It is the season of giving which ultimately fuels the season of estate and gift tax audits.
Many of the questions raised in an audit can be anticipated by prior cases, such as: review of the decedent’s background, lifestyle, gifts and assets (Estate of Harper, TC Memo 2002-121); information about the donor’s health, intent and entity operation (Estate of Rosen, TC Memo 2006-115); the order in which transactions occurred (Estate of Shepard, 115 TC 376 (2000), aff’d 283 F3d 1258 (11th Cir. 2002)); and information about meetings with the client(s) and the reason for the entity, the manner in which business responsibilities were assumed, and the documentation of legitimate non-tax reasons (Estate of Rosen, TC Memo 2006-115). One of the common gift or estate tax audit triggers occurs when a family limited partnership (FLP) or a limited liability company (LLC) is involved. This is because these entities are utilized by donors who may not completely understand the risks associated with planning with these entities or who demand continued control. The result is that the Internal Revenue Service may claim the estate retained certain enumerated rights over the entity, and pursuant to §2036 of the Internal Revenue Code, the full value of the transferred asset should be included in the estate at the date of death value, not at a discounted value.
