In what’s likely to be this year’s last case concerning the taxable assets of a family limited partnership (FLP), the estate was buried by the following “bad facts” concerning formation and funding:
- Although the founder transferred roughly $6 million worth of real property to the FLP in 1997, he kept reporting the properties’ income on his 1997 and 1998 personal tax returns, and didn’t set up a separate bank account for the FLP until 1999.
- More importantly, the founder (and his advisors) “ignored” a formal appraisal of the FLP interests, choosing their own values for the partnership’s units by “unclear” methods, according to the court.
- They also ignored partnership formalities, failing to hold meetings, keep proper books and accounts, and execute a management agreement with the founder’s son.
- Finally, the founder commingled personal and FLP funds; and the FLP paid many of his personal expenses, including his debts, tuition for his grandchildren, and—later—his estate taxes.
The estate tried to argue that protection against partition of the properties (along with general protection against creditors) were the FLP’s legitimate, non-tax purpose, sufficient to except its assets from the reach of IRC Sec. 2036(a). But the Tax Court disagreed, finding under the “totality” of bad facts that the FLP served primarily as the founder’s “testamentary device,” such that the full, fair market value of its assets was taxable. Read the complete digest of Estate of Liljestrand v. Commissioner, T.C. Memo 2011-259; 2011 Tax Ct. Memo LEXIS 251 (Nov. 2, 2011) in the January 2011 Business Valuation Update; the Tax Court’s opinion will be posted soon at BVLaw.
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