## Facts

- W.W. Jones II formed two family limited partnerships in 1995 to consolidate family ranch assets and support long-term family ownership.
- Jones and his son formed JBLP; Jones and his four daughters formed AVLP.
- Jones contributed ranch real property to JBLP and received a 95.5389% limited partnership interest; his son also contributed property and received general and limited interests.
- Jones contributed ranch real property to AVLP and received an 88.178% limited partnership interest; each daughter contributed property and received general and limited interests.
- The partners’ contributions were properly reflected in their partnership capital accounts.
- The partnership agreements restricted withdrawal and liquidation; the restrictions were no more restrictive than Texas law.
- Shortly after formation, Jones gifted an 83.08% limited partnership interest in JBLP to his son and a 16.915% limited partnership interest in AVLP to each daughter.
- Jones reported the gifts on his 1995 federal gift tax return using substantial valuation discounts for lack of control and lack of marketability.
- The IRS determined a gift tax deficiency and disputed whether (i) the funding of the partnerships constituted taxable gifts and/or (ii) the reported values overstated discounts, including by failing to disregard restrictions under I.R.C. § 2704(b).

## Issues

1. Whether Jones’s transfers of property to JBLP and AVLP in exchange for partnership interests were taxable gifts at formation.
2. Whether the partnership liquidation and withdrawal restrictions had to be disregarded under I.R.C. § 2704(b) when valuing the transferred interests.
3. What valuation discounts applied to the gifted limited partnership interests, including whether a separate discount for built-in capital gains was permitted.

## Decision

- The court held the transfers of property to JBLP and AVLP in exchange for proportionate partnership interests were not taxable gifts.
- The court held I.R.C. § 2704(b) did not apply to disregard the partnerships’ liquidation and withdrawal restrictions.
- The court allowed discounts for lack of marketability and, for AVLP, a secondary-market discount, using the following valuation approach:
  - Son’s JBLP gift: 83.08% of underlying asset value, reduced by an 8% lack-of-marketability discount.
  - Each daughter’s AVLP gift: 16.915% of underlying asset value, reduced by a 40% secondary-market discount and an 8% lack-of-marketability discount.
- The court denied any additional discount for built-in capital gains embedded in the appreciated partnership assets.

## Legal Principles

- A transfer of property to a partnership in exchange for a partnership interest is not a taxable gift when each contributor receives an interest proportionate to the value contributed and capital accounts properly reflect those contributions.
- I.R.C. § 2704(b) does not require disregarding liquidation or withdrawal restrictions that are no more restrictive than applicable state law.
- Closely held limited partnership interests may be valued below a pro rata share of net asset value to reflect lack of marketability and limits on transferability, including reduced secondary-marketability for minority interests.
- A separate built-in capital gains discount is not allowed where realization of gains is speculative and the evidence supports long-term holding rather than near-term liquidation or sale.

## Conclusion

The Tax Court treated the partnerships’ funding as non-gift exchanges, declined to ignore state-law-consistent restrictions under § 2704(b), applied moderated marketability and secondary-market discounts to the gifted interests, and rejected an additional discount for built-in capital gains.


Estate of Jones v. Commissioner, 116 T.C. 121 (T.C. 2001)