE, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 9611-06, 9642-06.     Filed January 4, 2010.



     Trent D. Reinert and David S. Houghton, for petitioners.

     Albert B. Kerkhove, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     THORNTON, Judge:    The issue for decision in these

consolidated cases is whether gifts that petitioners made of

limited partnership interests to their adult children during
                                 - 2 -

2000, 2001, and 2002 qualify for annual exclusions as provided by

section 2503(b).1

                           FINDINGS OF FACT

     The parties have stipulated some facts, which we incorporate

herein.    When they petitioned the Court, petitioners resided in

Nebraska.    They have been married for many years and have three

children, all of whom were of adult age at all times relevant to

these cases.

Formation of the Partnership

     In 1958 Walter M. Price (Mr. Price) began his career in

equipment finance and distribution at Caterpillar Tractor Co.    He

later worked for a dealer in Omaha, Nebraska.    In 1976 he started

his own company, Diesel Power Equipment Co. (DPEC), which

eventually distributed and serviced about 40 lines of equipment

and had about 90 employees.

     Petitioners’ children had no career interest in working for

DPEC.     Consequently, when a group of long-term employees made an

offer in the late 1990s, petitioners decided to sell the business

as part of a careful financial plan which involved first placing

the DPEC stock in a limited partnership.

     On September 11, 1997, petitioners formed Price Investments

Limited Partnership (the partnership) as a limited partnership


     1
      Unless otherwise indicated, section references are to the
Internal Revenue Code in effect for the years at issue. Rule
references are to the Tax Court Rules of Practice and Procedure.
                               - 3 -

under Nebraska law.   When the partnership was formed, Price

Management Corp., a Nebraska corporation, was its 1-percent

general partner; the Walter M. Price Revocable Trust and the

Sandra K. Price Revocable Trust were each 49.5-percent limited

partners.   Mr. Price was president of Price Management Corp., and

Mr. and Ms. Price, through revocable trusts, held the shares in

Price Management Corp.

     When the partnership was formed, its assets consisted of the

DPEC stock and three parcels of commercial real estate leased

under long-term leases to DPEC and another equipment company.    On

January 5, 1998, the partnership sold the DPEC stock and invested

the sale proceeds in marketable securities.

Gifts and Distributions to Petitioners’ Children

     During 1997 through 2002 each petitioner gave each of their

three adult children interests in the partnership as shown below.2


     2
      The parties have stipulated that during each of the years
1998 through 2002, each petitioner made separate and equal gifts
to each child. The parties have also stipulated that during 1997
“petitioners” transferred a 17-percent partnership interest to
each child, without specifying the manner in which they made the
gifts. Because all the limited partnership interests were
initially held equally by petitioners’ respective revocable
trusts, and because all these limited partnership interests were
transferred to petitioners’ children by 2002, it would appear
that petitioners’ gifts in 1997 necessarily came equally from
petitioners’ respective revocable trusts. Although it makes no
difference to our analysis, for ease of presentation we have
assumed that petitioners made their 1997 gifts, like all the
other gifts, separately and equally. The record does not reveal,
for any year, the exact manner in which petitioners effected
gifts to their children of the limited partnership interests held
                                                    (continued...)
                                - 4 -

                   Partnership
                 Gift Interests             Total
               Transferred by Each       Partnership      Children’s
               Petitioner to Each       Gift Interests    Cumulative
     Year             Child               Each Year       Interests

     1997                8.5%                  51%            51%
     1998                1                      6             57
     1999                0.5                    3             60
     2000                0.5                    3             63
     2001                0.85                   5.1           68.1
     2002                5.15                  30.9           99

     On Forms 1065, U.S. Return of Partnership Income, for

taxable years 1997 through 2002, the partnership reported income

from rental activities and losses, gains, and other income from

investment activities.   Each year except 1997 and 2001 the

partnership made cash distributions in equal amounts to each

child, as shown in the table below.

