5th Circuit confirms discounted FLP values in Keller and the importance of observing state law

Last week, the U.S. Court of Appeals for the 5th Circuit affirmed the federal district court’s decision in Keller v. United States (S.D. Tex. 2009). Appraisers may recall that the Keller case concerned a wealthy Texas widow who formed a family limited partnership (FLP), but, at her death in 2000, had failed to fund it with $250 million in corporate bonds. Concluding that they should abandon the FLP, her advisers caused her estate to pay over $147 million in taxes; then, a year later, after attending a professional seminar on Texas partnership law, one adviser believed he could finalize the FLP transfers. Lacking the liquid assets to pay its taxes, the estate took a retroactive loan from the FLP and then sued for a refund for its tax overpayment plus a $30 million deduction for the interest payments made on the loan.

At trial, the district court held that the widow’s intent to form and fund the FLP effectively established the partnership. It also found she created the FLP for legitimate, nontax business purposes. Accordingly, the court upheld the combined 47.5% discounts on the value of the FLP assets, particularly commending the estate’s appraiser, Robert Reilly of Willamette Management Associates, for using “the correct standard” to determine their fair market value. It also upheld the estate’s deductions for the loan as a “necessary administrative expense.”

On appeal, the 5th Circuit confirmed all aspects of the decision, noting in particular that “an estate is entitled to a discount on the value of [a partnership] interest to reflect restrictions on the interest’s transferability.” Under “well-established” principles of state law, the court also affirmed that the “intent of an owner to make an asset partnership property” is dispositive.

"We are very pleased that the 5th Circuit upheld the decedent’s intent and ruled the FLP was formed and funded,” the estate’s attorney, William Cousins III (Meadows, Collier, Reed, Cousins, Crouch & Ungerman), tells BVWire. “This is a testament to the tenacity of the family and its advisors through almost a decade of litigation." We’ll have the complete digest of Keller v. United States, No. 10-41311 (Sept. 25, 2012) in the November Business Valuation Update; the court’s opinion and digest are posted at BVLaw.