We see a lot of tax cases about family limited partnerships (FLPs) and family limited liability companies (FLLCs) that have bad facts that ultimately lead to the loss of any valuation adjustments for estate and gift tax purposes (e.g., discounts for lack of control or lack of marketability). Some of the more common “bad facts” include the following:
- Significant delay between formation and funding.
- Lack of sufficient business purpose for the FLP.
- Failure to retain sufficient assets outside of the FLP for personal living expenses.
- Commingling of FLP assets with personal assets.
- Gifting interests in the FLP prior to funding the FLP.
- Payment of personal expenses (including medical expenses and funeral costs) from FLP assets.
- Payment of estate taxes from FLP assets.
- Lack of active management of FLP assets.
- Loans to limited partners with no repayment.
- Lack of partnership books and records.
- Simultaneous funding and gifting transactions.
This list is not meant to be all-inclusive; however, it is representative of some of the recent tax cases. We typically don’t see “good facts” tax cases since they are rarely litigated by the IRS. Owners of FLPs and FLLCs would be wise to consider these bad fact patterns and avoid them.
Steve Koons, CPA/ABV, ASA, CFF