                                Total Partnership
                                  Distributions
                    Year           to Children

                    1997                --
                    1998              $7,212
                    1999             343,800
                    2000             100,500
                    2001                --
                    2002              76,824

Provisions of the Limited Partnership Agreement

     The limited partnership agreement (the partnership

agreement) states that the partnership’s primary purpose is to

achieve a reasonable rate of return on a long-term basis with



     2
      (...continued)
originally by the revocable trusts.
                               - 5 -

respect to its investments.3   The partnership agreement generally

prevents any partner from withdrawing capital contributions.   The

partnership agreement also restricts transfer and assignment of

partnership interests as follows:

          11.1 Prohibition Against Transfer. Except as
     hereinafter set forth, no partner shall sell, assign,
     transfer, encumber or otherwise dispose of any interest
     in the partnership without the written consent of all
     partners; provided, however, a limited partner may sell
     or otherwise transfer his or her partnership interest
     to a general or limited partner, or to a trust held for
     the benefit of a general or limited partner. * * *

          11.2 Assignment. Any assignment made to anyone,
     not already a partner, shall be effective only to give
     the assignee the right to receive the share of profits
     to which his assignor would otherwise be entitled,
     shall not relieve the assignor from liability under any
     agreement to make additional contributions to capital,
     shall not relieve the assignor from liability under the
     provisions of the partnership agreement, and shall not
     give the assignee the right to become a substituted
     limited partner. * * * The partnership shall continue
     with the same basis and capital amount for the assignee
     as was attributable to the former owner who assigned
     the limited partnership interest. * * *




     3
      The partnership agreement provides:

          2.1 Purposes. The partnership shall invest in,
     acquire, own, sell, encumber, operate, dispose of, and
     deal in and with investment grade real and personal
     property. The partners intend to reinvest income, gain
     and profits from the partnership’s investments to their
     mutual advantage, as the general partner may determine,
     subject to the provisions hereof, and hereby declare
     that annual or periodic distributions to the partners
     are secondary to the partnership’s primary purpose of
     achieving a reasonable, compounded rate of return, on a
     long-term basis, with respect to its investments.
                               - 6 -

     The partnership agreement further provides that in the event

of any voluntary or involuntary assignment of a partnership

interest, “the partnership and each of the remaining partners

shall have the option to purchase the partnership interest for

its fair market value” from the assignee.   The partnership

agreement provides detailed rules for exercising the purchase

option and for determining the fair market value of the

partnership interest.4   The partnership agreement provides

generally that the partnership will terminate after 25 years but

may be dissolved sooner if there is written consent or

affirmative vote “by at least two-thirds (2/3) in interest of the

partners.”

     Pursuant to the partnership agreement, partnership profits

are shared by the partners according to their proportional

partnership interests.   Partnership profits are to be distributed

to the partners “in the discretion of the general partner except

as otherwise directed by a majority in interest of all of the

partners, both general and limited.”   The partnership agreement

states that neither the partnership nor the general partner has


     4
      The partnership agreement provides that for this purpose
fair market value is to be determined on the basis of a majority
of three appraisers, one selected by the partner exercising the
option, one selected by the assignee of the partnership interest,
and the third selected by the other two appraisers. The
partnership agreement requires that any purchase option be
exercised within 180 days of any involuntary transfer but
provides no deadline for exercising a purchase option with
respect to a voluntary transfer.
                                  - 7 -

“any obligation” to distribute profits to enable the partners to

pay taxes on the partnership’s profits.

       The partnership agreement provides that it is to be

governed, construed, and interpreted according to the law of the

State of Nebraska.      The partnership agreement is binding upon

“all the parties hereto, their heirs, successors, assigns, and

legal representatives forever.”

Petitioners’ Gift Tax Reporting and Respondent’s Determinations

       On their separate Forms 709, United States Gift (and

Generation-Skipping Transfer) Tax Return, for 2000, 2001, and

2002 each petitioner identically reported gifts, annual

exclusions, and taxable gifts as follows:

            Reported         Reported        Total       Reported
            Value of           Total        Annual        Taxable
Year        Each Gift          Gifts      Exclusions       Gifts

2000         $14,905          $44,715      $30,000        $14,715
2001          20,770           62,310       30,000         32,310
2002         118,405          355,215       33,000        322,315

For each year petitioners reported zero gift tax due after

applying unified credits.

