Third Place Winner 2006

What a Long Strangi Trip It's Been – Family Limited Partnerships and Section 2036 of the Internal Revenue Code
Richard Devries
Marquette University Law School
I. Introduction
After a long career and decades of hard work, a person can amass substantial wealth. Often this wealth is comprised of a business created and grown by the person, property that has been in the person’s family for decades, and properties or marketable securities that can continue to generate income if managed. As the person ages and starts to face the inevitable, the person will begin to plan how to transfer these assets to future generations. A simple transfer of ownership could be unsatisfactory because the person may fear future generations will mismanage or otherwise lose the property. Also, the person will realize that transfer taxation – either gift or estate taxes – may take a large bite.
Faced with the need to transfer the assets but also wanting to limit future transfers and to reduce taxes, the person may consider transferring the property to a Family Limited Partnership. Family Limited Partnerships have been used for decades as a estate planning tool.[1] Using a Family Limited Partnership as part of an estate plan can keep assets within a family and lower estate taxes.[2]
The use of Family Limited Partnership reduces estate taxes through the availability of valuation discounts. Because of the possibility of large tax savings associated with Family Limited Partnerships and valuation discounts, the Internal Revenue Service closely scrutinizes the use of Family Limited Partnerships as an estate planning tool.[3] After many unsuccessful attacks on Family Limited Partnerships, the Internal Revenue Service has had recent success using Section 2036 of the Internal Revenue Code to expose abusive uses of Family Limited Partnerships and negate the valuation discounts.[4]
A series of decisions by the Tax Court and the Fifth Circuit Court of Appeals has outlined the application of Section 2036 to Family Limited Partnerships. These decisions show that to defeat a Section 2036 attack, the Family Limited Partnership needed to be created and conducted as a legitimate business. However, a recent decision by the Tax Court suggests that how much legitimate business activity is required to defeat a Section 2036 attack may still be an open question.
This article will begin in Part II with a discussion of the characteristics and formation of a Family Limited Partnership. Part III will discuss the elements of Section 2036 and the application to Family Limited Partnerships. Part IV discusses the recent series of decisions by the Tax Court and the Fifth Circuit Court of Appeals regarding the Strangi Estate. In Part V, the tests used in the cases regarding the Strangi estate are reconsidered to show that the basic requirement for an estate using a Family Limited Partnership to defeat a Section 2036 attack is for the Family Limited Partnership to be formed and conducted as a legitimate business. Finally, Part VI discusses application of the legitimate business test in the recent Tax Court case involving the Bongard Estate.
II. Family Limited Partnerships
A Family Limited Partnership (“FLP”) is recognized as a business entity under state statues. Characteristics of the FLP are defined by state statues, as are some steps required for the formation of a FLP. The formation of a FLP can offer non-tax and tax benefits related to estate planning. The primary tax benefit of a FLP is the availability of valuation discounts of partnership interests for calculating estate taxes.
