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Taxation & Estate Planning

Family Limited Partnerships

By Fox Rothschild (all)

       The most recent appellate case involving family limited partnerships, Estate of Bigelow v. Commissioner, 503 F.3d 955, 2007 WL 2684526 (9th Cir. 2007) deserves careful study for the discussion of the "bona-fide sale for adequate and full consideration," exception to section 2036.

       The Ninth Circuit held that if the consideration exception applies, section 2036 does not apply.  In determining the applicability of the exception, the inherent reduction (such as arises when an investor transfers a stock portfolio to a hedge fund in exchange for an interest therein) of the value of the property transferred cannot per se disqualify the property from failing the 2036(a) exception.  But, the court continues on to state:

"The validity of the adequate and full consideration prong cannot be gauged independently of the non-tax-related business purposes involved in making the bona fide transfer inquiry."

         Estate planners should not assume that the inquiry of subjective motive is necessarily required in measuring the adequacy of the consideration.  In Bongard, 124 T.C. 95 (2005), Judge Halpern, in a concurring opinion, expressed his disagreement with the majority's interpretation of the bona-fide sale exception, as the Judge stated:"

"Therefore, to establish that the transfers were for full consideration, petitioner must, for each transfer, establish that the value of the property transferred by decedent did not exceed the cash value of the property received by him. Id. By the explicit terms of section 25, 2512-8, Gift Tax Regs., the resulting inquiry is limited to an economic calculus, and there is no room for any inquiry as to the transferor's (decedent's) state of mind.  Yet the majority makes his state of mind critical..."

         A more recent Tax Court decision, Estate of Rector, T.C. Memo 2007 367 (2007) involved the creation of an FLP, by a 92-year old woman who was living in a nursing home.  She was the only general partner and her revocable trust held the remaining 98% interest as a limited partner.  Before death, the decedent transferred by a gift a 30% interest of FLP.  Judge Laro had no difficulty in concluding that section 2036 applied and no discount was available.  See also, Estate of Hilde E. Erickson, 2007 T.C. Memo 107 (2007).

Full post as published by Tax Litigation Blog on January 29, 2008 (boomark / email).