       Petitioners attached to their gift tax returns valuation

reports supporting the reported gift values.         Each valuation

report indicates substantial discounts for lack of control and

lack of marketability of the transferred partnership interests,

stating:    “Unless a partner owns or controls two-thirds of the
                                      - 8 -

partnership interests, his/her investment is illiquid until at

least the scheduled termination date.”

     Respondent issued each petitioner a notice of gift value

determination for 2000 and separate notices of deficiency for

2001 and 2002.     Each of these notices disallowed annual gift tax

exclusions for each transferred partnership interest for each

year on the ground that the gifts were of future interests in

property.    Respondent determined that petitioners had these gift

tax deficiencies for 2001 and 2002:

            Year          Petitioner           Deficiency

            2001       Walter   M.   Price      $21,763
            2002       Walter   M.   Price       14,741
            2001       Sandra   K.   Price       20,480
            2002       Sandra   K.   Price       14,602

                                     OPINION

     The parties disagree as to whether petitioners’ gifts of

partnership interests to their children are properly

characterized as present interests so as to qualify for annual

gift tax exclusions under section 2503(b).        Petitioners bear the

burden of proving that their gifts qualify for annual exclusions.5

See Rule 142(a); Hackl v. Commissioner, 118 T.C. 279, 294 (2002),

affd. 335 F.3d 664 (7th Cir. 2003); see also Stinson Estate v.

United States, 214 F.3d 846, 848 (7th Cir. 2000).



     5
      Petitioners do not claim and have not established that the
conditions of sec. 7491(a) have been met to shift the burden of
proof to respondent with regard to any factual issue.
                                  - 9 -

A.   Legal Framework

      Section 2501 generally imposes a tax on the transfer of

property by gift.      Section 2503(b) provides an inflation-adjusted

annual exclusion of $10,000 per donee.6     The annual exclusion

applies to “other than gifts of future interests in property”.

Sec. 2503(b)(1).

      The statute does not define the term “future interests”.

The regulations provide:

      “Future interest” is a legal term, and includes
      reversions, remainders, and other interests or estates,
      whether vested or contingent, and whether or not
      supported by a particular interest or estate, which are
      limited to commence in use, possession, or enjoyment at
      some future date or time. The term has no reference to
      such contractual rights as exist in a bond, note
      (though bearing no interest until maturity), or in a
      policy of life insurance, the obligations of which are
      to be discharged by payments in the future. But a
      future interest or interests in such contractual
      obligations may be created by the limitations contained
      in a trust or other instrument of transfer used in
      effecting a gift.

      * * * An unrestricted right to the immediate use,
      possession, or enjoyment of property or the income from
      property (such as a life estate or term certain) is a
      present interest in property. * * * [Sec. 25.2503-3(a) and
      (b), Gift Tax Regs.]

An example in the regulations provides that where a trustee is

authorized in his discretion to withhold payments of income for

addition to trust corpus, the beneficiary’s right to receive the



      6
      For 2002, the first year for which there was an inflation
adjustment, the exclusion amount was $11,000. Rev. Proc.
2001-59, sec. 3.19, 2001-2 C.B. 623, 627.
                              - 10 -

income payments is not a present interest and no exclusion is

allowed with respect to the transfer in trust.   Sec. 25.2503-

3(c), Example (1), Gift Tax Regs.    Caselaw is to similar effect.

See, e.g., French v. Commissioner, 138 F.2d 254 (8th Cir. 1943).

     The Supreme Court has stated:

     it is not enough to bring the exclusion into force that
     the donee has vested rights. In addition he must have
     the right presently to use, possess or enjoy the
     property. These terms are not words of art, like “fee”
     in the law of seizin * * * but connote the right to
     substantial present economic benefit. The question is
     of time, not when title vests, but when enjoyment
     begins. Whatever puts the barrier of a substantial
     period between the will of the beneficiary or donee now
     to enjoy what has been given him and that enjoyment
     makes the gift one of a future interest within the
     meaning of the regulation. [Fondren v. Commissioner,
     324 U.S. 18, 20-21 (1945).]

