Friday, May 21, 2004

The IRS yesterday lost an important family limited partnership case in the Fifth Circuit: Estate of Kimbell v. U.S (No. 03-10529) (5th Cir. May 19, 2004). The case comes on the heels of the IRS’s successful challenges to family limited partnerships in Tax Court cases like Estate of Strangi, T.C. Memo. 2003-145 (coincidentally decided precisely one year earlier and on appeal in the Fifth Circuit). Perhaps the most significant aspect of Estate of Kimbell is that it lays out a four-part roadmap for avoiding section 2036 in family limited partnership cases:

• Parent retains sufficient non-partnership assets for her support and avoids commingling of personal assets with partnership assets.

• Partnership formalities are followed.

• Assets contributed to partnership require active management.

• Parent had non-tax business reasons for forming partnership.

Thanks to tax valuation guru Jack Bogdanski (Lewis & Clark) for the tip.