A. Characteristics of a Family Limited Partnership
A FLP is simply a subset of the more common Limited Partnership (“LP”). A LP may be formed by any two or more people (or entities) where a FLP is formed by members of a family.[5] The formation and activities of FLPs (and LPs) are controlled by state statutes which are often modeled on the Revised Uniform Limited Partnership Act (“RULPA”).[6] RULPA defines a LP as an “entity having one or more general partners and one or more limited partners.”[7] Partnerships in general are formed to carry on a business for profit.[8]
The general partner in a FLP acts as the managing partner of the FLP.[9] Because the general partner has control over the activities of the FLP, the general partner is also personally liable for the obligations of the FLP.[10] In order to avoid this liability, FLPs are typically formed with a limited liability entity such as a corporation as the general partner to obtain limited liability for all parties.[11] Usually, the general partner interests represent a small percentage (typically 1%) of the FLP and have little economic value.[12]
Limited partner interests in a FLP have essentially the opposite characteristics from general partner interests. The limited partner(s) in a FLP have no right to manage and the limited partner interests represent a large percentage (typically 99%) of the FLP.[13] Unlike the general partner, the limited partner has no personal liability for the obligations of the FLP.[14]
Like other non-corporation business organizations, a FLP is subject to flow through taxation with income flowing through the partnership to the partners. The income is taxed to the partners and not to the FLP.[15]
B. Formation of a Family Limited Partnership
Family Limited Partnerships are usually formed when a member of a senior generation of a family believes there is a need to receive the tax and non-tax advantages of a FLP. The formation of a FLP can be described as a three step process: (1) determining general and limited partners; (2) creating the partnership agreement; and (3) transferring assets to the FLP.[16] In addition to these steps, state statutes will add the formal requirement of filing a certificate of limited partnership with the Secretary of State of the state where the FLP is located.[17] The limited partners are usually family members from the senior and subsequent generations. As mentioned above the general partner is typically a corporation formed by the family members to manage the FLP. Normally, family members from the senior generation will transfer assets such as real estate, securities, or ownership of a business to the FLP in exchange for limited partner interests in the FLP.[18] Other family members can transfer assets, most likely cash, or provide services to the FLP in exchange for limited partner interests.[19] At formation, the founding family members from the senior generation will typically own a large majority of the limited partner interests. Once formed, the founders of the FLP from the senior generation can gift their limited partner interests to other family members.[20]
C. Non-Tax Advantages of a Family Limited Partnership
The Family Limited Partnership offers several non-tax advantages such as (1) control of family business assets; (2) protection from creditors; and (3) simplification of estate administration.[21] The non-tax benefits of a FLP typically do not prompt the formation of a FLP but non-tax motivations can help blunt an attack by the IRS.[22]
1. Control of Family Business Assets
Transferring family business assets such as stock in a closely owned family corporation to a FLP can ensure that the business will stay in the family after the death of the transferor.[23] A FLP can further ensure the family business will stay in the family, by structuring the partnership agreement to prevent transfer of limited partnership interests to people outside of the family and to restrict involuntary transfers resulting form divorce.[24]
2. Protection From Creditors
The transfer of an asset to a FLP gives creditor protection to the limited partners of the FLP.[25] If an asset is transferred directly to a family member, that asset can be attached by creditors of the transferee. Transferring an asset to a FLP and giving limited partner interests in the FLP to a family member will shield the asset from the creditors of the transferee. The creditor can still attach the profits from the asset and FLP that flow through to the limited partner but the creditor can not force the liquidation of the FLP and assets.[26]
3. Simplification of Estate Administration
Transferring assets to a FLP will remove those assets from the transferor’s probate estate.[27] Forming a FLP will consolidate many assets into a single entity which can simplify estate administration, for example, by effectuating the transfer of fractional interests in real estate by transferring limited partner interests.[28]
D. Tax Advantages of a Family Limited Partnership
The primary estate and gift tax advantage of a FLP is the availability of valuation discounts for limited partner interests. Valuation discounts can change the transfer of a $10,000,000 asset into a transfer of a $6,000,000 asset for tax purposes, providing large tax savings for the transferor. As a result of the tax advantage of valuation discounts, a FLP can also be used as part of a tax-advantaged gifting program to reduce the size of an estate and remove appreciation of assets from an estate.
1. Valuation Discounts
The valuation for transfer tax purposes of an asset transferred from one person to another is based on “willing buyer-willing seller” test.[29] The form some assets take when transferred can result in a decrease in valuation for transfer tax purposes because the “willing buyer-willing seller” test results in a lower value. This decrease in value is recognized by the use of valuation discounts.
