Family Limited Partnerships: To Qualify or Not to Qualify for the Bona Fide Sale for Full and Adequate Consideration Exception Under §2036
The last article written by the authors regarding family limited partnerships (“FLPs”) for The Florida Bar Journal discussed Estate of Thompson v. Commissioner, T.C. Memo 2002-246.1 The article focused on §2036(a)(1) of the Internal Revenue Code of 1986, as amended, and the formation and operations of an FLP. Since Thompson, there have been a number of cases that have addressed FLPs and the issues relating to §2036 of the Code,2 and there have been many excellent articles published which discuss such cases and the “retained possession or enjoyment” of the transferred property test or “right to the income” from the transferred property test enunciated in §2036(a)(1).3 The “trend” within such recent cases is whether §2036 does not apply because the donor’s transfer of property to the FLP qualifies for the “bona fide sale for full and adequate consideration in money or money’s worth” exception (bona fide sale exception). The purpose of this article is to analyze the recent FLP cases in the context of the bona fide sale exception, and to discuss planning considerations to avoid the potential application of §2036 by satisfying the bona fide sale exception.4
Section 2036 and the Bona Fide Sale Exception
Section 2036(a) provides, in relevant part, that
[t]he value of the gross estate for federal estate tax purposes shall include the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer (except in case of a bona fide sale for adequate and full consideration in money or money’s worth), by trust or otherwise, under which he has retained for his life or for any period not ascertainable without reference to his death, or for any period which does not in fact end before his death, (1) the possession or enjoyment of, or the right to the income from, the property. . . ,5 (emphasis added).
The italicized portion of §2036(a) is the focus of this article.
Kimbell v. United States
In Kimbell v. United States, 371 F.3d 257 (5th Cir. 2004), the Fifth Circuit Court of Appeals held that the district court erred in its determination to deny the estate’s request for a refund of estate tax and interest paid, and that Mrs. Kimbell’s transfer of property to the FLP qualified for the bona fide sale exception, and that such transferred property was not includible in her estate under §2036.6 The Fifth Circuit relied primarily on Wheeler v. United States, 116 F.3d 749 (5th Cir. 1997), and addressed the issue as an objective inquiry. Pursuant to Wheeler, adequate and full consideration under §2036 “requires only that the sale not deplete the gross estate.”7 As a rule, unless a transfer that depletes the entire gross estate is coupled with a transfer that augments the gross estate, there is no “adequate and full consideration” for purposes of the estate or gift tax.8 Since Wheeler, a taxpayer’s testamentary or tax savings motive for a transfer alone does not trigger §2036(a) recapture if objective facts demonstrate that the transfer was made for full and adequate consideration.9
Wheeler also addressed whether a sale is “bona fide” for purposes of §2036. The examination was whether the sale was a bona fide sale or a disguised gift or sham transaction.10 The court stated that it should inquire beyond the form of the transaction (i.e., transactions between family members) to determine whether the substance of the transaction justifies the tax treatment requested.11 In determining that the transaction was a “real, actual and genuine”12 transaction, the Fifth Circuit recognized that the appropriate contributions were made to the FLP by the partners, and that the partners received a corresponding pro-rata interest in the FLP,13 and that the preservation of the family ranching business for the Kimbell family was a genuine business purpose to form the FLP.14
The court cited and discussed both Church v. United States, 2000 USTC (CCH) ¶60, 369 (W.D. Tex. 2000), affirmed No. 00-50386, July 18, 2001 (5th Cir. 2001), and Estate of Stone v. Commissioner, 86 T.C.M. (CCH) 551 (2003), both of which involved a transfer of property to an FLP or FLPs qualifying as a bona fide sale. The Fifth Circuit stated that the focus on whether a transfer to an FLP is for adequate and full consideration is: 1) whether the interests credited to each of the partners were proportionate to the fair market value of the assets contributed; 2) whether the assets contributed by each partner to the FLP were properly credited to the respective capital accounts; and 3) whether on termination or dissolution of the FLP the partners were entitled to FLP distributions in amounts equal to their respective capital accounts.15 The Fifth Circuit answered each of these questions in the affirmative.
