Friday, June 3, 2011

Holman v. Commissioner -- IRS Wins Chapter 14 Argument in FLP Case

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Last week's Eighth Circuit decision in Holman v. Commissioner (No. 08-3774, 4/7/10) had the feel of the early days of family limited partnership tax litigation, when the IRS hoped that Chapter 14 of the Code would provide it with a simple tool for denying FLP discounts.  The decisions in Church and Estate of Strangi, both of which rejected the application of §2703 to family partnership agreements, seemed to dash those hopes and the IRS soon moved on to using §2036(a) as its primary tool to attacking partnership discounts.

Of course, §2036(a), an estate tax provision, cannot be used in a gift tax case, which was the situation in Holman. The government attorneys in Holman argued that no discount should be allowed for taxpayer gifts of FLP interests, because the transfer restrictions baked into the partnership agreement did not pass the §2703 test. The Tax Court agreed that the partnership restrictions were subject to §2703(a) and that the §2703(b) exception was unavailable because the agreement was not a bona fide business arrangement.

On appeal by the taxpayers, the Eighth Circuit affirmed. It noted that there was no compelling business reason for creating the partnership, that it was funded solely with publicly traded stock, and that it had been created primarily for personal reasons. The court concluded that §2703 applied and that the only allowable discount was for lack of marketability.

Holman shows that the §2703 argument is not dead, especially when the taxpayer is unable to present a compelling business reason for creating the partnership.

Further discussion of Church, Estate of Strangi, and Holman can be found in 812-2nd T.M., Family Limited Partnerships and Limited Liability Companies.

Harold W. Pskowski, Managing Editor for Estates, Gifts and Trusts

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