Educational Presentations Coming Up.
Well, this is the time of year that CPE presentations are developed for later on in the Spring and throughout the year. I am speaking to a Northern California bar association group (estate planning section) on "Avoiding Litigation with FLPs and FLLCs", the same subject I presented in a workshop at the 2009 Southern California Tax & Estate Planning Forum. By the way, Lonnie McGee's Forum will be presented for the 30th consecutive year October 21-23 in San Diego - a most popular CPE event for lawyers, accountants and other practitioners.
For CPELink (www.cpelink.com), I am presenting several webcast courses, with presentations in July, August, October and December. The first course is on Estate Planning Imperatives for 2010 & Beyond (difficult to put together with the current estate tax mess!), the second one is on Using Valuation in Estate Planning, and the third course relates to FLPs, FLLCs and S Corporations in Planning. Check the website for details. In addition, I am a conference instructor for Western CPE (www.westerncpe.com), this year presenting courses at the Tax & Financial Planning Conference in Las Vegas in early December, and also I am working up some webcast and self-study courses for this provider. This all is a great way to try and keep up-to-date on estate planning.
The Estate & GST Tax Gap/Suspension Mess!
In my last newsletter (January 31, 2010), I discussed some of the issues that planners and their clients are faced with this year - and perhaps next year as well. Here we have today no federal estate or GST tax, but still a gift tax (albeit at "only" 35% gift tax rate for taxable gifts). But if Congress does not act - again - on January 1, 2010, the provisions of EGTRRA disappear as if they never were there - with the pre-2002 law coming back: 55% top estate tax rate (plus 5% surtax on estates over $10 million) and a $1 million AEA (same for GST tax, 55% top gift tax rate, and on and on. Further, this year we have a modified carryover income tax basis rule that will call for many more returns than filed in 2009, but that too would disappear in 2011 absent Congressional action.
I imagine we can say, oh well, Congress will fix it? - who would say that given the record of Congress the past few years - remember we thought Congress would enact a permanent "estate tax fix" long before 2010, and nothing happened!
The odds perhaps favor retroactive legislation to at least extend the 2009 law into 2010, but who knows what will happen. Further, the more months in 2010 that pass, the less likely - in a midterm election year - that anything will be enacted. And then there is Mr. Rangel's "furlough" as Chair of the House Ways & Means Committee - that certainly doesn't help the situation.
There now have been a number of articles published on the estate and GST tax gap/suspension mess, to add to the Heckerling Institute discussions I referenced in my January 31st newsletter. I especially like several of them, and suggest my professional advisor readers examine the following: (1) "Planning Without an Estate Tax", Howard Zaritsky, Estate Planning, March, 2010, (2) "Estate Planning in Uncertain Times", John Draneas, Willamette Management Associates Insights, Winter, 2010, (3) "Issues Raised by the One-Year Suspension of the Estate and GST Taxes", public side of the ACTEC website, www.ACTEC.org, and taking the prize for the most thorough and detailed analysis, (4) "The Impossible Has Happened: No Federal Estate Tax, No GST Tax, and Carryover Basis Fr 2010", Blattmachr, Gans, Zaritsky, and Zeydel, Journal of Taxation, February, 2010. Enjoy these articles, if you can, and try and develop an approach to discussing the issues and limited opportunities with clients!
And Now To The Shurtz Case.
IRS has won nearly 20 estate tax cases using IRC Sec. 2036(c) a an effective weapon in disregarding the FLP or LLC for estate tax purposes. The result in such cases has been virtually no valuation discounts, no matter how credible was the appraisal evidence. However, another line of cases, taxpayer victories, now have gathered some steam and total 11 decisions which all are taxpayer estate victories. These cases applied the "bona fide sale" exception to 2036(a), with the most important fact finding of the court being the "real and significant non-tax purpose for the entity". Several of my newsletters the past couple of years have reviewed the various cases, with the January 31, 2010 newsletter discussing the recent case of Black v. Commissioner, 133 T.C. No. 15 (12/14/09) - a case with such great facts that one wonders how many of our clients could ever hope to measure up!
Well that question has been answered somewhat by the new case of Charlene B. Shurtz v. Commissioner, T.C. Memo. 2010-21 (2/3/10) - a great FLP case decided by Judge Jacobs that found no estate tax deficiency due from Mrs. Shurtz' estate.
1. Non-Tax Purposes Pay Off.
Bonnie Barge, Charlene Shurtz' mother, made substantial co-tenancy timberland gifts to her children years ago. Eventually, in Estate of Bonnie Barge v. Comm'r, T.C. Memo. 1997-188, a gift tax case, the court split the difference in valuation positions between IRS and the donor. This possibly was a reason for going the FLP route.
Bonnie Barge had 3 children, and Charlene, her daughter, owned a 16% interest in Timberland, L.P., which owned nearly 50,000 acres of Mississippi timberland, and active timber farming and management business. Also, as the result of gifts to her, Charlene owned outright 748.2 acres of similar timberland. Mississippi was a very ligitious jurisdiction, as credibly testified to by the family's lawyers. In addition, the centralized management of an active business made good sense. So, after first gifting a co-tenancy interest in the 748.2 acres to her husband, Charlene and her husband formed Doulos, L.P. After making lifetime gifts, on her death (she was the first spouse to die), Charlene owned a 1% general partnership and a 87.6% limited partnership interest in Doulos, L.P. (which owned both the 16% interest in Timberland, L.P. and the 748.2 acres of timberland).
As you would imagine, the Service raised and litigated 2036(a); however, Judge Jacobs, in a short and clear 27-page opinion, found that the facts supported the exception applying to this case, namely, the "bona fide sale for full and adequate consideration". While not even discussing the litigating parties' positions and evidence on valuation discounts (including the tiered or layered discount), the court merely stated that Charlene's estate owed no estate tax deficiency.
The helpful issue about negative facts here was that the court concentrated on the non-tax purposes shown by the estate at trial, rather than worrying too much about the negative facts. The negative facts were several: First, Doulos, L.P. did not maintain regular or complete books and records. The CPA merely maintained "work papers like a trial balance". Second, the FLP's bank account was not set up for 4 months after the entity was formed and funded. Third, Charlene and her husband paid some FLP expenses directly, and then were sometimes reimbursed and other times had their capital accounts increased accordingly. And, finally, while made up in subsequent years, partnership distributions were not always made pro rata to partner capital accounts.
The court found that the principal non-tax reason existing for forming and operating Doulos, L.P. as the "legitimate concern about preserving the family business" in the face of real, not merely speculative, concern about the litigation atmosphere in the State of Mississippi. Further, "management efficiency" was found to be a non-tax purpose.
So here we seem to have the key to success in FLp/FLLC cases -if the advisors and clients work together at the outset and throughout operation of the entity. That is, a substantial, real and not speculative non-tax purpose for forming, funding and operating the entity is the most significant basis on which to have the FLP or FLLC respected for estate tax purposes - and consequently allow for substantial valuation discounts in estate tax valuation.
Spring Is Arriving In Idaho!
While we still have a bit of snow now and then (not having had much during winter at all), the robins and other birds are back, the grass is green, and the temperatures are warming up - so Spring is here.
Mary Ann and I are off soon on a wonderful trip to French Polynesia - more on that after our return.
Regards to all my readers.
owen fiore
On the Wild & Scenic Middle Fork of the Clearwater River!