The Fifth Circuit determined that the district court ignored record evidence in support of the taxpayer’s position that the transaction was entered into for substantial business and other nontax reasons. The Fifth Circuit relied on the following facts to determine that the transfer to the FLP was a bona fide sale: (1) Mrs. Kimbell retained sufficient assets outside of the FLP for personal expenses and did not commingle FLP assets with personal assets; (2) formalities with respect to the formation of the FLP were adhered to and the assets contributed to the FLP were retitled accordingly; (3) the assets contributed to the FLP included working interests in oil and gas properties which required active management; and (4) several credible nontax reasons for the FLP formation were present that could not be accomplished through Mrs. Kimbell’s revocable trust.16
Turner v. Commissioner
In Turner v. Commissioner, 382 F.3d 367 (3d Cir. 2004), the taxpayer in Thompson17appealed the Tax Court’s decision in favor of the Internal Revenue Service to the U.S. Court of Appeals for the Third Circuit. The court affirmed the decision of the Tax Court. Turner involved two FLPs, one for each of Mr. Thompson’s children.
Referring to Estate of Harper v. Commissioner, T.C. Memo 2002-121, the Third Circuit stated that the bona fide sale exception will be denied when there exists nothing but a circuitous “recycling” of value and when the transaction does not appear to be motivated primarily by legitimate business concerns.18 The court concluded that there was no transfer for consideration under §2036. Although the FLPs did conduct some economic activity, it was not enough to support any valid, functioning business enterprise.
The Third Circuit referred to the specific activities conducted on behalf of the FLPs to conclude that no valid business was conducted. Intra-family loans made on behalf of one of the FLPs with interest payments being late or not paid were addressed as being a way to use the decedent’s money as a source of financing the needs of family members, rather than a way to use the money for a business purpose. Regarding the other FLP, the only active operations involved the ranch owned by the FLP, which was not operated as an income producing business either before or after the property was contributed to the FLP. Income generated with respect to the property went to the contributor of the property, rather than to the FLP. This was a “putative business arrangement” which “amounted to no more than a contrivance and did not constitute the type of legitimate business operations that might provide a substantive nontax benefit for transferring assets to the FLP.”19
The Third Circuit also addressed the form of the assets transferred to the FLPs, which was predominantly marketable securities. It recognized that a nontax benefit for establishing an FLP is questionable if it holds an untraded portfolio of securities with no ongoing business operations.20 The court distinguished the facts from the facts in Church, Stone, and Kimbell, which involved operating entities. The Third Circuit concluded that the transfers to the FLPs did not constitute “bona fide sales,” although for a different reason than suggested by the commissioner. The commissioner argued there was no bona fide sale because such requires an arm’s length bargain, and there can be no such bargain when one party stands on both sides of the transaction.21 The Third Circuit, however, rejected such argument and stated that although an “arm’s length transaction” is not a requirement, the transfer must be made in good faith.22 Even if all FLP formalities are followed, the court addressed the fact that a good faith transfer to an FLP must have a benefit other than the estate tax benefits.
Estate of Strangi v. Commissioner
On July 15, 2005, the Fifth Circuit, in Estate of Strangi v. Commissioner, No. 03-60992, 2005 U.S. App. LEXIS 14497 (5th Cir. July 15, 2005), affirmed the Tax Court decision that the decedent, Mr. Strangi, retained enjoyment of the assets transferred to the FLP and that such assets were properly included in his estate under §2036(a). The estate argued the assets transferred to the FLP should be excluded under the bona fide sale exception. The Fifth Circuit disagreed and recognized that two requirements must necessarily be satisfied under such exception: 1) a “bona fide sale,” and 2) “adequate and full consideration.”23
Citing Kimbell, the Fifth Circuit held that adequate and full consideration exists only where any reduction in the estate’s value is “joined with a transfer that augments the estate by a commensurate. . . amount.”24 In addition, the three- prong test enunciated in Kimbell, which was previously discussed, promoted the existence of full and adequate consideration, provided that the formalities of the FLP were respected.25
The Fifth Circuit stated determining whether there was a “bona fide sale” was an “objective” inquiry,26 and that the proper approach to this prong was also set forth in Kimbell, where it was determined that a sale was bona fide if it served a “substantial business or other nontax” purpose.27 The Fifth Circuit determined that the Tax Court did not clearly err in finding that Mr. Strangi’s transfer of assets to the FLP lacked a substantial nontax purpose.28
The estate raised the following five “nontax” reasons for Mr. Strangi’s transfer of assets to the FLP: 1) deterring potential tort litigation by Mr. Strangi’s former housekeeper; 2) deterring a potential will contest; 3) persuading a corporate executor to decline to serve; 4) creating a joint investment vehicle for the partners; and 5) permitting centralized, active management of working interests owned by Mr. Strangi.29 The Fifth Circuit rejected each of these arguments.
