FLPs with passive assets are still the most vulnerable

Recent cases concerning the viability of taxpayers’ transfers to family limited partnerships (FLPs) as “bona fide” for legitimate, non-tax business purposes have been fairly successful in the Tax Court of late—even when the transfers have involved assets that don’t require active management. Estate of Black, for instance, upheld an FLP in which the partners held the critical “swing” votes on a large block of stock. Similarly, Estate of Mirowski upheld the transfer of patent royalties and related investments, and Estate of Kimball upheld working oil and gas interests. In Estate of Schutt, the court preserved the FLP in large part because it perpetuated the founder’s specific “buy and hold” investment philosophy, even though the assets were marketable securities.

A phrase not to use in an engagement letter? In its latest look at an FLP, however, the Tax Court found no such legitimate, non-tax business purpose when the transferred assets consisted primarily of bank company stock and the founder had  no specific investment philosophy—and in fact, wanted his grown children to learn about financial management through the FLP. Moreover, the Tax Court didn’t believe the taxpayer’s disavowal of any testamentary intent when his attorney stated in a letter that getting an appraisal was a “key” element of establishing and valuing the FLP “for tax planning purposes.”

Look for the complete digest of Estate of Turner v. Commissioner, 2011 WL 3835663 (U.S. Tax Court)(Aug. 30, 2011), in the November Business Valuation Update; the courts’ opinion will be posted soon at BVLaw, along with every important FLP decision in estate and gift tax cases.