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In the midst of a flurry of litigation in the Internal Revenue Service’s continuing war against the use of family limited partnerships (FLPs) for wealth planning and transfer purposes, the U.S. Tax Court decided Estate of Albert Strangi v. Commissioner(2000). According to the opinion, the FLP in Strangi was formed two months before the decedent’s death by the decedent’s attorney-in-fact, and the decedent transferred $10 million of largely marketable assets to the FLP in exchange for a 99 percent limited partner interest in the FLP and a 47 percent interest in the corporate general partner. As the opinion notes, upon Albert Strangi’s death, his estate claimed a substantial discount on the estate tax value of the decedent’s interest in the partnership. The IRS aggressively challenged the validity of the Strangi FLP on grounds that, if successful, could have restricted the use of FLPs for wealth transfer purposes. Two months prior to the trial, the IRS obtained a surprise victory at the U.S. Tax Court on its �2036 claim in Estate of Charles Reichardt v. Commissioner(2000) and sought to amend its pleadings in Strangito add �2036 claims that the decedent retained either the benefit from the transferred property or the right to designate who would benefit from that property. Section 2036(a)(1) drags back into a decedent’s gross estate assets transferred during life in which the decedent retained the possession or enjoyment of the property or its income. The Tax Court denied the IRS’s request to amend, stating that the request was untimely. The U.S. Tax Court was deeply divided on many of the legal theories asserted by the IRS at trial. According to the opinion, the court expressed great frustration over the creation of the FLP by the decedent under circumstances that effectively allowed the decedent to unilaterally reduce the value of his gross estate. While the court ultimately rejected all the IRS’ claims except valuation, the opinion suggested that the IRS would have prevailed on a �2036 claim had it been allowed. SECOND CHANCE This summer, the 5th U.S. Circuit Court of Appeals affirmed the U.S. Tax Court’s opinion in Strangion all substantive matters; however, the case was remanded on procedural grounds to consider the application of �2036. As a result, the IRS was granted a second chance to utilize �2036 to assault the Strangi FLP. Recently, the IRS has increasingly asserted and prevailed on its �2036(a)(1) claims of retained enjoyment by the decedent, and the number of U.S. Tax Court decisions supporting �2036(a)(1) claims continues to grow. Section 2036(a)(1) often is applied where there exists an implied agreement among the family members that the decedent will retain for his lifetime the economic benefits from the property transferred to the FLP. Evidence of such an agreement has been found by: 1. the commingling of FLP assets with those of the decedent; 2. the making of disproportionate distributions in favor of the decedent; 3. the transfer of substantially all the decedent’s assets to the FLP; 4. the lack of partnership meetings; and 5. the delayed funding of the FLP. There is little information in the Strangiopinion with which to assess whether an implied agreement existed. Such a determination will depend upon the facts surrounding the transfer and the subsequent use of the transferred property that will be developed on remand; however, the burden of disproving the existence of such an implied agreement will rest with the Strangi estate. This burden of proof and the U.S. Tax Court’s original assertion in Strangithat �2036 should apply may bode well for the IRS on remand. R. Paul Lancaster is an associate with the estate-planning, probate and nonprofit organizations section of Kelly Hart & Hallman in Fort Worth. His e-mail address is [email protected].

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