The transfer of limited partner interests in a FLP can result in large valuation discounts when valuing the limited partner interest compared to the value of the underlying assets. The valuation discounts for limited partner interests in a FLP arise from the lack of a ready market for the interest and the lack of control over the underlying assets.[30] The valuation discounts for limited partner interests in a FLP are typically between 20% and 40% but could be as high as 65%.[31]
Imagine a person who owns an income-producing piece of property, such as an apartment building, that has a fair market value of $1,000,000. If the person wanted to sell the building on the open market, a prospective buyer would be willing to pay the fair value of $1,000,000. After purchasing the building, the new owner would be entitled to the entire revenue stream from the property, would control the disposition of the revenue, and could sell the building at any time on the open market. The new owner would control the property and have access to a market.
If instead of the selling the building, the person transfers the property to a FLP in exchange for a 99% limited interest in the FLP (the general partner would own the other 1% interest) and then if the person tried to sell a 50% limited partner interest in the FLP it is very unlikely that any prospective buyer would be willing to pay $500,000. The new owner of the limited partner interest would be entitled to 50% of the income stream from the property but the income would be credited to the limited partner’s capital account and the new owner could not force the FLP to make a cash distribution. The new owner, as a limited partner, could not manage the building or force the liquidation of the FLP assets. The new owner also could not freely sell her limited partner interest because the partnership agreement of the FLP most likely restricts the transfer of limited partner interests and there is not a market for limited partner interests equivalent to the general real estate market. The new owner of the limited partner interest would not have control over the property or access to a market for the interest. Because of this, the prospective buyer is likely to only offer $200,000 to $400,000 for the 50% limited partner interest. These offers represent a valuation discount between 20% and 60%.
2. Other Tax Benefits
Once a FLP is formed and the valuation discounts are created, the original owner of the asset can gift limited partner interests to leverage the annual exclusion and reduce the size of her estate. Assuming a 50% valuation discount for limited partner interest in a FLP, each dollar of annual exclusion used will remove two dollars of original value from the original owner’s estate. Additionally, transferring assets to a FLP will remove any future appreciation of the asset from the original owner’s estate.[32]
III. Section 2036
Valuation discounts make a FLP a powerful estate planning tool for reducing estate taxes. The effectiveness of valuation discounts invites abuse by estate planners and scrutiny by the IRS. The IRS has employed several techniques to attack the use of a FLPs to reduce estate taxes. Early techniques used by the IRS include an Economic Substance test; Section 2703; and arguing a gift on the formation of the FLP.[33] The IRS enjoyed only limited success with these attacks.[34] The IRS, however, has enjoyed much better success attacking FLPs using Section 2036.[35] A successful attack against a FLP based on Section 2036 will not only negate the valuation discounts but will also bring all transferred assets, and post-transfer appreciation, back into the original owner’s estate.
A. The Gross Estate and String Sections
When a person dies, her assets comprise her gross estate and estate taxes are due when the assets are transferred to others. Section 2031(a) defines the gross estate and begins with the value of all the property of the decedent.[36] With this in mind, the easiest way to reduce the value of the decedent’s estate, and estate tax, is to plan for the decedent to have little property at the time of death. The easiest way to remove property from an estate is through inter-vivos gifting. However, people often do not want to give up control of their assets and attempt to arrange ways to remove the assets from the gross estate yet keep the enjoyment or benefit of the asset during life. A simple example is a parent who owns a valuable painting. The parent does not want to pay estate taxes on the value of the painting and future appreciation of the painting so she gifts the painting to the child. The parent, however, likes where the painting hangs and would rather not remove it, so the child allows the parent to keep the painting. While technically the parent does not own the painting, the parent continued to enjoy the painting through her life just as if she did own the painting. Congress and the IRS consider this an abuse of the estate tax rules and have created several “string” sections that will bring assets previously transferred by the decedent, but still controlled by the decedent at death, back into the gross estate and subject to estate taxation.[37] Section 2036 is one of the “string” sections and has been successfully used by the IRS to attack the use of a FLP as an estate planning device.
