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Learning Objectives (What You Asked)YOUR QUESTION(S) Objective one
What You Will Need
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Plain English Analysis What it does, Why it works - The Answer, Alternatives
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YOUR ANSWERS What it does, Explanation of this topic and how it may affect you: Family Limited Partnerships Are Approved by
U.S. Tax Court A family limited partnership won't be disregarded for federal tax purposes
– and therefore the value of the taxpayer's interest can be discounted, says
the en banc U.S. Tax Court in two decisions released on the same day.
As a result, the taxpayers are entitled to valuation discounts for lack of
control and lack of marketability.
In both cases, the IRS argued that the FLP should be disregarded because it
was formed purely for tax reasons.
But the court disagreed, finding that the FLPs were valid under state law.
Estate planning lawyers should find "a considerable amount of
relief" in the cases, says Ronald Aucutt, an estate planning attorney in
McLean, Va.
"The rulings are a reminder that the observance of formalities in
forming an FLP is very important," he adds.
However, in both cases the court rejected the 44% discounts requested by the
taxpayers. The lesson there, says Aucutt, "is that appraisers have to
explain what they're doing. They can't expect judges to connect the dots for
them."
In the first case, the taxpayer transferred over $9.8 million to an FLP in
return for a 99% interest. After he died, his children received a combined total
of over $2.6 million in distributions from the FLP.
The IRS argued that the FLP was set up solely to avoid taxes and therefore
should be disregarded in valuing the assets in the taxpayer's estate.
But in an 8-5 opinion, the court refused to disregard the partnership for tax
purposes even though it acknowledged "there are reasons to be skeptical
about the nontax motives for forming" the partnership.
The FLP "was validly formed under state law. The formalities were
followed, and the proverbial i's were dotted and t's were crossed...Regardless
of subjective intentions, the partnership had sufficient substance to be
recognized for tax purposes. Its existence would not be disregarded by potential
purchasers of decedent's assets, and we do not disregard it in this case."
However, the court declined to adopt the taxpayer's suggested discount of 44%
and instead applied discounts of 19 and 31 percent to the taxpayer's shares in
the FLP and the corporate general partner.
A dissenting judge argued that "the transfer of property to the
partnership [was] a masquerade…[I]t is clear that the transfer was made to
reduce the value of decedent's assets for estate tax purposes, while at the same
time allowing the full value of decedent's property to pass to his
children."
In the second case, the taxpayer contributed over $2 million to a family
limited partnership, and then transferred a 22.3% interest in the FLP to each of
his two children.
The court refused to disregard the FLP because "the steps followed in
the creation of the partnership satisfied all requirements under [state] law,
and...the partnership has been a limited partnership under [state] law since it
was created...[The taxpayer has] burdened the partnership with restrictions that
apparently are valid and enforceable under [state] law...
"We apply the willing buyer, willing seller test to value the interests
in the partnership that [the taxpayer] transferred under [state] law. We do not
disregard the partnership because we have no reason to conclude from this record
that a hypothetical buyer or seller would disregard it."
However, the court refused to adopt the requested discount of 44% and instead
permitted a discount of 15% for lack of control and lack of marketability.
Click
here for the opinion in Estate of Strangi
Commissioner.
Click
here for the opinion in Knight
Commissioner.
Start of Plain English Section Why or How it works - Both Sides of the Equation and Examples: Start of Plain English Section Start of Plain English Section Start of Plain English Section Other Start of Plain English Section Reserved
Start of Plain English Section
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Technical Analysis & Citations What It does, Why it works -
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CommentaryPlease Read the following cases - in Adobe pdf format: Estate
of Strangi v. Commissioner
After concessions by the parties, the issues for decision are
(alternatively): (1) Whether the Strangi Family Limited Partnership (SFLP)
should be disregarded for Federal tax purposes because it lacks business purpose
and economic substance; (2) whether the SFLP is a restriction on the sale or use
of property that should be disregarded pursuant to section 2703(a)(2); (3)
whether the transfer of assets to SFLP was a taxable gift; and (4) if SFLP is
not disregarded, the fair market value of decedent’s interest in SFLP at the
date of death.
Knight
v. Commissioner
On Dec. 28, 1994, Ps established a trust of which P-H was trustee (the
management trust), a family limited partnership (the partnership) of which the
management trust was the general partner, and trusts for the benefit of each of
Ps' two adult children (the children’s trusts). Ps transferred three parcels
of real property used by Ps and their children and some financial assets to the
partnership. Each P transferred a 22.3-percent interest in the partnership to
each of their children’s trusts. The parties stipulated that the steps to create the partnership satisfied all
requirements under Texas Law, and that the partnership has been a limited
partnership under Texas law since it was created.
Start of Revenue Procedures Section Start of Private Letter Rulings
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Tax KillersThis is about Activity Based Taxplanning - maximizing deductions, minimizing cash outlay and maximizing the amount of cash retained and the net worth. Activity Based Taxplanning (ABT) is a methodology developed by Bob Parrish CPA, that assists people with the tax issues by focusing on the activity (or actions - events) that are being undertaken or contemplated (or have already taken place). The, research is compiled from the myriad of sources to help you complete the activity with the least tax cost, while maintaining compliance the tax laws, other laws and regulations and place yourself in a position to protect your objectives. Tax is a subject that many view in order to cut costs. Taxes are a cost just as any other cost. It happens this cost is somewhat intangible and is defined by legislation without a tangible item to view and control. The money is spent and the control of the expenditure is more appropriately administered by someone trained in the law.
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Cost Killers Management Info Sys, Cost Acctg, Activity Based Costing)This is about Activity Based Costing - methods to cut costs, management accounting, management information systems, decision support systems - in general about being a manager.
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Preparing for your CPA, attorney, or preparing to start your own What to gather -
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From Your Other Business, or Financial Records From Corporation Records or Organization Records (meetings, etc.) Start of Preparing For You CPA Section
Forms - checklists, time-line to do, etc. Assistance - What To Do -
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Financial Accounting: Bookkeeping & Financials
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Financial Statement Presentation Back to Start of Financial Accounting: Bookkeeping & Financials Back to Start of Financial Accounting: Bookkeeping & Financials Back to Start of Financial Accounting: Bookkeeping & Financials Back to Start of Financial Accounting: Bookkeeping & Financials Bookkeeping Methods - Cash, Accrual and Other Back to Start of Financial Accounting: Bookkeeping & Financials How the Business Entity Affects the Recording
Compliance - what is required for protection, defense, etc.Compliance Checklist Back to Start of What is required for protection, defense, etc.
Alerts & Dangers - Risks, Asset Protection, IRS DefenseClick on the title to expand or collapse the topics
Back to Start of Alerts & Dangers Back to Start of Alerts & Dangers Back to Start of Alerts & Dangers Back to Start of Alerts & Dangers
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Spreadsheets & Computations
Spreadsheet #1 Back to Start of Spreadsheets & Math
Contracts, Trusts, etc.Agreement #1 Back to Start of Contracts, Trusts, etc.
Reports RequiredReport #1 Back to Start of Reports Required
Checklists for DeploymentChecklist #1 Back to Start of Checklists - Deployment
Checklist for MonitoringChecklist #1 Back to Start of Checklist - Monitoring
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Introduction
Objectives - Your Question
Analyses
Plain English Analysis - Your Answers
Increase Wealth
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flp_ustc_approvals.htm
