Estate & Gift Valuation E-Flash

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ValuePoint Consulting Group, LLC
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FCG Estate & Gift Valuation E-Flash
www.GoFCG.org
Edited by John Gilbert, CPA/ABV, ASA
Issue 7:3
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CITATION:
Albert Strangi et al. v. Commissioner , No. 03-60992, United States Court of Appeals for the Fifth Circuit, July 15, 2005

SUMMARY:
The United States Court of Appeals for the Fifth Circuit has upheld a US Tax Court decision that the full amount of the assets transferred to a family limited partnership must be included in decedent's estate under §2036(a).

DETAILS:
Shortly before his death in 1994, Mr. Strangi transferred 98% of his assets to a family limited partnership (SFLP). In 2000, a sharply divided Tax Court held: (1) SFLP was valid under State law and would be recognized for estate tax purposes, (2) I.R.C. §2703(a) did not apply to the partnership agreement, and (3) the transfer of assets to the partnership was not a taxable gift. (Strangi I)

The IRS appealed the decision and the Fifth Circuit considered the IRS's request for leave to amend in order to add a §2036 claim. Under §2036, the estate would be required to include the assets transferred by Mr. Strangi to SFLP rather than just his partnership interest in SFLP. The Fifth Circuit disagreed with the Tax Court's denial of the IRS leave to amend and reversed the Tax Court on that single issue.

Upon remand, the Tax Court determined that the transfers to SFLP met the tests under both §2036(a)(1) and §2036(a)(2) and ruled that the full amount of the assets transferred must be included in decedent's estate. (Strangi II) The Estate appealed this ruling to the Fifth Circuit, which affirmed the Tax Court decision.

The Fifth Circuit determined that there was no clear error in the Tax Court's finding under §2036(a)(1) that there was an implicit agreement with the Strangi children that Mr. Strangi would retain enjoyment of his property after the transfer to SFLP. For example, Mr. Strangi lived in a house he transferred to the partnership, but the partnership did not receive rent until more than two years after he died. In addition, Mr. Strangi held few assets outside of SFLP and relied on partnership distributions to pay a number of personal expenses as well as many post death expenses.

The estate also argued that the “bona fide sale for an adequate and full consideration” exception should apply to the transfer of assets to SFLP. The Tax Court agreed that there was “full and adequate consideration” but determined there was no “bona fide sale.” The Fifth Circuit adopted the position that a sale is bona fide if, “as an objective matter, it serves a ‘substantial business (or) other non-tax' purpose.” In Tax Court, the estate advanced five non-tax rationales for Mr. Strangi's transfer of assets to SFLP. The Fifth Circuit carefully noted that they found no “clear error” by the Tax Court in rejecting these rationales, but not whether they would have reached the same conclusion.

Conclusion :
This is certainly a clear win for the IRS in the “taxpayer friendly” Fifth Circuit. Unfortunately for estate planners, the Fifth Circuit opinion offered no guidance on the decision it might have reached on the bona fide sale test had it been presented the same facts as the Tax Court.

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