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Wednesday, June 07, 2006


In 1996, Lillie Rosen established a limited partnership and funded it with marketable securities and cash. A trust held for her benefit obtained a 99% limited partnership interest, and her children each acquired a 0.5% general partner interest. Through 2000, Ms. Rosen gifted away interests in the partnership, so that at her death in 2000 her trust and various family members and trusts owned limited partnership interests.

For estate tax purposes, the IRS sought to treat Ms. Rosen as owning all of the assets of the partnership in her gross estate for estate tax purposes pursuant to Code Section 2036(a). The Tax Court ruled in favor of the IRS.

Section 2036(a)(1) will treat a decedent as owning property that was transferred away so long as it was not transferred in a bona fide sale for adquate and full consideration if the decedent retained possession or enjoyment of, or the right to income from, the transferred property. In applying this rule, the first question is whether there was a bona fide sale for full value. The Tax Court indicated that for this exception to apply, it must be shown that (1) the family limited partnership was formed for a legitimate and significant nontax reason and (2) each transferor received a partnership interest proportionate to the fair market value of the property transferred. The Tax Court found that there was no legitimate and significant nontax reason for a whole host of reasons, including:

-the overwhelming reason for the partnership was to avoid Federal estate and gift taxes;

-the partners did not negotiate or set any of the terms of the partnership;

-the partnership was not funded until three months after it was set up;

-the childrens' share was de minimis;

-substantially all of the decedent's assets were transferred to the partnership;

-decedent was unable to meet her financial obligations without using funds of the partnership;

-the assets contributed were solely marketable securities and cash; and

-decedent was old and in poor health at the time of formation.

The Court thus found that there was no sale for full consideration. The Court then went on to find that the course of distributions and disbursements for the benefit of Ms. Rosen from the partnership, and the other facts of the situation, gave rise to an understanding for the decedent to retain possession or enjoyment of the transferred assets, and thus Section 2036(a) applied.

Note that the estate tax inclusion was not limited to the portion of the partnership owned by Ms. Rosen at her death, but also included the partnership assets attributable to the limited partnership interests that Ms. Rosen had gifted away prior to her death - her estate was thus being taxed on assets that were not owned by her at her death.

Estate of Rosen, TC Memo 2006-115.

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