In his annual year-end symposium on federal tax valuation case law, Prof. John Bogdanski (Lewis & Clark Law School) says recent cases concerning family limited partnerships (FLPs) should “encourage” taxpayers—as well as their appraisers and attorneys. At the same time, the Tax Court’s “unpredictable” interpretation of IRC §2036(a) means there is no "foolproof blueprint" for securing a win in these cases, which translates into the court adopting the funding and formation of the FLP as well as accepting its associated, discounted values. For example:
- In Estate of Stone v. Comm’r, TC Memo. 2012-48, the court accepted the FLP’s nontax purpose as the management of the family’s timberland. The decision “surprised” many observers, Bogdanski said, because the partnership did not engage in a business or investment activity, had no liquid assets or bank account, and did not change the nature of the property.
- Compare this to the court’s final decision in Estate of Turner v. Comm’r, 138 T.C. No. 14 (2012), when it declined to reverse an earlier ruling that included the entire fair market value of the FLP assets (passive investment securities) in the decedent’s gross estate. Among other reasons, the operative documents used “boilerplate” language in stating the partnership’s nontax purpose and discrediting testimony from the advisors that tax advantages were not an element of formation.
It's difficult to reconcile these two outcomes, Bogdanski concluded, which may depend on the court’s interpretation of the particular facts and circumstances under 2036(a) as well as the parties’ credibility and sympathies. As a final note, Bogdanski mentioned the IRS’s “nonacquiescence” to the Wandry decision on defined-value clauses. Considering the applicable forum for the appeal (the 10th Circuit), which apparently shares a “pro-taxpayer” stance with the 9th Circuit, Bogdanski says the IRS may want to pursue challenges against formula value clauses further east. Note: All cited opinions—in addition to all relevant case law on FLPs, from the Tax Court and the federal circuits—are available at BVLaw.
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