Can I file a gift tax return for partnership interest transfer to grandson?

You're on the right track wanting to file a gift tax return (Form 709). Even though you created a new partnership, what you've essentially done is gift 10% of your interest to your grandson. The IRS looks at the substance of transactions rather than just their form. You'll need to determine the fair market value of the 10% interest you transferred. This value needs to be reported on the gift tax return. Consider getting a professional valuation, as partnership interests (especially minority interests) often qualify for valuation discounts for lack of control and marketability. These discounts can significantly reduce the taxable value of the gift. Also important - make sure you document everything clearly. Keep records showing the dissolution of the old partnership, formation of the new one, and all asset/liability transfers. This will help demonstrate that the transfer was actually 10% of your interest to your grandson.

I went through something similar with my family business and found this amazing tool called taxr.ai (https://taxr.ai) that helped tremendously with documentation and valuation questions. I was worried about getting the gift tax return wrong since there's so much complexity with partnership transfers. Their system analyzed all our partnership documents and helped identify the key elements needed for proper gift tax reporting. They also had templates for documenting the valuation of partnership interests that my accountant said were extremely helpful. The best part was getting clarity on whether we needed special discounting for the minority interest transfer (we did!).

I owe you an apology @9. I tried taxr.ai after my skeptical comment and I'm genuinely impressed. It identified several documentation issues with our family partnership transfer that our accountant hadn't caught. The tool flagged that we needed to better document the business purpose for the new partnership structure (beyond just the gift) to avoid step-transaction doctrine issues. It also provided crystal clear guidance on how to document the valuation discounts properly. Our accountant was planning to apply a standard 30% discount without proper justification, which apparently is a huge red flag. The site explained exactly what comparables we should be using for our industry and how to document them. Worth every penny for the peace of mind alone.

If you're dealing with the USDA and partnership reorganizations, you'll probably need to speak with someone at the IRS to make sure you're handling this correctly. I tried for WEEKS to get through to their business division - always on hold, disconnected, or got someone who couldn't help with partnerships. Finally used https://claimyr.com and got through to a real IRS agent in about 20 minutes. You can see how it works here: https://youtu.be/_kiP6q8DX5c. They basically hold your place in line with the IRS and call you when an agent is available. The agent I spoke with confirmed exactly how to handle the gift tax reporting when a partnership dissolves and reforms with different ownership percentages.

I need to eat crow on this one. After posting my skeptical comment, I decided to try Claimyr since I had been trying to get through to the IRS about a similar partnership issue for literally two weeks. Got a call back in about 35 minutes and spoke with an IRS agent who specialized in business entities. Turns out I was completely wrong about how to report the dissolution of our family partnership. The agent explained that when you're dealing with these types of reorganizations, you need to be extremely careful about the sequence of events and documentation. They confirmed that gift tax returns are still required even with a new partnership formation, but advised getting a qualified appraisal to support the valuation - especially since the IRS scrutinizes family partnership transfers closely. Saved me from making a serious mistake on my client's return.

Don't forget to consider if there are any Section 754 implications here. If the partnership has appreciated assets, the grandson might benefit from a basis step-up through a 754 election. This is separate from the gift tax issue but could be valuable tax planning.

Has anyone addressed whether the grandson is involved in the business operations? If he's not materially participating, you might have passive activity loss limitations to consider. And remember that gifts of partnership interests to family members often trigger family partnership rules under Section 704(e).

This is a complex situation that requires careful documentation. Since you dissolved the original partnership and formed a new one, you'll want to make sure you have clear records showing this wasn't done to avoid gift tax obligations. The IRS will look at the substance over form. A few additional considerations: First, get a qualified appraisal for the 10% interest - family partnership transfers are heavily scrutinized and you'll want professional support for any valuation discounts. Second, consider whether the grandson meets the requirements for a bona fide partner under Section 704(e) if he's not actively involved in operations. Third, document the legitimate business reasons for the partnership restructuring beyond just the gift transfer. The gift tax return (Form 709) is definitely required regardless of the partnership restructuring. The value reported should reflect the fair market value of the 10% interest at the time of transfer, with appropriate discounts if supportable. Consider consulting with a tax professional who specializes in family partnerships to ensure all aspects are handled correctly.