     In Hackl v. Commissioner, supra, this Court held that gifts

of units in a limited liability company (LLC) were gifts of a

future interest that did not qualify for the annual exclusion.

The Court rejected the taxpayers’ argument that a gift that takes

the form of an outright transfer of an equity interest in a

business or property is necessarily a gift of a present interest.

Id. at 292.   The Court held that to establish entitlement to an

annual exclusion under section 2503(b), a taxpayer must--

     establish that the transfer in dispute conferred on the
     donee an unrestricted and noncontingent right to the
     immediate use, possession, or enjoyment (1) of property
     or (2) of income from property, both of which
     alternatives in turn demand that such immediate use,
     possession, or enjoyment be of a nature that
     substantial economic benefit is derived therefrom.
     * * * [Id. at 293.]
                                - 11 -


B.   The Parties’ Contentions

     Petitioners contend that their gifts of the partnership

interests are properly characterized as gifts of present

interests because the donees can freely transfer the interests to

one another or to the general partner, Price Management Corp.

Petitioners also contend that each donee has immediate rights to

partnership income and may freely assign income rights to third

persons.     They suggest that Hackl v. Commissioner, supra, was

decided incorrectly and contend that it is, in any event,

distinguishable from the instant cases.

     Relying on Hackl, respondent contends that the transferred

partnership interests represent future interests because the

partnership agreement effectively bars transfers to third parties

and does not require income distributions to the limited

partners.7

C.   Analysis

     We decline petitioners’ invitation to reconsider our holding

in Hackl.    Furthermore, we disagree that Hackl is distinguishable

from the instant cases in ways that are helpful to petitioners.

As explained below, applying the methodology set forth in Hackl,

we conclude that petitioners have failed to show that their gifts

of interests in the partnership conferred upon the donees the



     7
      Respondent stipulates that the fair market values of the
gifts were correctly reported on petitioners’ gift tax returns.
                              - 12 -

immediate use, possession, or enjoyment of either (1) the

transferred property or (2) the income therefrom.

     1.   Application to the Transferred Property

     We agree with petitioners that the partnership agreement

must be examined to determine whether the donees obtained the

immediate use, possession, or enjoyment of the transferred

partnership interests.   We disagree, however, that the

partnership agreement permits the donees presently to access any

substantial economic benefit from the transferred property.

     It is undisputed that under the partnership agreement the

donees have no unilateral right to withdraw their capital

accounts.   Furthermore, section 11.1 of the partnership agreement

expressly prohibits partners from selling, assigning, or

transferring their partnership interests to third parties or from

otherwise encumbering or disposing of their partnership interests

without the written consent of all partners.   As stated with

respect to analogous circumstances in Hackl v. Commissioner, 118

T.C. at 297, transfers subject to the contingency of approval (by

the LLC manager in Hackl and by all partners in the instant

cases) “cannot support a present interest characterization, and

the possibility of making sales in violation thereof, to a

transferee who would then have no right to become a member or to

participate in the business, can hardly be seen as a sufficient

source of substantial economic benefit.”
                              - 13 -

     Moreover, because of the operation of section 11.2 of the

partnership agreement, it appears that the donees are not even

properly characterized as limited partners in the partnership.

Section 11.2 of the partnership agreement provides:   “Any

assignment made to anyone, not already a partner, shall be

effective only to give the assignee the right to receive the

share of profits to which his assignor would otherwise be

entitled * * * and shall not give the assignee the right to

become a substituted limited partner.” (Emphasis added.)8    It must

be remembered that when the partnership was created, petitioners’

children were not partners--the only partners were the 1-percent

general partner, Price Management Corp., and two 49.5-percent

limited partners, the Walter M. Price Revocable Trust and the

Sandra K. Price Revocable Trust.   The record does not reveal

exactly how petitioners effected assignments of limited

partnership interests from these trusts to their children.    But

however it was done, because the children were not already

partners, pursuant to section 11.2 they did not become

substituted limited partners; rather, the gifts were effective

only to give each child a share of the profits to which the


     8
      Petitioners contend that section 11.2 of the partnership
agreement permits the donees to sell their shares of partnership
profits to any third party without approval of the other partners
or the partnership. We disagree. This provision merely
describes the effect of assignments and does not supersede the
immediately preceding section 11.1 of the partnership agreement
restricting a limited partner’s ability to sell or assign his or
her partnership interest.
                               - 14 -

revocable trusts otherwise would have been entitled.