First, Mr. Strangi’s housekeeper was injured on the job and the estate argued that the FLP was formed partly out of concern that she may sue for damages. However, the record showed that Mr. Strangi and the housekeeper were very close. Mr. Strangi paid her medical bills after the injury and there was no evidence that Mr. Strangi caused the injury. Thus, the Tax Court did not clearly err in the finding that the transfer of assets into the FLP did not deter a potential tort claim.
Second, regarding the contention that the creation of the FLP would deter a potential will contest by the children of Mrs. Strangi (from her prior marriage), the Tax Court concluded that these claims were stale when the FLP was formed.30 The conclusion that a claim would not be filed or successful was not clearly erroneous.
Third, the estate argued that the creation of the FLP would deter the appointment of the corporate co-executor and the fiduciary fees associated with the appointment.31 The Tax Court was unpersuaded by this argument and could not equate the estate’s claim of “business purpose” with executor fees.32 The Fifth Circuit determined that there was nothing clearly erroneous in the Tax Court’s refusal to infer a relationship between the FLP and the co-executor’s declination to serve in such capacity.
Fourth, the estate contended that the FLP functioned as a joint investment vehicle for its partners.33 Addressing the de minimis contribution of the Strangi children to the FLP, this argument was rejected by the Tax Court. Even if the children contributed their respective proportionate amounts to the FLP, it did not conduct any active business or make any investments after formation.34 In response, the estate cited Kimbell, which addressed the fact that there was no principle in FLP law which required a minority partner to own a minimum percentage interest for a transfer to be bona fide. However, it was noted that a finding that the FLP served as a joint investment vehicle was questionable where it made no actual investments and there were minimal minority contributions. The Fifth Circuit determined that it was not clear error for the Tax Court to reject this argument.
Finally, again referring to Kimbell, the estate asserted that the FLP’s real property and interests in real estate (the “working assets”) comprised an approximately equal proportion of the transfer in this case.35 The court recognized that although Mr. Strangi may have transferred a substantial percentage of assets that might have been actively managed under the FLP, the Tax Court concluded that no such management took place. Thus, the Fifth Circuit could not agree that the Tax Court clearly erred in rejecting this argument.
Estate of Bongard v. Commissioner
In Estate of Bongard v. Commissioner, 124 T.C. No. 8 (2005), the estate argued that Mr. Bongard’s transfer of Empak, Inc., stock to a limited liability company (“LLC”) and his transfer of Class B membership interests in the LLC to his FLP satisfied the bona fide sale exception. The Tax Court referred to a series of FLP cases to address the estate’s argument.36 The court addressed a “simplified” bona fide sale exception stating that the exception would be met where the “record establishes the existence of a legitimate and significant nontax reason for creating the FLP and the transferors received FLP interests proportionate to the value of the property transferred (emphasis added).” The objective evidence must indicate that the nontax reason was a significant factor that motivated the FLP’s creation and that the significant purpose must be an “actual motivation,” not a “theoretical justification.”37
The Tax Court addressed Kimbell, and recognized that the bona fide sale exception was separated into two prongs: 1) whether the transaction qualified as a bona fide sale; and 2) whether the decedent received full and adequate consideration. In examining the adequate and full consideration language, the Tax Court stated that the proper objective question in examining this prong was whether the sale depleted the gross estate.38
The Tax Court held the bona fide sale exception applied to Mr. Bongard’s transfer of Empak stock to the LLC because he possessed a legitimate and significant nontax reason for the transfer and because he received LLC interests proportionate to the value of the property transferred.39 The court acknowledged that the LLC was formed as a holding company for the Empak stock to facilitate liquidity and attract outside investment.40
In comparison, the bona fide sale exception was held not to apply to Mr. Bongard’s transfer of Class B membership interests in the LLC to the FLP. The court discussed a letter executed by Mr. Bongard which summarized his reasons for forming the FLP and dismissed the nontax reasons discussed therein as not satisfying the legitimate and significant nontax reason test on the following grounds. First, Mr. Bongard had stated that he wanted to gift FLP interests. The formation of the LLC eliminated direct stock ownership in Empak and allowed Mr. Bongard to make gifts (of membership interests in the LLC) without diversifying the Empak ownership. While using the FLP as part of a future gifting program could be an acceptable nontax reason for creating the entity, the court pointed out that Mr. Bongard only made one small gift of FLP interests to his spouse, but no other gifts of FLP interests.41
Second, another reason to establish the FLP was for Mr. Bongard to satisfy the asset requirement for post-marital agreements under Minnesota law. Under Minnesota law, each spouse is required to own at least $1.2 million in assets to have a valid post-marital agreement. Mr. Bongard only transferred a small amount of FLP interests to his spouse; such transfer did not justify his transfer of all his Class B membership interests to the FLP. Moreover, Mr. Bongard could have gifted nonvoting membership interests in the LLC (rather than limited partnership interests in the FLP).
