The Ebb and Flow of the Federal Tax Role of Fiduciary Duties in Family Limited Partnerships: From Byrum to Bongard

Resumen

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I. Introduction . II. Nature and tax motivation of family entities. III. Legislative history of section 2036 & the byrum case . A. Legislative History of Section 2036(a)(1) (Possession and Enjoyment). B. Legislative History of Section 2036(a)(2) (The Right To Designate). C. The Byrum Case. 1. Byrum and Section 2036(a)(1). 2. The Byrum Case and Section 2036(a)(2). 3. Lower Court Fiduciary Duty Expansion of Byrum(Estate of Gilman). D. Legislative History of Section 2036(b) (The Right To Vote). IV. The expanding role of fiduciary duties . A. The Post-Byrum Era (Section 2036(a)(1) Focus, 1972-2003). B. The Strangi Era. 1. Strangi III. 2. Strangi IV. C. The Bongard Case. 1. The Majority Opinion. 2. Dissenting Fiduciary Duty Opinion. V. Conclusion .

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Extracto

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The Ebb and Flow of the Federal Tax Role of Fiduciary Duties in Family Limited Partnerships: From Byrum to Bongard

This Article was completed while I was a Visiting Professor at George Washington University Law School, where I received superb research assistance from Kathryn A. Todryk, J.D. 2008. My understanding of law in general has been enriched by an ongoing dialogue with my colleague and friend, Professor Daniel S. Kleinberger.

The fiduciary duty impact theory, developed by the Supreme Court of the United States in its 1972 opinion in United States v. Byrum,1 has been one of the most important and controversial developments in estate taxation involving transfers to family-controlled entities.2 In 2003, the Tax Court's decision in Estate of Strangi v. Commissioner (Strangi III)3 sent shock waves throughout the estate planning community when it became the first case to reject the family limited partnership estate planning technique by expanding the reach of Internal Revenue Code (Code) section 2036.4 The expansion was largely achieved by rejecting Byrum's fiduciary duty impact theory,5 which had been utilized, with the Internal Revenue Service (Service) sanction, to negate the application of section 2036.6Faced with mounting failures on other theories,7 the Service reversed course and turned to section 2036 in an attempt to distinguish Byrum factually.8

In many ways, Strangi III presented government-friendly facts. Albert Strangi made a deathbed transfer of 98% of his personal and investment assets to a family limited partnership,9 which was formed and managed by his son-in-law under a power of attorney.10 Under this set of facts, the constraining fiduciary duty feature of Byrum was not well served. There was no transfer of an operating business with a substantial unrelated minority ownership interest to add substance and real meaning to the fiduciary duties.11 No matter how strenuously argued, fiduciary duties owed in a friendly family limited partnership are simply too rarely enforced to add meaning.12 Unfortunately, armed with its Strangi III victory, the Service ramped up the Byrum-slayer theory, applied it to very different facts in Estate of Bongard v. Commissioner,13 and was rewarded with an unwarranted victory.14 Unlike the deathbed investment-asset transfers in Strangi III, the Bongard transfers were made by a healthy businessman of his ownership in a successful, operating business.15 He made the transfers along with a substantial cadre of unrelated Japanese corporations.16

This Article analyzes the origins and legacy of the fiduciary duty impact theory to challenge conventional Bongard-styled wisdom. It chronicles the statutory development of section 2036 and the fiduciary duty impact theory to demonstrate that the theory arose to deal with specific instances of control over property transferred to family members, rather than transfers to a family entity controlled by the transferor. For this reason, the theory was not initially utilized to attack transfers to controlled entities. The theory's recent deployment arose because of the failure of other theories, not because of its logical force. As a result, Bongard and its likely progeny are aberrations; they are not a proper basis for extending the theory to contravene a valid and existing Supreme Court Byrum opinion. As in 1976 when it enacted section 2036(b) to negate Byrum in the context of transfers of voting stock while retaining the vote,17 Congress, and not the Courts, must remedy the alleged estate tax abuse in the form of family limited partnerships.18

I. Introduction .

Family limited partnerships19 have become ubiquitous asset protection20 and estate tax planning reduction vehicles,21 and they now share center stage attention at the Service,22 along with the venerable tax shelter.23 Given the vigorous audit attention, past Service losses under various theories,24 and its new victories under section 2036,25 is the hype and promise a myth or a reality? Can taxpayers truly transfer all or most of their assets to an entity controlled by a family member and achieve adequate estate tax savings, justifying the probable significant professional costs to defend these positions? The professional defense costs are easily quantifiable, but are the estate tax savings as easily quantifiable? Specifically, are the realistic requirements necessary to achieve such savings adequately known by family practitioners and, if so, are wealthy family members willing to abide by the complex rules associated with the management structures of the family controlled entities? For the most part, this Article is a story about the estate tax-saving virtues and the necessary profession...

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