B. Section 2036
The development of Section 2036 began in the 1916 Federal Tax Code.[38] The original purpose of Section 2036 was to bring assets transferred in contemplation of death back into the gross estate.[39] After a limiting interpretation by the Supreme Court, Congress amended Section 2036 in 1931.[40] These amendments changed the focus from transfers in contemplation of death to retained objective economic rights and benefits.[41] The present version of Section 2036 incorporates much of the 1931 language.[42] Section 2036 has two parts: Section 2036(a) pertains to retained interests and control while Section 2036(b) pertains to retained voting rights in controlled corporations. Section 2036(a) is the section the IRS has used to successfully attack FLPs. The present version of Section 2036(a) states:
Transfers with retained life estate
(a) General rule.—The value of the gross estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer (except in case of a bona fide sale for an adequate and full consideration in money or money’s worth), by trust or otherwise, under which he has retained for his life or for any period not ascertainable without reference to his death or for any period which does not in fact end before his death—
(1) the possession or enjoyment of, or the right to the income from, the property, or
(2) the right, either alone or in conjunction with any person, to designate the persons who shall possess or enjoy the property or the income therefrom.[43]
C. Application of Section 2036(a) to a Family Limited Partnership
When attempting to decide whether Section 2036(a) will bring property transferred to a FLP back into a decedent’s estate, a court will look at two elements: (1) “if there was an express or implied agreement at the time of the transfer that the transferor will retain present economic benefits of the property, even if the retained right is not legally enforceable;”[44] and (2) if Section 2036 does not apply because the transfer fits under the parenthetical exception of a “bona fide sale for an adequate and full consideration in money or money’s worth.”[45] In many cases the same facts can support the existence of an agreement for continued enjoyment of the property and show the transfer was not a bona fide sale.
1. Express or Implied Agreement
A court will consider “all of the facts and circumstances surrounding the transfer and subsequent use of the property”[46] to determine whether there was an agreement between the transferor and FLP which allowed the transferor to continue to enjoy the transferred property. The transferor (usually transferor’s estate) has the burden to show no agreement existed.[47] Because transfers to a FLP involve related parties, a court will apply more scrutiny when looking at the transactions and the burden to show no agreement is “especially onerous”.[48]
Facts that will suggest an agreement exists include: (1) commingling of FLP and personal assets after the transfer to the FLP; (2) transferring nearly all assets to a FLP and the transferor not retaining sufficient assets to meet future needs; and (3) transferring a personal residence to a FLP.[49] Also, failing to follow formalities of Limited Partnerships such as not timely filing a certificate of partnership[50] or failing to open a bank account for the FLP[51] will suggest an agreement exists for continued enjoyment of transferred property by the transferor. Finally, since a court will look at all the facts surrounding the transfer, both at the time of the transfer and after, a FLP that is created a short amount of time before the death of the transferor will probably not have enough time to create evidence of practice and habit to show that no agreement existed.[52]
2. Bona Fide Sale
The Tax Court and the Fifth Circuit Court of Appeals have used separate, but similar, tests to determine whether a transfer meets the bona fide sale exception of Section 2036.
The Tax Court has, on several occasions, required a FLP to have a genuine business purpose in order for the transfer of assets to fit within the bona fide sale exception.[53]
While outlining the test for the bona fide sale exception, the Fifth Circuit has stated that for intra-family transfers heighten scrutiny is needed to insure the transfer to a FLP was not a “sham transaction or disguised gift.”[54] The Fifth Circuit has also explained that the examination is limited to objective facts and that for the transfer to meet the bona fide sale requirement the transferor must actually part with her interest in the transferred assets and the partnership must actually part with the partnership interest in exchange.[55] Further, to be for full and adequate consideration the “exchange of assets for partnership interests must be roughly equivalent so the transfer does not deplete the estate.”[56]
The Fifth Circuit has listed several objective facts that support a transfer being a bona fide sale. These facts included: (1) the transferor retained sufficient assets for future support; (2) FLP and personal funds were not commingled; (3) partnership formalities were followed; and (4) non-tax business reasons for the formation of the FLP.[57]
Although the Fifth Circuit has not expressly required a business purpose, as the Tax Court has, the Tax Court standard and the Fifth Circuit standard for the bona fide sale exception are similar. Also, there are several facts that if absent support the conclusion that the transfer is a bona fide sale, and if present support the presumption that an implied agreement existed for the transferor to continue enjoyment of the transferred assets. For example, if the transferor commingles her personal funds with those of the FLP this would be strong evidence that the transfer was not a bona fide sale and the transferor retained enjoyment of the property. Commingling funds will trigger Section 2036 and the assets transferred to a FLP would be brought back into the transferor’s gross estate.
