Taxpayer loses FLP appeal on retained rights.

• Author: Gulig, Rosalie
• Position: Family limited partnership

S transferred approximately $10 million worth of personal assets to a family limited partnership (SFLP) as his health began to fail. On his death, S's estate (E) filed an estate tax return based on the value of his interest in SFLP, as opposed to the actual value of the transferred assets.

After protracted litigation, the Tax Court found that S had retained an interest in the transferred assets such that they were properly included in his estate under Sec. 2036(a), and it sustained the IRS's deficiency; see Est. of Albert Strangi, TC Memo 2003-145. E appealed to the Fifth Circuit.

E advances two primary arguments on appeal, both of which hinge on Sec. 2036(a)'s application. First, it contends that the Tax Court erred in holding that S retained (1) "possession or enjoyment" of the property he transferred to SFLP or (2) the right to designate who would possess or enjoy it. If S did not retain such an interest, Sec. 2036(a) does not apply. Second, E contends that, even if S retained possession or enjoyment of the assets, the Tax Court erred in holding that the transfer did not fall within Sec. 2036(a)'s "bona fide" sale exception.

Possession and Enjoyment

The core of E's argument on appeal is that the Tax Court erred in concluding that S retained possession or enjoyment of the assets he transferred to SFLP. Sec. 2036(a) is one of several Code provisions intended to prevent parties from avoiding the estate tax by means of testamentary substitutes that permit a transferor to retain lifetime enjoyment of purportedly transferred property. Specifically, under Sec. 2036(a), property transferred by a decedent will be included in the taxable estate if, after the transfer, the decedent retains either (1) "possession or enjoyment" of the transferred property; or (2) "the right ... to designate the persons who shall possess or enjoy the property or the income therefrom."

Transferors retain "possession or enjoyment" of property, within the meaning of Sec. 2036(a)(1), if they retain a "substantial present economic benefit" from the property, as opposed to "a speculative contingent benefit which may or may not be realized" (Byrum, 408 US 125 (1972)). Regs. Sec. 2036-1(a) further requires that there be an "express or implied" agreement "at the time of the transfer" under which the transferor will retain possession or enjoyment of the property.

In the case at bar, the benefits retained by S--including, for example, periodic payments made prior to his death...