In Strangi (Albert Strangi et al. v. Commissioner; No. 03-60992, 5th Cir., July 15, 2005),  the Fifth Circuit affirmed the Tax Court decision (T.C. Memo 2003-145 (May 20, 2003)) that the assets transferred to a family limited partnership (FLP) were includible in the estate under Section 2036(a)(1). In affirming the finding of an implied agreement by the Tax Court, the Fifth Circuit noted that Mr. Strangi continued to occupy the residence transferred to the FLP, received substantial monthly payments out of the FLP and that the FLP paid funeral expenses, estate administration expenses, specific bequests and various personal debts of Mr. Strangi. The Court also rejected the contention of the estate that the bona-fide sale exception applied, given the lack of a substantial non-tax purpose.

Because the Court concluded that Section 2036(a)(1) applied (i.e., that the taxpayer had retained possession and enjoyment of the property following the transfer), it was not necessary for the Court to address the issue many had hoped it would, that being whether or not the taxpayer had retained the right to designate the persons who could enjoy the property, thereby causing estate inclusion under Section 2036(a)(2). The Fifth Circuit’s failure to rule on the Tax Court’s finding that Section 2036(a)(2) applied to the transfer to the FLP leaves open whether another court would interpret the “right to control” who will enjoy the benefit of the property and/or its income as broadly as the Tax Court did in this case. The case can be found at this Web site.

Strangi serves as a reminder of what not to do with an FLP– retaining actual possession or use of property without reimbursement after transfer; making improperly-planned distributions; and paying personal expenses. The AICPA Tax Division’s Trust, Estate, and Gift Tax TRP highlights these and many other factors in its Checklist of Issues to Consider in Yearly Administration of Family Limited Partnerships.