Third, Mr. Bongard had also stated that the FLP was formed for asset protection purposes. This purpose was rejected because no additional protection was afforded by the FLP with respect to the Empak shares.42
Fourth, Mr. Bongard’s letter addressed that the FLP would provide tutelage to his children regarding the management of family assets; the court rejected this purpose and noted that the interests were never diversified and the FLP did not perform any management function. Thus, the “recycling” argument discussed in Harper applied.43
Estate of Bigelow v. Commissioner
In Estate of Bigelow v. Commissioner, T.C. Memo 2005-65, the Tax Court determined that §2036 applied to Mrs. Bigelow’s transfer of assets to the FLP because there was an implied agreement for Mrs. Bigelow to retain the enjoyment of the contributed property.44 It also addressed whether the bona fide sale exception applied and, citing Thompson, recognized that the transfer to the FLP must have been made in good faith, and citing Bongard, that the transfer must be made for a legitimate nontax purpose.45 In determining that the transfer was not made in good faith and that there was no nontax benefit to Mrs. Bigelow, the following reasons were addressed.
The transfer of the property to the FLP by Mrs. Bigelow rendered her unable to meet her financial obligations.46 In addition, Mrs. Bigelow continued to make substantial gifts during her lifetime, despite the fact that funds were not available for the payment of her living expenses.47 The provisions governing the formalities of the transaction were not respected. For example, K-1s were not properly reflective of capital accounts and balance sheets improperly showed a loan as an FLP liability, although it was a liability of Mrs. Bigelow’s revocable trust. With respect to the referenced loan, the Bigelow trust had obtained a loan from the bank to pay off loans that had been secured by a residence that was transferred to a third party in an exchange and leaseback agreement. Although Mrs. Bigelow and her son personally guaranteed the notes, the monthly payments were made by the FLP.48
In order for the transaction to be bona fide, the transfer must provide “some benefit other than estate tax savings.” No nontax benefit existed “because management of the assets did not change as a result of the transfer and there was no pooling of assets.”49 Distinguishing the facts in Kimbell, the Tax Court concluded the Bigelow trust did not relinquish its interest in the property transferred to the FLP because it continued to secure Mrs. Bigelow’s personal obligations. In comparison, Mrs. Kimbell transferred assets to the FLP consistent with her percentage interest in such FLP. Because the Bigelow trust did not benefit from the creation of the FLP, the FLP interest received was not equal in value to the property transferred; the percentage interest Mrs. Kimbell received in the FLP was equal to the value of the assets she contributed. In Kimbell, an LLC was the general partner and shielded the decedent from liability; in Bigelow, the Bigelow trust was the general partner of the FLP. The transfer of property from the Bigelow trust to the FLP did not shield such trust from liability because the Bigelow trust was the FLP’s general partner. While Mrs. Kimbell retained assets outside of the FLP for her support, Mrs. Bigelow transferred assets to the FLP and did not retain sufficient assets for her living expenses. Finally, Mrs. Kimbell did not transfer assets between the entity and her revocable trust; in comparison, for the two-year period ending on Mrs. Bigelow’s death, her son transferred funds between the FLP and Mrs. Bigelow 40 times.50
Estate of Korby v. Commissioner51
In Estate of Korby v. Commissioner, T.C. Memo 2005-102, the Tax Court determined that an implied agreement existed between the Korbys and their children that the assets transferred to the FLP would be available for Mr. and Mrs. Korby if they needed income. Thus, inclusion of the transferred assets was warranted under §2036.52 After making such determination, the Tax Court addressed the issue of whether the bona fide sale exception applied. The court referred to Bongard, which held that the exception is met when the record establishes the existence of a legitimate and significant nontax reason for the transfer, and the transferors received FLP interests proportionate to the value of the property transferred. The objective evidence must indicate that the nontax reason was a significant factor that motivated the FLP’s creation and that the significant purpose must be an actual motivation, not a theoretical justification.53
