Sheppard on Estate of Strangi, Family Limited Partnerships, and Business Purpose

Lee A. Sheppard (Contributing Editor, Tax Analysts) has published Business Purpose for Family Limitd Partnerships?, 108 Tax Notes 865 (Aug. 22, 2005), also available on the Tax Analysts web site as Doc 2005-1749, 2005 TNT 162-4. The article discusses the Estate of Strangi decisions, family limited partnerships, and business purpose.  Here is part of the Introduction:

[W]hat does the Fifth Circuit's affirmation of the family limited partnership case, Estate of Strangi v. Commissioner, Dkt. No. 03-60992 (July 15, 2005), tell us? Well, estate planners breathed a sigh of relief that the IRS once again did not get a per se rule that these hokey deals do not work. The IRS likewise breathed a sigh of relief that the apparent damage done by Kimbell v. United States, 371 F.3d 257 (5th Cir. 2004), in which the Fifth Circuit rejected the recycling theory, was limited.

In so limiting Kimbell, the Fifth Circuit opened the door to using business-purpose case law to effectively disregard a family limited partnership. Four months earlier, in Estate of Bongard v. Commissioner, 124 T.C. No. 8 (2005), the Tax Court made an even stronger statement about the application of the business purpose doctrine to the creation of family limited partnerships, while it bucked the Kimbell holding on what constitutes adequate consideration for the bona-fide-sale exception to § 2036(a). Bongard can be appealed to the Eighth Circuit, which is likely given that the tax deficiency is larger than most taxable estates.

So where are we now? It will be much more difficult, if not impossible, for the family limited partnership doing nothing but holding the portfolio assets of some core affluent decedent to be justified by a made-up business purpose. The business purpose inquiry comes late, after the inquiry whether the decedent retained possession and enjoyment of the transferred assets (or controlled their disposition), but the point is that it comes eventually. Estate planners have lost their bid to keep business purpose out of the evaluation of the paper transactions they create.