Estate of Strangi v. Commissioner
2000 U.S. Tax Ct. LEXIS 89, 115 T.C. 478, 115 T.C. No. 35 (2000)
Rule of Law:
A family limited partnership (FLP) validly formed under state law will generally be recognized for federal estate tax purposes, even if largely motivated by tax avoidance, unless specific anti-abuse provisions, such as Section 2036 or Section 2703 (when properly applied to the partnership interest itself), dictate otherwise, and its interests will be valued using appropriate discounts for lack of marketability and minority interest.
Facts:
- Albert Strangi (decedent), a multimillionaire, remarried Irene Delores Seymour in 1965.
- In 1988, Irene Strangi suffered serious medical problems, and the couple moved to Waco, Texas; Michael J. Gulig, Albert's son-in-law and an attorney, was named Albert's attorney-in-fact.
- In May 1993, Albert Strangi had cancer surgery and was later diagnosed with supranuclear palsy, a brain disorder that would gradually reduce his ability to speak, walk, and swallow.
- On August 12, 1994, Michael Gulig, acting as Albert's attorney-in-fact, formed the Strangi Family Limited Partnership (SFLP) and its corporate general partner, Stranco, Inc.
- Albert Strangi contributed property worth $9,876,929, including approximately 75% cash and securities, to SFLP in exchange for a 99-percent limited partnership interest and purchased 47% of Stranco.
- Albert Strangi required 24-hour home health care from September 1993 until his death.
- On October 14, 1994, Albert Strangi died of cancer at age 81, two months after SFLP's formation.
- Following SFLP's formation and Albert's death, SFLP made substantial distributions to Albert's estate for state and federal taxes and directly to the Strangi children.
Procedural Posture:
- On December 1, 1998, the Commissioner of Internal Revenue (respondent) determined a federal estate tax deficiency of $2,545,826 against the Estate of Albert Strangi, Rosalie Gulig, independent executrix (petitioner).
- In the alternative, the Commissioner determined a federal gift tax deficiency of $1,629,947.
- The Estate of Albert Strangi filed a petition with the United States Tax Court.
Premium Content
Subscribe to Lexplug to view the complete brief
You're viewing a preview with Rule of Law, Facts, and Procedural Posture
Issue:
Does a family limited partnership (FLP) with no active business, formed shortly before death and primarily for tax reduction, lack sufficient economic substance and business purpose to be disregarded for federal estate tax purposes, and should its restrictions on asset value be disregarded under Section 2703(a)(2)?
Opinions:
Majority - Cohen, Judge
No, the Strangi Family Limited Partnership (SFLP) should not be disregarded for federal estate tax purposes based on a lack of business purpose and economic substance, nor should its restrictions on asset value be disregarded under Section 2703(a)(2), because it was validly formed under state law and its existence changed the legal relationships between the decedent, his heirs, and creditors. The Tax Court recognized that taxpayers are generally free to structure transactions for tax avoidance, citing Gregory v. Helvering. While the court was skeptical of the estate's asserted non-tax motives, such as reducing executor fees, insulating assets from tort claims, or providing a joint investment vehicle, it found that the partnership formalities were followed. The court explicitly declined to apply the economic substance doctrine to disregard the partnership, stating that doing so would be equivalent to applying Section 2036(a), which the respondent attempted to raise but was denied as untimely. Regarding Section 2703(a)(2), the court held that 'property' refers to the limited partnership interest itself, not the underlying assets contributed to the partnership, citing Kerr v. Commissioner. Congress enacted Chapter 14 (including Sections 2703 and 2704) as a targeted substitute for the repealed Section 2036(c), and treating partnership assets as estate assets under Section 2703(a) would reintroduce the complexities Congress sought to avoid. The court rejected the Commissioner's argument that a gift occurred at the partnership's inception, noting that Strangi's beneficial interest in the assets exceeded 99% and his contribution was reflected in his own capital account, meaning he did not transfer value to other shareholders or partners. Finally, the court determined the fair market value of Strangi's limited partnership interest by applying an 8-percent minority interest discount and a 25-percent marketability discount, for a combined 31 percent discount, also considering his interest in the general partner (Stranco) as functionally inseparable.