Consequently, the donees lack the ability “presently to access

any substantial economic or financial benefit that might be

represented by the ownership units.”    Hackl v. Commissioner,

supra at 296.

     But even if it were to be assumed, contrary to the foregoing

analysis, that the donees did somehow become substituted limited

partners, it would not affect our conclusion that contingencies

stand between the donees and their receipt of economic value for

the transferred partnership interests so as to negate finding

that the donees have the immediate use, possession, or enjoyment

of the transferred property.   Pursuant to section 11.1 of the

partnership agreement, unless all partners consented the donees

could transfer their partnership interests only to another

partner or to a partner’s trust.   In addition, any such purchase

would be subject to the option-to-purchase provisions of section

11.4 of the partnership agreement, which gives the partnership

itself or any of the other partners a right to purchase the

property according to a complicated valuation process but without

providing any time limit for exercising the purchase option with

respect to a voluntary transfer.

     Petitioners suggest that if one donee purchased the

partnership interest of another donee, the purchaser would gain

an “unrestricted and noncontingent right to the immediate use,
                               - 15 -

possession or enjoyment of the partnership interest”, for

instance, by being able unilaterally to cause the partnership’s

liquidation.9   As just discussed, we do not believe that the

donees were substituted limited partners in the partnership.

Consequently, we do not believe that the donees possessed

anything more than income rights to transfer to each other or

anyone else.    More fundamentally, we reject any suggestion that a

present interest in a donee is properly founded on additional

rights that the donee or some other donee might later acquire.

     Petitioners allude to the possibility of the donees’ selling

their partnership interests to the general partner.   It must be

remembered, however, that the general partner is owned by

petitioners and that its president is Mr. Price, who engineered

the gifts of partnership interests to his children in the first

instance.   If the possibility of a donor’s agreeing to buy back a

gift sufficed to establish a present interest in the donee,

little would remain of the present interest requirement and its

statutory purpose would be subverted if not entirely defeated.

Cf. Chanin v. United States, 183 Ct. Cl. 840, 850, 393 F.2d 972,


     9
      The premise seems incorrect. Section 10.3.1 of the
partnership agreement permits the partnership to be dissolved
with the consent of “at least two-thirds (2/3) in interest of the
partners.” The greatest partnership interest held by any partner
(though not until 2002) was a 33-percent interest. A donee who
purchased another donee’s 33-percent interest would have only a
66-percent interest, which would be insufficient to unilaterally
effect a dissolution under section 10.3.1, which requires consent
by “at least two-thirds (2/3) in interest of the partners.”
                              - 16 -

977 (1968) (rejecting the proposition that an annual exclusion

should be allowed “in every case in which the donee received a

future interest in property, which was marketable, thus doing

violence to the well recognized statutory purpose”).

     Petitioners contend that the donees enjoyed a present

interest in the transferred property because they were able to

use the Schedules K-1, Partner’s Share of Income, Credits,

Deductions, Etc., that the partnership issued to them each year

as evidence of their own personal assets, thereby enhancing their

“financial borrowing ability.”   Apart from Mr. Price’s vague and

uncorroborated testimony, there is no evidence to support this

contention.   In any event, whatever benefit the donees might be

thought to enjoy in this regard is at best highly contingent and

speculative and does not, we believe, constitute a source of

substantial economic benefit, particularly in the light of the

restrictions on alienation (including on the ability of a partner

to “encumber” a partnership interest) contained in the

partnership agreement.   Cf. Stinson Estate v. United States, 214

F.3d at 848 (holding that a gift of forgiveness of corporate

indebtedness was a future interest notwithstanding that the

individual donees saw an increase in their stock value due to a

balance sheet improvement of the debtor family-owned

corporation).
                                 - 17 -

       2.    Application to Income From the Transferred Property

       In order to show that the gifts of the partnership interests

afforded the donees the right to immediately use, possess, or

enjoy the income therefrom, petitioners must show that:        (1) The

partnership would generate income at or near the time of the

gifts; (2) some portion of that income would flow steadily to the

donees; and (3) the portion of income flowing to the donees can

be readily ascertained.      See Hackl v. Commissioner, 118 T.C. at

298.