The Tax Court noted that the facts and circumstances must be examined in order to determine whether the bona fide sale exception has been met. Addressing previous FLP cases, the factors referred to by the Tax Court were: whether the taxpayer stood on both sides of the transaction;54 the taxpayer’s financial dependence on FLP distributions;55 commingling partner and FLP funds;56 and the taxpayer’s failure to transfer property to the FLP.57 It was determined that Mr. Korby stood on all sides of the FLP transaction.58 Mr. Korby and his estate lawyer formed the FLP without the involvement of his sons, who were 24.5 percent owners of the FLP through trusts and who signed the FLP agreement. Mr. Korby determined the assets to be contributed to the FLP and the Korby children did not have any understanding of the FLP from a funding or operational perspective. The determination that the fees from the FLP from a trust established by the Korbys were not management fees also supported a conclusion against the bona fide sale exception.
The estate’s argument that the FLP was formed for nontax reasons was not supported. Specifically, the estate argued that the creation of the FLP was bona fide because it was created to protect the family from commercial and personal injury liability resulting from their business, as well as liability arising from divorce. Although the estate pointed to the provision in the FLP agreement that prevented a partner from unilaterally forcing a distribution and restricting a transfer of FLP interests, the Tax Court held that the estate did not show that the terms of the FLP agreement would prevent a creditor of a partner from obtaining the FLP interest in an involuntary transfer.59 Thus, the limited protection and other evidence supported a conclusion that creditor protection was not a significant reason for forming the FLP.
Estate of Schutt v. Commissioner
In Estate of Schutt v. Commissioner, T.C. Memo 2005-126, the Tax Court determined that Mr. Schutt’s transfers of stock in DuPont and Exxon to two Delaware business trusts satisfied the bona fide sale exception. Prior to establishing the trusts, Mr. Schutt and his advisors discussed family asset planning. A main topic of discussion was Mr. Schutt’s concerns regarding family sales of stock positions and the perpetuation of his “buy and hold” investment philosophy regarding the maintenance of family assets. In determining that the bona fide sale exception applied, the Tax Court addressed: Mr. Schutt’s motive to perpetuate his family investment policies through the creation of the trusts;60 the fact that the underlying motive to establish the trusts was more than merely testamentary;61 and that the corporate trustee of the trusts took an active role with respect to their establishment and implementation.62 The trusts had a meaningful economic impact on the rights of the beneficiaries under other trusts established by Mr. Schutt for the benefit of his descendants. Mr. Schutt was recognized as having a legitimate desire with respect to the holding and perpetuation of family stock (his investment philosophy), and such was deemed a legitimate and significant nontax purpose in creating the trusts.63
The court addressed the adequate and full consideration issue and noted that contributors other than Mr. Schutt were responsible for the addition of more than one-half of the assets to the trusts. Thus, there was more than just a mere recycling of assets.64 In making such determination, the court equated the bona fide sale analysis in Turner, which recognized that the bona fide sale prong would be met where the transfer was made in good faith, such that the transferor is provided some potential for benefit other than the potential estate tax savings, with the Tax Court’s finding in Bongard, which recognized the bona fide sale standard for an arm’s length transfer that shows a legitimate and significant nontax purpose for the entity.65
Bona Fide Sale Exception Checklist
The following checklist was designed as a guide for practitioners and clients to follow so that the transfers to an FLP may potentially qualify for the bona fide sale exception.
