Recent developments: FLPs, option income and home office depreciation.

• Author: Josephs, Stuart R.
• Position: Federaltax

In A. Strangi Estate (No. 03-60992), the Fifth Circuit Court of Appeals affirmed the Tax Court and decided July 15, 2005 that the full value of assets transferred by Albert Strangi to a family limited partnership (FLP) was includible in his gross estate under IRC Sec. 2036(a)(1).

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This statute requires such a result where a decedent makes a transfer of property (except in a case of a bona fide sale for adequate and full consideration) under which the decedent retained for life the possession or enjoyment of, or the right to the income from, the property.

Two months before his death, Strangi created the FLP and its corporate general partner. He transferred approximately $10 million of investment assets to the FLP for a 99 percent limited partnership interest. The new corporation owned by Strangi and his daughter (on behalf of herself and siblings) contributed approximately $100,000 for a 1 percent general partnership interest.

The Fifth Circuit held that there was an implied agreement between Strangi and his children that he would retain the property's enjoyment after the transfer because:

1. The FLP's disbursements to meet the needs of Strangi and his estate;

2. His continued occupation of his residence after it was transferred to the FLP, where the accrued rent was unpaid for more than two years; and

3. Strangi's transfer of almost all his liquid assets to the FLP, leaving him with insufficient assets to meet his personal needs.

The court also rejected the estate's argument that the transfer was a bona fide sale since it lacked a substantial non-tax purpose.

Nonstatutory Option Income

Rev. Rul. 2005-48 (IRB 2005-32, 8/8/05) holds that an employee (E) who exercises a nonstatutory option before the end of a six-month "lock-up period" must recognize income from that exercise even if E's sale of the stock is restricted under the insider trading rules.

Facts: E is granted a nonstatutory option to purchase 100 shares of her employer's (X's) stock for $10 a share on Jan. 2, 2005. X sells its stock in an initial public offering on May 1, 2005.

As required by the underwriting agreement, E agrees not to dispose of any options or stock from May 1-Nov. 1, 2005, the lock-up period.

On May 1, 2005, X adopts an insider trading compliance program under which insiders, such as E, may trade X shares only between Nov. 5-Nov. 30, 2005.

X's stock is trading at more than $10 a share on Aug. 15, 2005. On that date, E exercises her option...