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Yellow Flag. The Tax Court waived the checkered flag on Family Limited Partnerships and LLC’s in the latest
of the ongoing series of Strangi decisions. There has been much written about the earlier taxpayer victory.
The facts in Strangi are somewhat typical. The Limited Partnership was established by Mr. Strangi’s son-in-
law under a Durable Power of Attorney. The general partner was a Corporation in which Mr. Strangi owned
47% with his four children owning the remaining 53%. Substantially, all of Mr. Strangi’s assets were
transferred to the LP, including the personal residence. Money from the LP was used for Mr. Strangi’s
personal expenses, such as medical expenses and taxes. Mr. Strangi died two months after the plan was
launched..

Second Look. After the initial taxpayer victory (establishing substantial discounts to the value of the LP
assets), the case was sent back to the Tax Court for a review of the application of a particular section of the
Internal Revenue Code, Section 2036. Result - things are not so easy anymore. The Tax Court ruled for the
IRS under Section 2036, holding that the decedent had retained control over the LP assets. Family LP’s and
LLC’s are not "no-brainers" and in many cases the discounts that taxpayers (or their families) sought may be
denied. The rationale of many planners has been "why not try", and that may still be the case. Advisors had
best be cautious when recommending an LLC or LP solely for discount reasons.

Obviously, the latest decision in Strangi is not the final word. There will probably be an appeal. The legal bills
have got to be horrendous in the matter, and if the case is not settled, the family will be out a bundle.

What To Do. On existing Family LP’s and LLC’s, consider the following steps:

  • Make sure there are no "personal assets" in the entity;
  • Make sure business formalities are scrupulously followed;
  • Do not play any personal expenses out of the entity;
  • Grantors should give up control as managers or general partners, completely, unless there are
    unrelated third parties that would enforce fiduciary responsibilities;
  • If the Grantor is not willing to relinquish control, then the case gets tougher. That is where
    knowledgeable professional advice, in light of all the circumstances, can spell the difference between
    success in obtaining discounts and failure;
  • Give the entity business reality; have other assets beside marketable securities;
  • Plan ahead. Don’t do everything on the death bed.

Not The Last Word. As mentioned above, we have not heard the last word from the Courts in this area of the
law. Taxpayers will appeal Strangi. Other valuation decisions involving Family LP’s and LLC’s continue to
proliferate, as discount disputes clog the courts, and the IRS gets more aggressive.  The best advice for now
is to tread carefully. Remember the old adage:

"Pigs get fat and hogs get slaughtered"

For many taxpayers shy of eight figure net worths, the game may not be worth the candle. For those taxpayers
with combined net worths in the eight figures, the Family Limited Partnership or LLC is still a valuable
planning device if structured according to the taxpayer’s particular circumstances. In this area of estate
planning, the question has always been - how far to reach? It is clear now that modest goals may be a better
key to success than overly aggressive strategies.

©BRANDT, FISHER, ALWARD & ROY, P.C.

This newsletter is provided for informational purposes and should not be acted upon without professional
advice.
WEALTH CONSERVATION:
PROFESSIONAL ALERT
Brandt, Fisher, Alward & Roy, P.C.
July 2003
CONTINUING SAGA - FAMILY LP’s AND LLC’s
by James R. Modrall III, J.D., C.P.A.
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