Wills, Trusts & Estates Prof Blog

Editor: Gerry W. Beyer
Texas Tech Univ. School of Law

Sunday, December 4, 2011

Estate Tax Inclusion of Transfers to FLPs

BrentBrent B. Nicholson (Professor of Law, Bowling Green State University) recently published his article entitled , Recent Developments Concerning the Estate Tax Inclusion of Transfers to a Family Limited Partnership, 26 Akron Tax J. 41 (2001). The introduction to the article is below:

In February, 2010 the taxpayer in Estate of Shurtz v. Commissioner successfully challenged the Internal Revenue Service’s attempt to include the value of underlying assets transferred to a family limited partnership (FLP) in the decedent’s gross estate. The Tax Court decision is the most recent example of the tug of war between taxpayers and the Service, arbitrated by the tax and United States appellate courts, over whether lifetime contributions made to a FLP are included in a decedent’s estate at their full date of death value or, rather, the discounted value of the fractional partnership interest owned at death.

The tool the Service uses to argue in favor of full estate inclusion is section 2036(a) of the Internal Revenue Code. That section draws into a decedent’s estate the value of assets transferred during life over which the decedent retained a lifetime interest or control, or retained the power to direct the enjoyment of the property. The United States Supreme Court has referred to section 2036 as reaching “transfers that were essentially testamentary.” While the very validity of the FLP was initially challenged by the Service, its emphasis has now shifted to argue the estate tax inclusion under section 2036. The courts have steered a middle course between capitulation to the Service’s position and a blanket rejection of it. The Shurtz case is the latest iteration of this ongoing dispute which is largely fact dependent.Nevertheless, the case law has developed an increasingly well-defined path that taxpayers can follow. After a brief examination of the statutory and regulatory background, this paper will summarize the significant cases prior to Shurtz, the significant cases in the last year, discuss the facts and holdings of Shurtz, and then outline the coordinates that have emerged to guide taxpayers.


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