From a tax perspective, partnerships and limited liability companies are, by far, the most flexible of business vehicles. Among other benefits, they have no restrictions as to ownership or as to classes of equity; special allocations and disproportionate distributions may be provided for in the partnership or operating agreement; and there is pass-through tax treatment.

             Every now and then, a case comes along that is just chock-full of lessons, not only for taxpayers, but for their advisors as well.  The Tax Court’s decision in Cavallaro v. Comr.  describes such a case.  It involves closely held corporations, related party transactions, a tax-free reorganization and, oh yeah, a huge taxable gift.

“Blood may be thicker than water,” begins an advertisement in a recent edition of the NY Times Magazine, “but can it hold a business together?”   The advertisement continues, “It’s a little-known fact that nearly 90% of U.S. businesses are family firms. All over America, people pour their heart and soul into building family companies.

Historically, the gift and estate tax laws have limited the ability of wealthy individuals to transfer their interests in family businesses to their children without suffering potentially severe tax consequences.  However,  many wealthy taxpayers are interested in shifting the appreciation in their business out of their estate and into the hands of their children.

Transfers