Submitted by: Eugene P. Zuspann
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S. Stacy Eastland, of Baker & Botts, L.L.P., Houston, Texas is to make a presentation to the Southern Federal Tax Institute in September of 1996 entitled The Art of Making Uncle Sam Your Assignee Instead of Your Senior Partner: The Use of Family Partnerships in Estate Planning. Stacy has generously agreed to permit the Committee to post portions of the outline on this site. The outline poses a hypothetical example and asserts that certain "fundamental principles" apply to family limited partnerships. This summary concerns Stacy's Fifth and Sixth Fundamental principles.
"Fifth Fundamental: Both the entering into a limited partnership and the transferring of a limited partnership interest can be designed to comply with the prerequisites of Internal Revenue Code Section 2703. "
An example using Stacy's favorite characters - Sam Selfmade (the decedent) and his children, Sonny Selfmade and Betsy Bossdaughter. An FLP is created with undeveloped land, which is later developed. Sam dies, and in the estate tax audit, the examining agent claims that no discounts are permitted from the fair market value of the underlying partnership assets.
Sam's executor prepares a protest elaborating on the relevant statutes, legislative history, and other authority and concludes that the Internal Revenue Service can not ignore the creation of a partnership under IRC Sec. 2703(a).
The protest then discusses the the safe harbor exception under Section 2703(b). 2703(b) has three test that must be met. These three tests are:
(i) The right or restriction is a bona fide business arrangement (bona fide arrangement test);
(ii) The right or restriction is not a device to transfer property to members of the family for less than full and adequate consideration in money or money s worth (device test); and
(iii) At the time the right or restriction is created, the terms of the right or restriction are comparable to similar arrangements entered into by persons in an arms-length transaction (comparables test).
Each of the tests are discussed, then the
Sixth Fundamental sets out 13 business (non-tax) reasons for
formation of a partnership among family members.
"Sixth fundamental: Even if substantial transfer taxes are saved because of the use of a family limited partnership, the Internal Revenue Service cannot disregard the entity if either business or financial reasons exist for its creation."
FULL TEXT: To see the full text of the fifth and sixth of S. Stacy Eastland's transfer tax fundamentals with respect to the creation of family limited partnerships, click here.