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. ^{42010 Tax Ct. Memo LEXIS 2">*9} 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 "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."

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:

For 2010 Tax Ct. Memo LEXIS 2">*10 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 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:

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 2010 Tax Ct. Memo LEXIS 2">*11 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">118 T.C. 279, 118 T.C. 279">294 (2002), affd. 335 F.3d 664">335 F.3d 664 (7th Cir. 2003); see also Stinson Estate v. United States, 214 F.3d 846">214 F.3d 846, 214 F.3d 846">848 (7th Cir. 2000).

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, 2010 Tax Ct. Memo LEXIS 2">*12 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.]

The Supreme Court 2010 Tax Ct. Memo LEXIS 2">*13 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">324 U.S. 18, 324 U.S. 18">20-21, 65 S. Ct. 499">65 S. Ct. 499, 89 L. Ed. 668">89 L. Ed. 668, 1945 C.B. 421">1945 C.B. 421 (1945).]

In 118 T.C. 279">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. 118 T.C. 279">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 2010 Tax Ct. Memo LEXIS 2">*14 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. * * * [118 T.C. 279">Id. at 293.]

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 118 T.C. 279">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. ^{72010 Tax Ct. Memo LEXIS 2">*15}

We decline petitioners' invitation to reconsider our holding in Hackl. Furthermore, we disagree that118 T.C. 279">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 immediate use, possession, or enjoyment of either (1) the transferred property or (2) the income therefrom.

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, 2010 Tax Ct. Memo LEXIS 2">*16 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. 279">118 T.C. 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."

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 2010 Tax Ct. Memo LEXIS 2">*17 shall not give the assignee the right to become a substituted limited partner." (Emphasis added.) ^{82010 Tax Ct. Memo LEXIS 2">*18} 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 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." 118 T.C. 279">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 2010 Tax Ct. Memo LEXIS 2">*19 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, possession or enjoyment of the partnership interest", for instance, by being able unilaterally to cause the partnership's liquidation. ^{92010 Tax Ct. Memo LEXIS 2">*20} 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">183 Ct. Cl. 840, 183 Ct. Cl. 840">850, 393 F.2d 972">393 F.2d 972, 393 F.2d 972">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, 2010 Tax Ct. Memo LEXIS 2">*21 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 846">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).

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 2010 Tax Ct. Memo LEXIS 2">*22 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. 279">118 T.C. 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 primary purpose of achieving a reasonable, compounded rate of return, on a long-term basis, with respect to its investments."

Petitioners allege 2010 Tax Ct. Memo LEXIS 2">*23 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 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. ^{112010 Tax Ct. Memo LEXIS 2">*25} Cf. Kellis v. Ring, 92 Cal. App. 3d 854">92 Cal. App. 3d 854, 155 Cal. Rptr. 297">155 Cal. Rptr. 297 (Ct. App. 1979)2010 Tax Ct. Memo LEXIS 2">*24 (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.

To reflect the foregoing,

Decisions will be entered for respondent.