Albert Strangi, Deceased, Rosalie Gulig, Independent v. Commissioner of Internal Revenue
2005 U.S. App. LEXIS 14497, 96 A.F.T.R.2d (RIA) 5230, 417 F. 3d 468 (2005)
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Rule of Law:
A transfer of assets to a family limited partnership is not a bona fide sale and will be included in the decedent's gross estate under I.R.C. § 2036(a) if there is an implied agreement that the decedent will retain possession or enjoyment of the assets and the transfer lacks a legitimate and significant non-tax purpose.
Facts:
- Albert Strangi, while in failing health, granted his son-in-law, Michael Gulig, a general power of attorney.
- On August 12, 1994, acting under the power of attorney, Gulig created the Strangi Family Limited Partnership (SFLP) and its corporate general partner, Stranco, Inc.
- Gulig then transferred approximately 98% of Strangi's personal assets, valued at nearly $10 million, to SFLP.
- In exchange, Strangi received a 99% limited partnership interest in SFLP and 47% of Stranco's stock, while his four children purchased the remaining 53% of Stranco, giving them control over SFLP's management.
- The transfer left Strangi with minimal liquid assets, insufficient to cover his living expenses and other anticipated costs.
- Strangi continued to live in one of the houses he had transferred to SFLP; rent was accrued on the partnership's books but not paid until more than two years after his death.
- SFLP made cash distributions to Strangi to cover his personal expenses before his death on October 14, 1994.
- After his death, SFLP paid for Strangi's funeral, estate administration expenses, personal debts, and estate taxes.
Procedural Posture:
- The Internal Revenue Service issued a notice of deficiency to the Estate of Albert Strangi for over $2.5 million in estate taxes.
- The Estate petitioned the U.S. Tax Court for a redetermination of the deficiency.
- The Tax Court denied the Commissioner of Internal Revenue's motion to amend its answer to include a claim under I.R.C. § 2036(a).
- After trial, the Tax Court held for the Estate on other grounds (Strangi I).
- The Commissioner appealed to the U.S. Court of Appeals for the Fifth Circuit, challenging, among other things, the denial of the motion to amend.
- The Fifth Circuit reversed the denial and remanded, instructing the Tax Court to either explain its denial or permit the amendment.
- On remand, the Tax Court permitted the amendment, considered the § 2036(a) claim, and found in favor of the Commissioner (Strangi II).
- The Estate of Albert Strangi (appellant) now appeals that decision to the U.S. Court of Appeals for the Fifth Circuit, with the Commissioner of Internal Revenue as appellee.
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Issue:
Does a decedent's transfer of substantially all of his assets to a family limited partnership, from which he continues to derive substantial economic benefits and which lacks any significant non-tax purpose, constitute a transfer with a retained interest under I.R.C. § 2036(a), thereby requiring the assets' full value to be included in his gross estate?
Opinions:
Majority - E. Grady Jolly
Yes. The decedent's transfer of assets constitutes a transfer with a retained life interest under I.R.C. § 2036(a), requiring the full value of the assets to be included in his gross estate. The court found that an implied agreement existed for Strangi to retain possession and enjoyment of the transferred property, as evidenced by SFLP's payment of his pre- and post-death expenses, his continued residence in the transferred home, and the fact that he transferred 98% of his wealth, leaving him unable to meet his own financial needs. This arrangement provided Strangi with a substantial present economic benefit from the assets. Furthermore, the transfer did not qualify for the 'bona fide sale' exception because it lacked a substantial non-tax purpose. The court examined and rejected the estate's proffered non-tax rationales—such as deterring potential litigation, creating a joint investment vehicle, and enabling active management—as factually implausible and objectively unlikely at the time of the partnership's creation. The transaction was merely a 'testamentary substitute' designed to avoid estate taxes.
Analysis:
This decision significantly curtails the effectiveness of family limited partnerships (FLPs) as an estate tax avoidance tool, particularly when created shortly before death for an elderly individual. The court reinforced a two-part test for the 'bona fide sale' exception, requiring not just adequate consideration but also a 'substantial non-tax purpose' that is objectively verifiable. By focusing on the objective realities of the transaction rather than subjective intent, the ruling makes it more difficult for estates to defend FLPs that do not engage in legitimate business activities and where the decedent continues to benefit from the transferred assets. The case establishes a strong precedent for the IRS to 'look through' the partnership form and include assets in an estate where there is evidence of an implied agreement for retained enjoyment, such as paying the decedent's expenses or allowing continued use of property.