1) All nontax reasons to establish the FLP should be documented in the FLP agreement and in external documents, and should be implemented. There must be at least one “legitimate and significant nontax reason” to establish the FLP. Strangi required a “substantial business or other nontax purpose,” which altered the standard in Kimbell (which used “and” instead of “or”). Also, Kimbell discussed the business and nontax purpose as “factors” to consider; Strangi recognized the requirement for a “substantial business or nontax purpose.” Investment management, educating younger family members, creating a vehicle for gifting programs, creditor protection, and pooling investment assets appear to be viable “nontax” purposes. Some examples are as follows:
• Gifting Programs — Gifts need to be actually made.
• Educating Younger Family Members — Meetings should take place with such younger family members and educational programs should be designed and implemented.
• Creditor Protection — FLP formalities must be followed in order to avoid a creditor’s “pierce the veil” argument. It appears that the “creditor protection” purpose will work better when real estate is contributed to the FLP, as opposed to marketable securities. When practical, each piece of real estate should be held in a separate entity (i.e., an LLC of which the FLP is a member) and should never be held in the same entity as other assets (such as marketable securities) unless the FLP owns the real estate through an entity.
2) Ensure the FLP functions as an investment vehicle for its partners when asset management is one of the reasons to form the FLP. Regarding implementation, regular meetings should take place with all partners and investment advisors. Thus, the FLP should make actual investments and the composition and management of the assets contributed to the FLP should change after they are contributed. Consider transferring assets to the FLP that require active management.
3) Perhaps the best argument to fall within the bona fide sale exception is for the FLP to be involved in an active business.
4) When creditor protection is one of the reasons to form the FLP, “exposed” assets should be contributed to the FLP, separate and apart from “nonexposed” assets.
5) The partners must contribute assets to the FLP in accordance with their FLP percentages. Capital accounts of the partners must be credited with the fair market value of the assets contributed by each partner. Each partner’s capital account must be debited by the fair market value of property distributed to that partner.
6) Upon the termination or dissolution of the FLP, the partners should receive liquidating distributions from the FLP in amounts equal to the balance of their respective capital accounts.
7) A sufficient amount of assets must be retained outside of the FLP for personal expenses. The amount of anticipated, normal expenses that will be incurred on an annual basis, in addition to potential expenses for estate and other administrative expenses and debts of a decedent should be determined. An analysis should be prepared which illustrates that the income generated by the assets outside of the FLP will be sufficient to meet the anticipated annual expenses. Alternatively, the analysis could demonstrate that the “liquid assets” outside of the FLP will be sufficient to satisfy the recurring expenses that will be incurred over the taxpayer’s life expectancy and the estimated expenses, debts, and taxes that will need to be satisfied upon the taxpayer’s death.
8) Avoid commingling of personal and FLP assets.
9) Adhere to the formalities regarding the formation of the FLP. Assets to be contributed to the FLP should be retitled accordingly. There must be a “legal transfer” of assets to the FLP via deed, assignment, stock transfer, or other appropriate method.
10) To avoid an argument that the taxpayer is standing on both sides of the transaction, consider forming the FLP with nonfamily members. Actual negotiations should be conducted with respect to the FLP formation and funding, and all parties should engage separate counsel to represent them.
1 David Pratt and Jennifer E. Zakin, Estate of Thompson: Respecting the Formalities of the Family Limited Partnership, 77 Fla. B. J. 51 (March 2003).
2 See Estate of Strangi v. Commissioner, T.C. Memo 2003-145; Kimbell v. United States, 371 F.3d 257 (5th Cir. 2004); Turner v. Commissioner, 382 F.3d 367 (3d Cir. 2004); Estate of Abraham v. Commissioner, 408 F.3d 26 (1st Cir. 2005); Estate of Hillgren v. Commissioner, T.C.M. 2004-46; Estate of Bongard v. Commissioner, 124 T.C. No. 8 (2005); Estate of Bigelow v. Commissioner, T.C. Memo 2005-65; Estate of Strangi v. Commissioner, No. 03-60992, 2005 U.S. App. LEXIS 14497 (5th Cir. July 15, 2005); Estate of Korby v. Commissioner, T.C. Memo 2005-102; Estate of Korby v. Commissioner, T.C. Memo 2005-103; Schutt v. Commissioner, T.C. Memo 2005-126.
3 See, e.g., S. Stacy Eastland, New Tax Court Cases: Developments in Planning with Family Limited Partnerships, 29 Actec J. 2 (Fall 2003); Michael D. Mulligan, Courts Err in Applying § 2036(a) to Limited Partnerships, 30 Estate Planning 486, 490 (October 2003).