IV. The Strangi Estate
A series of recent decisions by the Tax Court and the Fifth Circuit Court of Appeals regarding the estate of Albert Strangi and the FLP formed by Mr. Strangi demonstrates how courts will apply Section 2036 to a FLP. The question surrounding the tax deficiency of the Strangi estate has been before a court four times: twice before the Tax Court and twice before the Fifth Circuit Court of Appeals.[58]
A. Fact Background
Albert Strangi was a self-made multimillionaire with a net worth of approximately $10,000,000 living in Waco, Texas.[59] Mr. Strangi had four children with his first wife before that marriage ended in divorce and his second wife, who predeceased him, had two children from a previous marriage.[60] In 1985, one of Mr. Strangi’s daughters married Michael Gulig, an attorney with substantial experience as an estate planner.[61] Mr. Strangi executed a power of attorney in 1988 making Mr. Gulig his attorney in fact.[62]
In 1993, Mr. Strangi had several surgeries for cancer and was diagnosed with supranuclear palsy, a wasting, fatal disease, and his family expected Mr. Strangi had approximately two years to live.[63] After these surgeries and diagnosis, Mr. Gulig took over Mr. Strangi’s affairs as his attorney in fact.[64]
In August, 1994, Mr. Gulig attended a seminar by the Fortress Financial Group, Inc. on the use of Family Limited Partnerships as tool for estate planning.[65] The day after the seminar, Mr. Gulig, acting as Mr. Strangi’s attorney in fact, formed SFLP, a Texas limited partnership, and Stranco, Inc, a Texas corporation, to act as the general partner of SFLP and filed a certificate of limited partnership for SFLP and articles of incorporation for Stranco with the State of Texas..[66] Mr. Gulig assigned Mr. Strangi’s interest in nearly all of Mr. Strangi’s assets, including his personal residence, worth approximately $10,000,000 with approximately 75% of the property in cash or securities to SFLP in return for a 99% limited partnership interest in SFLP.[67]
The children of Mr. Strangi (not the children of his second wife) owned 53% of Stranco with Mr. Strangi owning the remaining 47%.[68] Mr. Gulig was employed by Stranco to manage the daily business of SFLP and Stranco.[69]
After the formation of SFLP, SFLP paid for Mr. Strangi’s home health care and other debts of Mr. Strangi.[70] The SFLP accrued rent on Mr. Strangi’s residence on its books but Mr. Strangi never actually paid rent.[71]
Mr. Strangi died in October 1994 at the age of 81 and Mr. Gulig filed an estate tax return reporting the value of Mr. Strangi’s limited partner interest in SFLP as approximately $6,500,000. [72] This value was determined by an appraiser who considered SFLP to be an ongoing business and the value reflected a 33% discount for lack of marketability and control.[73] The IRS determined there was a deficiency in Federal estate tax.[74]
B. Sequence of Decisions
The following will briefly review the four decisions by the Tax Court and the Fifth Circuit Court of Appeals about the Strangi estate.
