What is a Woman?: And Other Essays (review)

Family Limited Partnerships Under Attack: Is the End Near?

“…In Strangi, for example, the Court flatly notes -we are skeptical of the estate's claim of business purposes‖ 26 since there were -no business assets contributed‖ 27 to the FLP. Similarly, in Knight, the facts stipulate that the FLP -never conducted any business activity,‖ 28 and the -partners never met and never discussed any business activity.‖ 29 Instead, the Court's application of the economic substance doctrine rests substantially on the second prong of the argument as to whether the taxpayer's economic position has been appreciably changed by the transaction. In essence, the Court has ruled that, if the taxpayer validly forms a FLP under applicable state law, the Federal government must respect the creation of this entity and the alterations the entity imposes on ownership and control of the underlying assets.…”

“…Since both Strangi 31 and Knight 32 represent cases reviewed en banc by the full Tax Court (a relatively rare situation), the importance of the Court's determination that the economic substance test rests not on business purpose, but on the changed economic position of the taxpayer, should not be taken lightly. In essence, this means state law will control when defining property rights for transfer taxes; federal law determines only the appropriate tax treatment of these rights.…”

“…Because the partnership agreement imposes legal rights and restrictions on the partners, enforceable in court, the partners' legal control over partnership assets, particularly the limited partners', is fundamentally altered. As the Tax Court indicates in Strangi the FLP -changed the relationships between decedent and his heirs and decedent and actual and potential creditors.‖ 34 Similarly in Knight, the taxpayers' -rights and legal relationships and those of their children changed significantly when petitioners formed the partnership, transferred assets to it and transferred interests in the partnership to their children's' trusts.‖ 35 Defining the economic substance test solely on the unidimensional question of whether or not a FLP was validly formed seems somewhat simplistic, leading one to question whether the Court is now exalting form over substance. Perhaps to counter this, the Tax Court has linked the valid formation test with a corollary -willing buyer/willing seller‖ requirement.…”

“…In cases such as Strangi 20 and Knight, 21 the Service argued FLPs should be ignored because they lacked economic substance. This would have required taxpayers to base the transfer taxes on a proportionate share of the fair market value of the actual partnership assets and not on the value of the limited partnership interests transferred, thus eliminating any valuation discounts.…”

“…The use of the business purpose argument has proved unsuccessful in transfer tax situations. In concurring opinions to Strangi 22 and Knight, 23 the judges state bluntly -the economic substance doctrine, with its emphasis on business purpose, is not a good fit (when) dealing with donative transfers. 24 Similarly, -the Court should conclude that the economic substance doctrine does not operate to disregard a validly formed entity where the issue is the value for Federal gift and estate tax purposes of the interest transferred in that entity.…”