35 Cap. U. L. Rev. 1 (2006-2007)
Family Limited Partnership Formation: Dueling Dicta

handle is hein.journals/capulr35 and id is 11 raw text is: FAMILY LIMITED PARTNERSHIP FORMATION:
DUELING DICTA
MITCHELL M. GANS AND JONATHAN G. BLATTMACHR*
INTRODUCTION
In attempting to limit the use of family limited partnerships as a
transfer-tax strategy, the Internal Revenue Service (IRS) has advanced
several arguments.' The courts, however, have not been entirely receptive.
For example, the IRS has not had any success with the argument that a
partnership  formed    without   a   sufficient  business   purpose   must
2
automatically be disregarded for transfer-tax purposes.       As a result,
partnerships formed for tax-driven reasons remain a viable estate-planning
strategy. Nonetheless, the IRS has enjoyed some important successes with
two arguments.
The first argument, a gift-tax argument, stems from the indirect gift
regulation.3 Under the regulation, the contribution of an asset to an entity
is treated as an indirect gift of the asset to those who own an interest in the
Copyright © 2006 Mitchell M. Gans and Jonathan G. Blattmachr.
All rights reserved. Mitchell M. Gans is a Professor of Law at Hofstra University
School of Law in Hempstead, N.Y. He is an ACTEC Academic Fellow. Jonathan G.
Blattmachr is a partner in Milbank, Tweed, Hadley & McCloy, LLP, in New York City. He
is an ACTEC Fellow. The authors recently co-authored, along with Damien Rios, THE
CIRCULAR 230 DESKBOOK (PLI 2006).
1 For example, in Estate ofStrangi v. Commissioner, 115 T.C. 478 (2000), aff d in part,
rev'd in part, 293 F.3d 279 (5th Cir. 2002), the IRS argued that the family limited
partnership should be disregarded on the ground that the decedent did not have a business
purpose for creating it, id. at 484; that the same result should be obtained under I.R.C.
section 2703 or section 2036, id. at 487; and that a taxable gift occurred in connection with
the partnership's formation, id at 489. In Hackl v. Commissioner, 335 F.3d 664, 667 (7th
Cir. 2003), the IRS successfully denied the annual exclusion for the gift of an interest in a
limited liability company (LLC) because of restrictions on transferability. Finally, in Smith
v. United States, No. 02-264, 2005 WL 3021918, at *2, *5 (W.D. Pa. July 22, 2005), the
IRS successfully invoked section 2703 to deny an enhanced marketability discount claim
for a right of first refusal with respect to the partnership unit that was the subject of a gift.
2 See Estate of Strangi, 115 T.C. at 486-87; see also Knight v. Comm'r, 115 T.C. 506,
513-14 (2000). But see Estate of Bongard v. Comm'r, 124 T.C. 95, 126 n.l 1 (2005)
(noting that the IRS had not argued that the partnership should be disregarded under
sections 7701 or 701).
3 See Treas. Reg. § 25.2511-1 (2006).

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