## Facts

- Baine P. Kerr and Mildred C. Kerr (taxpayers) formed two Texas family limited partnerships in 1993 with their four adult children: Kerr Family Limited Partnership (KFLP) and Kerr Investments Limited Partnership (KILP).
- The partnership agreements contained identical restrictions affecting liquidation/dissolution and related partner rights.
- The partnerships were governed by the Texas Revised Limited Partnership Act (TRLPA), which set default dissolution rules (including dissolution upon events specified in the agreement or upon written consent of all partners).
- In 1994, the Kerrs transferred limited partnership interests to the University of Texas and later admitted the University as a limited partner of KILP.
- On December 28, 1994, the Kerrs created separate grantor retained annuity trusts (GRATs) and each transferred a 44.535% class B limited partnership interest in KFLP to a GRAT; remainders were intended for descendants through generation-skipping trusts.
- On December 31, 1994 and December 31, 1995, the Kerrs transferred additional KILP limited partnership interests to their children.
- The Kerrs’ 1994 and 1995 gift-tax returns valued transferred interests using discounts for lack of marketability/liquidity and, in some instances, minority interest, based in part on the agreements’ restrictions.
- The IRS issued gift-tax deficiency notices asserting that I.R.C. § 2704(b) required disregarding the liquidation restrictions as “applicable restrictions,” thereby disallowing the claimed discounts.
- Petitioners moved for partial summary judgment under Tax Court Rule 121, limited to whether § 2704(b) applied to those liquidation restrictions.

## Issues

1. Whether the GRAT transfers were of limited partnership interests or merely assignee interests.
2. Under Treas. Reg. § 25.2512-1, whether the transferred interests must be characterized and valued as assignee interests under the willing buyer–willing seller standard.
3. Whether the partnership liquidation restrictions were “applicable restrictions” under I.R.C. § 2704(b) that must be disregarded in valuing the transferred interests.

## Decision

- The court held the Kerrs transferred limited partnership interests to the GRATs in both form and substance, rejecting the assignee-interest characterization.
- The court reaffirmed that Treas. Reg. § 25.2512-1 requires valuing the transferred limited partnership interests at fair market value under the hypothetical willing buyer–willing seller standard.
- The court granted partial summary judgment for petitioners, holding § 2704(b) did not apply because the liquidation restrictions were not “applicable restrictions” on these facts.
- The ruling did not determine the precise amount of any valuation discounts; it resolved only the § 2704(b) applicability question.

## Legal Principles

- A transferred interest is valued for gift-tax purposes based on what was actually transferred; documented and substantive transfers of limited partnership interests are not recharacterized as mere assignee interests absent supporting facts.
- Fair market value under Treas. Reg. § 25.2512-1 is the price a hypothetical willing buyer would pay a hypothetical willing seller, neither under compulsion and both with reasonable knowledge of relevant facts.
- I.R.C. § 2704(b) requires disregarding certain liquidation restrictions only if they qualify as “applicable restrictions,” including that the restriction is more limiting than what would apply under state law absent the restriction and is subject to family removal after the transfer.
- Restrictions that are no more restrictive than state-law default rules fall within the state-law exception and are not disregarded under § 2704(b).

## Conclusion

The Tax Court held that the GRATs received limited partnership interests valued under the standard willing buyer–willing seller test and that § 2704(b) did not mandate disregarding the partnerships’ liquidation restrictions because they were not more restrictive than TRLPA baselines; the amount of any discounts remained for later determination.


Kerr v. Commissioner, 113 T.C. 449 (Tax Ct. 1999)