4 The discussion of the facts of the cases herein is limited to those facts which are necessarily relevant to the “bona fide sale exception.”
5 I.R.C. §2036(a).
6 Kimbell v. United States, 371 F.3d 257 at 269.
7 Id. at 262 (citing Wheeler, 116 F.3d 749 at 759).
8 Id.
9 Id. at 263.
10 Id. (citing Wheeler, 116 F.3d 749 at 767).
11 Id. at 263.
12 Id. (citing Black’s Law Dictionary 161 (5th ed. 1979).
13 Id. at 264.
14 Id.
15 Id. at 266 (citing Stone, 86 T.C.M (CCH) at 580).
16 Id. at 267.
17 Because the executor of the estate, Betsy T. Turner, resided in Pennsylvania, venue was proper under the Third Circuit pursuant to §7482(b)(1) of the Code. Thus, the name of the case was changed accordingly.
18 Turner, 382 F.3d 367 at 379.
19 Id.
20 Id. at 380.
21 Id. at 381.
22 Id. at 383.
23 Strangi, No. 03-60992, 2005 U.S. App. Lexis 14497 at 21.
24 Id. (citing Kimbell, 371 F.3d at 262).
25 Id. at 21.
26 Id. at 23.
27 Id. at 25 (citing Kimbell, 371 F.3d at 267).
28 Id.
29 Id. at 27.
30 Id. at 28.
31 Id.
32 Id.
33 Id. at 29.
34 Id. at 30.
35 Id. at 31 (citing Kimbell, 371 F.3d at 268).
36 Bongard, 124 T.C. No. 8 at 40 (citing Estate of Harrison v. Commissioner, T.C. Memo 1987-9; Harper, T.C. Memo 2002-121; Turner, 392 F.3d 367 (3d Cir. 2004), affg. Thompson, T.C. Memo 2002-246; Strangi, T.C. Memo 2003-145; Stone, 86 T.C.M. (CCH) 551 (2003); Hillgren, T.C. Memo 2004-46.
37 Id. at 40.
38 Id. at 51.
39 Id. at 61.
40 Id. at 59.
41 Id. at 66.
42 Id. at 68.
43 Id. at 69 (citing Harper, T.C. Memo 2002-121).
44 Bigelow, T.C. Memo 2005-65 at 35.
45 Id. at 27.
46 Id. at 29.
47 Id. at 31.
48 Id.
49 Id.
50 Id. at 34.
51 Estate of Korby v. Commissioner, T.C. Memo 2005-102 and Estate of Korby v. Commissioner, T.C. Memo 2005-103 are companion cases. Such cases are virtually identical and involve a husband and wife who died within five months of each other.
52 Korby, T.C. Memo 2005-102 at 17.
53 Id. at 23.
54 Id. at 24 (citing Hillgren, T.C. Memo 2004-46).
55 Id. (citing Thompson, 392 F.3d 367 (3d Cir. 2004), affg. T.C. Memo 2002-246; Harper, T.C. Memo 2002-121).
56 Id. (citing Thompson, 392 F.3d 367 (3d Cir. 2004), affg. T.C. Memo 2002-246).
57 Id. (citing Hillgren, T.C. Memo 2004-46).
58 Id. at 25.
59 Id. at 26.
60 Schutt, T.C. Memo 2005-126 at 63.
61 Id. at 69.
62 Id. at 71.
63 Id. at 77.
64 Id. at 83.
65 Id. at 80.
David Pratt is a partner in the personal planning department of Proskauer Rose, LLP, in its Boca Raton office. Mr. Pratt specializes in estate and gift, generation-skipping transfer, and fiduciary income taxation. He is a fellow of the American College of Trust and Estate Counsel and is Florida board certified in taxation and wills, trusts, and estates.
Jennifer E. Zakin is an associate in the personal planning department of Proskauer Rose, LLP, in its Boca Raton office. Ms. Zakin received her J.D. from Nova Southeastern University Law School and has an LL.M. in taxation from the University of Miami Law School.
This column is submitted on behalf of the Tax Section, Mitchell I. Horowitz, chair, and Michael D. Miller, Benjamin A. Jablow, and Normarie Segurola, editors.
