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Circuit Court Affirms IRS’ Position That Extensive Personal Use of FLP Assets Voids Tax Benefits

Family Limited Partnership

The Ninth Circuit Court of Appeals confirmed a judgment from the Tax Court and took stood with a victory for the IRS.  In the case fact pattern, a husband formed an LLC.  The husband then funded the LLC with real estate, securities, and cash. He then gave a 50% interest to his wife with a proper document.  Upon his death, his wife gave a 50% interest to their children and grandchildren.  The assets were then still used in a personal, not a business manner.

Upon review of the situation, the IRS disagreed with the tax position of the decedent and estate in so far as the assets were used personally.    In Tax Court, the court sided with the IRS and agreed that the decedent retained economic benefit from the supposed transfer.  Further the transfer had no valid tax reason, the transactions were not from arms length transactions, and the partners did not follow partnership formalities.

Editor’s Comment

In yet another FLP/FLLC case, another example of the FLP/FLLC being messed up.  FLP’s have their place in estate planning, but FLP’s are not a one size fits all circumstance.  Once assets are transferred to an LLC, the assets must be utilized properly (in a business usage) to avoid violating the use of the estate planning.  There are methods to get some personal use form the assets, but the taxpayers must be careful.  Many business owners have condominiums and houses they can include in a business, but they may also use them personally as well.  This is permissible, but certain rules and procedures must be followed in order to shed the appearance of only personal use.

By: Basi & Basi at the Center for Financial, Legal and Tax Planning for Transworld M&A Advisors