1. Strangi I
The first court decision regarding the Strangi Estate is found in a Tax Court decision written by Judge Cohen.[75] This decision was narrowly focused on whether Section 2703 should be applied.[76] The Tax court determined that even though SFLP did not conduct business it was validly formed and had sufficient substance so that Section 2703 did not apply.[77]
The commissioner attempted to amend his answer and include a review of the FLP under Section 2036. The Tax Court felt the amendment was untimely and did not address Section 2036.[78]
1. Strangi II
The decision in Strangi I was appealed by the commissioner to the Fifth Circuit Court of Appeals.[79] Upon review, the Fifth Circuit agreed with the Tax Court decision that SFLP had enough substance that Section 2703 did not apply.[80] The Fifth Circuit, however, reversed the Tax Court decision to not allow the commissioner to amend the answer and add consideration of Section 2036.[81] The Fifth Circuit remanded the case back to the Tax Court with instructions to consider the commissioner’s claim under Section 2036.[82]
3. Strangi III
On remand, the Tax Court determined, in another opinion written by Judge Cohen, that the transfers to SFLP did not meet the bona fide sales exception of Section 2036 and that there was an expressed and implied agreements between Mr. Strangi and his children that he would continue to enjoy income from the transferred property.[83] The Tax Court concluded that Section 2036(a)(1) brought all the transferred assets back into Mr. Strangi’s gross estate.[84]
In a result that surprised many commentators,[85] the Tax Court also found in the alternative that Mr. Strangi retained the right to designate who was to possess the property and therefore the assets of SFLP were also includible under Section 2036(a)(2).[86]
4. Strangi IV
The Strangi estate appealed the Tax Court decision in Strangi III to the Fifth Circuit.[87] The Fifth Circuit reviewed the Tax Court decision applying Section 2036(a)(1) and did not find any error.[88] Since the Fifth Circuit concluded that all of the transferred assets should be included in the gross estate under Section 2036(a)(1), the Fifth Circuit did not address the Tax Court opinion on Section 2036(a)(2).[89]
C. Application of Section 2036 to the Strangi Family Limited Partnership
The Tax Court first applied Section 2036 in Strangi III. The Tax Court began by analyzing whether Mr. Strangi retained an interest in the transferred property.[90] The analysis first looked at whether the transferred assets should be included in the gross estate under Section 2036(a)(1), and then under Section 2036(a)(2).[91] After concluding that the assets should be included in the gross estate under both Section 2036(a)(1) and Section 2036(a)(2), the Tax Court then turned to whether the transfers were a bona fide sale and fit within the exception to Section 2036 and concluded the transfer did not fit within the exception.[92] Many of the facts the court used to support the decision to include the transferred assets in the gross estate also supported the finding that the transfer did not fit within the exception.[93]
1. Section 2036(a)(1)
The Tax Court first noted that because Mr. Gulig managed Stranco and SFLP while at the same time serving as Mr. Strangi’s attorney in fact there were no restrictions precluding Mr. Strangi, acting through Mr. Gulig, from designating himself as recipient of income from Stranco and SFLP.[94] This alone was sufficient to include the transferred assets under Section 2036(a)(1).[95] It is unusual for the Tax Court to find an explicit agreement for the transferor to have a right to the income. Most estate planners are aware of the basic requirements of Section 2036. It should be noted that while the Tax Court referred to the arrangement between Mr. Strangi and Mr. Gulig as an explicit agreement, the arrangement arose from the power of attorney executed five years before the transfer to SFLP. As a result Mr. Gulig (Mr. Strangi’s son-in-law) ended up wearing too many hats at once. Usually in FLP Section 2036 cases, the Tax Court has to look for evidence of an implied agreement, which is what the Tax Court did next.
