The litigation over valuation discounts associated with family limited partnerships and limited liability companies shows no signs of abating. Additional cases have been decided since we last wrote to you in August. In Estate of Clyde W. Turner, Sr. (August 30, 2011), the taxpayer formed a family limited partnership funded with investment assets and cash. Stock of Regions Bank made up 60% of the total assets of the partnership. The taxpayer retained $2 million of assets outside of the partnership. Gifts of limited partnership interests were made to the taxpayer's children.

Upon Clyde's death, the IRS took the position that the partnership's assets should be included in Clyde's gross estate for estate tax purposes under IRC Section 2036(a)(1) which includes assets that the decedent had transferred during his life but with respect to which he retained an interest. The court found that the decedent retained an interest in the assets because he paid himself excessive management fees from the partnership and he had stated that the Regions Bank shares should never be sold. The court also said that the assets would be includible in his estate under Section 2036(a)(2), which includes property where the decedent retains the right to determine who shall enjoy or possess the property. The decedent was the general partner and had discretion to determine when and if distributions would be made from the partnership. The decedent also had the right to amend the partnership agreement without any vote on the part of the limited partners. Even as to matters that did require a majority vote of the limited partners, Clyde and his wife retained more than 50% of the limited partnership interests.

The second case was Estate of Paul H. Liljestrand (November 2, 2011). Again, the issue was whether assets transferred to a family limited partnership should be included in the transferor's gross estate for estate tax purposes pursuant to IRC Section 2036(a)(1). In this case, it was easy for the court to conclude that the taxpayer had retained an interest in the property that he transferred to the partnership. He retained a preferred return that was high enough to consume all of the partnership's income, he did not retain sufficient assets outside of the partnership to pay his bills, and he received non-pro rata distributions from the partnership.

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