Full value of FLP included in estate.

• Author: Korby, Edna
• Position: Family limited partnerships

The Eighth Circuit recently upheld another case in which taxpayers retained the right to income from property they transferred to a family bruited partnership (FLP) prior to their deaths, and found that the transfer was not a bona fide sale for consideration.

Facts

A and E formed a revocable living trust in 1993, contributing their family home, household furnishings, a vacant lot, a money market account, bank accounts and monthly Social Security income. A year later, they created a limited partnership (LP) (KPLP), transferring stocks and bonds for a 98% LP interest. The living trust transferred a savings account for a 2% KPLP general partnership interest.

In 1995, A and E gifted the 98% KPLP interest to four irrevocable trusts created for their sons; each received a 24.5% interest in KPLP. For three years before A and E's deaths in 1998, KPLP made several distributions to the living trust as general partner, as well as a limited number of distributions to the four sons' trusts as limited partners. These payments were used for E's nursing home costs and to pay the couple's taxes, medical bills and other expenses. Payments to the limited partners during the same period were intended to pay their income taxes.

Returns

On gift tax returns, A and E claimed a 43% discount on the book value of each gift, because the LP interests were minority interests, their transfer was restricted and they lacked management control. A and E's estate tax returns did not include the value of the assets transferred to KPLP in 1995. The IRS issued deficiency notices to both estates, including the full value of the KPLP assets, on the grounds A and E retained for their lives "the possession or enjoyment of, or the right to the income from, the property" under Sec. 2036. The Tax Court also held that KPLP did not satisfy the Sec. 2036(a) exception for bona fide sales. The taxpayers appealed to the Eighth Circuit.

Analysis

Sec. 2036 provides in relevant part:

The value of the gross estate 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 ... by trust or otherwise, under which he has retained for his life or for any period not ascertainable without reference to his death ... the possession or enjoyment of, or the right to the income from, the property.

Retained rights: We find no clear error in the Tax Court's determination that an implied agreement existed that allowed A and E to retain...