Family Limited Partnerships - Appeals settlement Guidelines

The IRS recently issued its Appeals Settlement Guidelines for Family Limited Partnerships and Family Limited Liability Companies. The guidelines issued cover four separate topics:

(i) whether the fair market value of transfers of family limited partnership or corporation interests, by death or gift, is properly discounted from the pro rata value of the underlying assets;
(ii) whether the fair market value at date of death of Code section 2036 or 2038 transfers should be included in the gross estate;
(iii) whether there is an indirect gift of the underlying assets, rather than the family limited partnership interests, where the transfers of assets to the family limited partnership (funding) occurred either before, at the same time, or after the gifts of the limited partnership interest were made to family members;
(iv) whether an accuracy-related penalty under section 6662 is applicable to any portion of the deficiency.

The IRS recently issued its Appeals Settlement Guidelines for Family Limited Partnerships and Family Limited Liability Companies. The guidelines issued cover four separate topics:

(i) whether the fair market value of transfers of family limited partnership or corporation interests, by death or gift, is properly discounted from the pro rata value of the underlying assets;
(ii) whether the fair market value at date of death of Code section 2036 or 2038 transfers should be included in the gross estate;
(iii) whether there is an indirect gift of the underlying assets, rather than the family limited partnership interests, where the transfers of assets to the family limited partnership (funding) occurred either before, at the same time, or after the gifts of the limited partnership interest were made to family members;
(iv) whether an accuracy-related penalty under section 6662 is applicable to any portion of the deficiency.

As to the issue of valuation/discounts the guidelines noted that the United States Tax Court had in three cases McCord v. Commissioner, 120 T.C. 358 (2003); Lappo v. Commissioner, T.C. Memo 2003-258 and Peracchio v. Commissioner, T.C. Memo. 2003-280 allowed combined discounts of 32%, 27%, and 29%, respectively. That is the good news. However, the news may even be better as it must be remembered that McCord was reversed and the discounts claimed by the estate were upheld by the 5th Circuit. See Succession of McCord v. Commissioner, 461 F.3d 614 (5th Cir. 2006). In addition, in its guidelines the IRS tries to distinguish Estate of Kelley v. Commissioner, T.C. Memo. 2005-235 were the Court approved of a combined discount of approximately 35%. Thus, the discounts allowed by the Courts may even be higher than the discounts referred to by the IRS in its settlement guidelines. For an interesting article concerning the amount of discounts being obtained in South Florida See Pratt, Kiziah, Pokorny, Family Limited Partnerships: Are They Still Alive and Kicking,Vol. 81 Florida Bar Journal No. 1 (January 2007).

As to the issue of section 2036, the IRS recognized that the issue will come down to whether the taxpayer retained a sufficient interest in the property or whether there was a bona fide sale for full and adequate consideration. It should be noted that the decision in Estate of Bongard v. Commissioner, 124 T.C. 95 (2005) was entered on September 7, 2006 and it appears that no appeal was filed. For an interesting discussion as to the issues surrounding section 2036 we recommend the following three part articles: August, Dawson, Maxfield, and Pollingue, The IRS Continues its Section 2036 Assault on FLPs – (Part 1 through Part 3), Business Entities (WG&L).

As to the issue of gift on formation, the good news is that the argument is not nearly as broad as originally advocated by the IRS. Rather, the argument is being limited to those arguments raised in Shepherd v. Commissioner, 115 T.C. 376 (2000).

As to the impositions of penalties, the IRS's position may be distributing to some practitioners. In the Appeals Coordinated Issue Settlement Guidelines Issue, the IRS relies on Long Term Capital Holdings v. United States, 330 F. Supp.2d 122, 199 (D. Conn. 2004), aff’d 2005 U.S. App. LEXIS 20988 (2005). Long Term Capital is a tax shelter case wherein the Court imposed on 40% penalties where the Court found that the tax opinion was not timely received and the law firm did not conduct sufficient due diligence in discerning the validity of the taxpayer’s factual representations. It is interesting that the IRS is citing to tax shelter cases when analyzing the reasonable cause exception as it applies to estate tax issues. The days of relying on the planner’s advice and the planner not performing any subsequent due diligence may have come to an end.