CPE Activities Through Year-End
My CPE activities continue through year-end, concentrating on estate planning, pass-through entities, and valuation discounts - complementing my ongoing consulting efforts. First, I am presenting a workshop at the 29th Annual Southern California Tax and Estate Planning Forum in San Diego. This popular conference runs from October 22nd through the 24th, with such outstanding speakers as Jeff Pennell, Johathan Blattmachr, Sam Donaldson, and John Porter. My workshop, on October 23rd, is titled "Avoiding Tax Litigation on FLP/FLLC Plans and Valuation Discounts." Over 1,000 tax practitioners are expected at the conference. If you would like copy of my 21-page outline for the presentation, email me your request and I would be pleased to send you the outline (which includes discussion of the 2 new court decisions reviewed in this issue of my Newsletter).
Also, my presentations for both WesternCPE and for CPELink continue: (1) see www.westerncpe.com for my New Orleans resort conference courses (November 18 and 20) and the Las Vegas resort conference courses (December 2 and 3) - one course being on "Hot Topics in Estate Planning", including the future of the estate tax, and the other one on "Family Business and Entity Tax and Financial Planning"; and (2) see www.cpelink.com, for my webcasting of the same courses and a specific FLP/LLC planning course - being presented on November 6, November 11 and December 21. The webcasting field has exploded in recent years and is an excellent way to obtain CPE credits at minimum cost.
The "M & M" Cases - one for IRS, one for the taxpayer estate!
On September 16th, Tax Court Judge Halpern issued his opinion in Estate of Roger D. Malkin v. Commissioner, T.C. Memo. 2009-212, a case involving both gift and estate tax issues. On the latter, here is a telling quote from the court's opinion: "Favorable estate tax treatment was the aim of the change in form. We are unable to identify a legitimate and significant nontax reason for the transfers...We find that decedent's transfers of D&PL stock to the FLPs achieved nothing more than testamentary objectives and tax benefits, and thus those transfers do not qualify for the bona fide sale exception in section 2036(a)." And then for a counter-point to this statement, see the great taxpayer victory and template case for use of the bona fide sale exception, namely, Estate of Anna Mirowski, T.C. Memo. 2008-74, in which Tax Court Judge Chiechi concluded: "On the record before us, we find that Ms. Mirowski's significant and legitimate non-tax purpose in forming and funding MFV (a LLC) of ensuring joint management of the family's assets by her daughters and eventually her grandchildren, standing alone, is sufficient to satisfy the requirement that, in order to qualify for the exception in sec. 2036(a) for a bona fide sale for an adequate consideration in money or money's worth, there must be a legitimate and significant nontax reason for creating the entity in question." (fn 44 to the court's opinion")
We will review this case in more detail below, but the other case, an Arkansas U.S. District Court case, is a full taxpayer victory - Estate of Murphy v. U.S., U.S. District Court, W.D., Ark. El Dorado Division, No. 07-CV-1013 (October 2, 2009. See LISI Estate Planning Newsletter # 1532 for Steve Akers' excellent article on this case (October 12, 2009). Also, Steve's analysis is found in www.ACTEC.org. The court in Murphy found that the transfer to the FLP satisfied the requirements of the bona fide sale exception to 2036(a), and then went on to conclude quite substantial valuation discounts for the decedent's FLP limited partnership interests and his 49% interest in the LLC general partner of the FLP.
The Malkin Case - overreaching taxpayer, bad facts, failure to consider appropriate planning in use of the FLP as a valuation discount vehicle! Complicated and broad estate planning was involved, led by an Arthur Andersen & Co., CPAs, team (remember them?). Two FLPs were involved, one formed in 1998 and the other in 1999, the apparent goal being to shift most wealth of decedent to his two children or trusts formed for their benefit. For example, the first FLP (formed prior to decedent being diagnosed as having terminal pancreatic cancer) found the immediate use of SCINs (self-cancelling installment note sales) immediately upon decedent's funding of the FLP (see the earlier case of Hurford, in Dec. 2008, where a similar approach involving formation and funding of an FLP and immediate use of the private annuity technique). In this first FLP, an extremely negative fact was that the FLP, after its funding and the SCIN sales, then pledged all of its assets as security for decedent's personal loans! The SCINs were treated as shams and the bona fide sale exception to 2036(a) denied the taxpayer's estate.
Then the second FLP was funded with more publicly traded stock and with 4 LLC interests, plus sales of FLP interests, and at least did not involve SCINs - as decedent had been diagnosed with cancer already. But the gifts of the LLC interests, for gift tax purposes, were treated by the cour as "indirect gifts", the sales to the children's trusts having been deemed shams. I suggest you read both the Malkin and the Hurford opinions to learn what "not to do" in FLP/FLLC planning!
And now to the Murphy case, a taxpayer victory in the Arkansas U.S. District Court - good planning, excellent lawyering in the Tax Court, and super valuation testimony supporting substantial valuation discounts! Here "Legacy Assets" were involved, as decedent was concerned about dissipation of family wealth, in part due to two of his four children having squandered family wealth given them previously. The other two children shared the long-term hold philosophy of decedent, and actively participated in management of the FLP. The transfer of assets, "Legacy Assets"(shares of publicly traded Murphy Oil Corp., stock in publicly traded Deltic Timber Corp. and certain bank stock), was found by the court to meet the requirements for the bona fide sale 2036(a) exception. Overall, the combined valuation discount then allowed for the estate's 95%+ limited interest in the FLP was 41%, plus there was allowed a 52% overall discount for decedent's 49% interest in the LLC that owned a small general partner percentage in the FLP.
Here are the key findings of the District Court in this excellent case, another template for planning:
(1) the goal was to place the Legacy Assets into one entity to be centrally managed and preserved.
(2) Two of the four children, the responsible ones, took active roles in the FLP management.
(3) Decedent retained sufficient assets outside the FLP to provide for his support during lifetime.
(4) The FLP assets were not treated as decedent's own assets following their transfer to the FLP, and he did not commingle personal assets with FLP assets.
(5) Decedent did not stand on "both sides of the transaction" (one of his children even had independent counsel involved).
(6) Each partner received a proportionate interest in the entity based on the fair market value of assets contributed.
(7) Each partner's contribution of property was correctly credited to his or her respective capital account(s), and upon any liquidation of the entity, or termination of the partner's interest, he or she would be entitled to distributions in accordance with such capital accounts.
My conclusion: Considering all the above as to entity reality of FLPs and FLLCs (and see my 9/7/09 newsletter on earlier 2009 developments here), we should conclude that, where appropriate, careful and fully documented planning with pass-through entities can success against IRS attack - but the "red flag" for audit and litigation is there, so beware! See in my earlier newsletters the suggested "Factors for Success" - the key to success is to plan reasonably, document fully, and have the advisors themselves audit the plan in actual operation.
I hope you enjoy the discussion in this newsletter - email me with any questions or comments.
Owen Fiore