       Because the partnership owned real properties generating

rents under long-term leases, we believe that the partnership

could be expected to generate income at or near the time of the

gifts.      The record fails to establish, however, that any

ascertainable portion of the income would flow steadily to the

donees.      To the contrary, the record shows that the partnership’s

income did not flow steadily to the donees--there were no

distributions in 1997 or 2001.

       Pursuant to the partnership agreement, profits of the

partnership were distributed at the discretion of the general

partner, except when otherwise directed by a majority in interest

of all the partners, both limited and general.      Furthermore, the

partnership agreement stated that “annual or periodic

distributions to the partners are secondary to the partnership’s
                                 - 18 -

primary purpose of achieving a reasonable, compounded rate of

return, on a long-term basis, with respect to its investments.”

     Petitioners allege that the partnership is expected to make

distributions to cover the donees’ income tax liabilities arising

from the partnership’s activities.        Section 7.3 of the

partnership agreement, however, clearly makes such distributions

discretionary:     “Neither the partnership nor the general partner

shall have any obligation to distribute profits to enable the

partners to pay taxes on the partnership’s profits.”        Because the

timing and amount of any distributions are matters of pure

speculation, the donees acquired no present right to use,

possess, or enjoy the income from the partnership interests.

     Without citation of legal authority, petitioners contend

that the general partner has a “strict fiduciary duty” to make

income distributions to the donees.        We are not persuaded that

such a fiduciary duty, if it exists, establishes a present

interest in a transferred limited partnership interest where the

limited partner lacks withdrawal rights.10       Moreover, because (as


     10
          As has been observed elsewhere:

     In many respects a limited partner who has no
     withdrawal rights is much like a beneficiary of a
     discretionary trust whose only rights with respect to
     the trust consist of the right to trust distributions
     which may be withheld at the discretion of the trustee.
     Regardless of the general partner’s fiduciary duties,
     there is no certainty that the limited partner will
     receive current distributions from the partnership.
     * * * [Kalinka, “Should the Gift of a Limited Partnership
                                                    (continued...)
                               - 19 -

previously discussed) the donees are not substituted limited

partners, there is significant question as to whether under

Nebraska law the general partner owes them any duty other than

loyalty and due care.11   Cf. Kellis v. Ring, 155 Cal. Rptr. 297

(Ct. App. 1979) (holding that under California law the assignee

of a limited partner’s partnership interest could not bring suit

against the general partner for alleged breaches of fiduciary

duty).

     In sum, petitioners have failed to show that the gifts of

partnership interests conferred on the donees an unrestricted and

noncontingent right to immediately use, possess, or enjoy either

the property itself or income from the property.   We therefore

hold that petitioners are not entitled to exclusions under

section 2503(b) for their gifts of partnership interests.




     10
      (...continued)
     Interest Constitute a Future Interest?”, Taxes, Apr. 1998,
     at 12, 18.]
     11
      Pursuant to the Nebraska Uniform Limited Partnership Act,
an assignee of a limited partnership interest may become a
limited partner if and to the extent that the partnership
agreement so provides and all other partners consent. Neb. Rev.
Stat. Ann. sec. 67-274(a) (1981). As previously discussed, it
appears that the donees did not become substituted limited
partners in the partnership. With respect to persons who are not
partners of a limited partnership, the general partner has the
liabilities of a partner in a partnership without limited
partners. Neb. Rev. Stat. Ann. sec. 67-256 (1981). Under
Nebraska law, the only fiduciary duty such a partner owes to
other partners is the duty of loyalty and due care. Neb. Rev.
Stat. Ann. sec. 67-424(1), (2), and (3) (1997).
                        - 20 -

To reflect the foregoing,


                                 Decisions will be entered

                            for respondent.