Dissenting - Parr, Judge
No, the majority erred in recognizing the partnership for tax purposes with significant discounts because the 'paper arrangements' of the partnership agreement had 'no relationship to the reality' of decedent's ownership and control over the assets. Judge Parr argued that the court should apply the 'substance over form' doctrine, especially given the clear evidence that Albert Strangi and his estate could and did cause the partnership to make distributions at will (e.g., for taxes, Stone's surgery, and to children). This actual control, despite the written agreement's restrictions, means that a minority discount (premised on limited control) and a lack of marketability discount (premised on inability to access assets directly) are inappropriate. If Strangi could effectively withdraw funds at will, then a hypothetical buyer would pay the value of the underlying assets. Therefore, the partnership interest should be valued at the value of the partnership's assets without any discount.
Dissenting - Ruwe, Judge
Yes, if the partnership interest is valued significantly less than the assets transferred, a taxable gift occurred at the partnership's formation. Judge Ruwe asserted that the transfer of property to the partnership in exchange for an interest valued at 31 percent less than the contributed assets, without bona fide nontax business reasons (which the majority acknowledged were skeptical), constituted a deemed gift under Section 2512(b) and its regulations. Section 2512(b) defines a gift as the amount by which property value exceeds consideration received, unless it's a bona fide, arm's-length business transaction free from donative intent. Citing Commissioner v. Wemyss, Judge Ruwe emphasized that the gift tax aims to reach all arrangements that remove property from a donor's estate and are not genuine business transactions. Since the court rejected the estate's business purpose claims and found the transfer was primarily to reduce estate taxes, the difference in value between the transferred assets and the received partnership interest should be treated as a gift, regardless of who the donees are or if they can be identified.
Dissenting - Beghe, Judge
No, the property to be valued for estate tax purposes should be the underlying assets originally held by Albert Strangi, not his interest in the SFLP, because the entire transaction should be viewed as an integrated transfer under the 'end-result' version of the step-transaction doctrine. Judge Beghe argued that the sole purpose of forming the SFLP was to reduce federal transfer taxes by artificially depressing the value of Strangi’s assets as they passed to his children. The immediate loss of one-third of the value of his liquid assets upon transfer, coupled with his age and declining health, makes it inconceivable that Strangi would have entered such a transaction at arm’s length. The post-death distributions from SFLP (for taxes, to children, and division of accounts) further demonstrate that the partnership merely facilitated the transfer of the underlying assets to the same beneficiaries who would have received them anyway. Citing Penrod v. Commissioner, Judge Beghe contended that the formally separate steps of the transaction (creation and funding of the partnership within 2 months of death, substantial distributions, and carving up the Merrill Lynch account) should be collapsed and viewed as a single, integrated transaction: the transfer of the underlying assets at Strangi's death. He concluded that restrictions like the SFLP agreement, when viewed as part of a testamentary conveyance, should be disregarded for valuation purposes, citing Citizens Bank & Trust Co. v. Commissioner.
Analysis:
This case highlights the ongoing tension between taxpayer rights to legitimate tax planning and the IRS's efforts to prevent abusive valuation discounts in family wealth transfers. The majority's decision to respect the partnership's legal form, despite skepticism about its non-tax motives and the lack of an active business, set a precedent that formal adherence to state law in creating such entities could be sufficient to avoid complete disregard under the economic substance doctrine, absent the application of specific anti-abuse statutes like Section 2036. The case also clarified that Section 2703 (regarding restrictions on property) applies to the interest in the entity, not the underlying assets, limiting its scope in discrediting the partnership structure itself. However, the strong dissents, particularly Judge Ruwe's gift tax argument and Judge Beghe's step-transaction analysis, foreshadowed future litigation strategies and legislative responses concerning perceived abuses of family limited partnerships, especially when formed on the deathbed with minimal business purpose. This decision implicitly encouraged taxpayers to ensure technical compliance with state law formalities while pushing the boundaries of valuation discounts.
