Kerr v. Commissioner

Baine and Mildred Kerr (plaintiffs) created two family limited partnerships (FLPs) in accordance with the Texas Revised Limited Partnership Act (TRLPA). Both the Kerrs and their children were partners in the FLPs. The FLPs’ terms provided for dissolution and liquidation upon the earlier of (1) December 31, 2043, or (2) the agreement of all partners. The TRLPA provided for dissolution of Texas limited partnerships on the earlier of (1) the occurrence of events specified in the agreement to cause dissolution, (2) the written consent of all partners, (3) the withdrawal of a general partner, or (4) entry of a judicial dissolution decree. The Kerrs donated partnership interests to their children and also created trusts into which they transferred partnership assets and from which they retained a right to receive annuities. The Kerrs reported these transfers on their federal gift-tax returns, which included valuation discounts for lack of liquidity or marketability. The discounts were meant to reflect the FLPs’ restrictions on liquidation. The commissioner of the Internal Revenue Service (IRS) (defendant) disallowed the discounts on the ground that Internal Revenue Code § 2704(b) operated to disregard restrictions on liquidation. The Kerrs challenged this determination in the United States Tax Court, where they moved for partial summary judgment on the issue of § 2704(b) applicability.