Section 2036 Proves Potent IRS Weapon Against Family Limited Partnerships

Abstract

Taxpayers’ successful uses of Family Limited Partnerships (FLPs) to shield wealth from estate taxes and gift taxes are being challenged by the IRS with Code Section 2036. Sec. 2036 “pulls back” into the taxable estate all assets over which the taxpayer retains direct or indirect control, subjecting them to transfer taxes. These assets can include those transferred to FLPs where taxpayers act carelessly in conducting relationships with the entity. The IRS’ use of Code Section 2036 has recently resulted in taxpayer losses in court and now represents the major challenge to a FLP’s viability. To assist accountants and their clients engaged in FLPs, this article analyzes Sec. 2036 and details current tax developments, particularly the June 2003 decision in the remanded case of Strangi. The article also provides specific tax planning procedures for accountants to undertake when advising clients engaged in FLPs, so as to safeguard taxpayers’ assets against Sec. 2036 attack.