The IRS Wins Another FLP Case

In the Estate of Erma V. Jorgensen, the taxpayer did almost everything wrong in creating, funding, and managing a family limited partnership (“FLP”). In the Jorgensen case, the 9^th Circuit affirmed the Tax Court and held that assets transferred to an FLP were includible in the decedent’s estate under IRC Section 2036.

The facts in the Jorgensen case are that Ms. Jorgensen created an FLP and contributed approximately $2 million of marketable securities in exchange for her initial partnership interest. She made gifts to children and grandchildren of interests in the FLP. Even though the value of these FLP interests exceeded the annual exclusion amount, gift tax returns were not filed. The FLP did not operate a business. It held only passive investments, and it did not maintain books or records. The Partnership Agreement stated that withdrawals could only be made by general partners. Nevertheless, Ms. Jorgensen, as a limited partner, wrote checks on the FLP’s checking account. Some withdrawals were used by Ms. Jorgensen to make gifts (some of which should have been reported on gift tax returns, but none of the gifts were so reported). The Tax Court determined that Ms. Jorgensen’s estate included the value of the securities that she contributed to the FLP.

The Tax Court concluded that an implied agreement existed at the time of the transfers that Ms. Jorgensen would retain economic benefits of the property in the FLP. The 9^th Circuit affirmed the Tax Court’s ruling and found that $90,000.00 in checks personally written by Ms. Jorgensen and the use of $200,000.00 of FLP funds to pay Ms. Jorgensen’s estate’s Federal Estate Tax were further evidence of her retaining an improper benefit under IRC Section 2036.

MY RECOMMENDATION: As I have pointed out on previous occasions in writing about FLP cases, the proper limited partnership formalities need to be followed, and the FLP should have a legitimate business purpose.

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