The Tax Court also found several facts to support a finding of an implicit agreement for Mr. Strangi to continue to enjoy the transferred assets. Two primary factors cited by the Tax Court were (1) that Mr. Strangi (actually Mr. Gulig acting for Mr. Strangi) transferred nearly all of his assets to SFLP and did not have enough liquid assets for his continued support after the transfer; and (2) that Mr. Strangi continued to live in his personal residence after transferring ownership to SFLP.[96]
With respect to the lack of liquid assets, the estate argued that Mr. Strangi retained enough “liquefiable” assets to cover his continued support.[97] The Tax Court noted that after the transfer Mr. Strangi had less than one thousand dollars in cash and that it was unreasonable to expect Mr. Strangi to rely on sale of personal assets to meet his basic cost of living.[98]
The Tax Court found “highly probative” the fact that Mr. Strangi continued to live in his residence after transferring ownership to SFLP.[99] The estate argued that it was charging Mr. Strangi rent and the rent was accrued on the books of SFLP.[100] The Tax Court noted that Mr. Strangi himself never actually paid rent; accrued rent was not paid by the estate until two years after Mr. Strangi’s death; no landlord dealing at arm’s length would allow outstanding rent for two years; and that mere accounting would not “[belie] the existence of an agreement for retained possession and enjoyment.”[101]
The Tax Court did note that there was limited post-transfer history since Mr. Strangi died soon after the transfer but felt that SFLP failed to alter the relationship between Mr. Strangi and his assets at inception.[102]
The opinion in Strangi III was written by the same judge as the opinion in Strangi I, Judge Cohen.[103] Early in the analysis, Judge Cohen noted that in Strangi I, the Tax Court determined that SFLP had enough economic substance to receive valuation discounts but that finding did not preclude a finding of retention of economic interests for Section 2036.[104]
There were many bad facts about the Strangi estate plan and use of SFLP as an estate planning tool. Examples of the bad facts include: waiting until the end of Mr. Strangi’s life to begin estate planning and form the FLP; transferring nearly all assets to the FLP and relying on income from the FLP for future support ; commingling personal and FLP funds; and not enforcing the lease arrangement on a personal residence owned by the FLP.[105] The decision by the Tax Court to include the assets in Mr. Strangi’s estate is similar to other recent decisions by the Tax Court in Estate of Hillgren v. Commissioner[106] and Estate of Abraham v. Commissioner.[107] In Hillgren, the certificate of limited partnership was not filed until the estate return was filed and the FLP not only commingled funds but did not even open a bank account. [108] In Abraham, the transferor transferred nearly all of her assets to the FLP and relied on the FLP for future support.[109] The decision of the Tax Court to include the transferred assets in Mr. Strangi’s gross estate under Section 2036 was also in line with previous Tax Court decisions.[110]
2. Section 2036(a)(2)
Even though the Tax Court had determined that all the transferred assets should be included in Mr. Strangi’s estate under Section 2036(a)(1), the Tax Court also analyzed the transfer under Section 2036(a)(2).[111] The Tax Court decided that the transferred property should also be included in Mr. Strangi’s gross estate under Section 2036(a)(2).[112]
Section 2036(a)(2) mandates the inclusion of transferred property in the transferor’s gross estate when the transferor keeps the right to determine who will possess or enjoy the property.[113] This section was previously interpreted by the Supreme Court in United States v. Byrum.[114] In Byrum, the Supreme Court concluded that a person did not have control over who would possess or enjoy property if the person was subject to economic and legal constraints such as an objective business environment or fiduciary duty.[115]
In reviewing the structure of SFLP, the Tax Court returned to the fact that Mr. Gulig was in charge of the day-to-day management of Stranco and SFLP while at the same time being Mr. Strangi’s attorney in fact.[116] The structure of SFLP put Mr. Strangi, acting through Mr. Gulig, in the position to make distribution decisions.[117]
The estate argued that actions by Mr. Gulig were constrained in ways similar to the constraints in Byrum. The Tax Court found no constraints such as a business environment or fiduciary duties on Mr. Strangi similar to constraints in Byrum. The Tax Court noted that the fiduciary duties in Byrum “ran to a significant number of unrelated parties and had their genesis in operating businesses that would lend meaning to the standard of acting in the best interests of the entity.”[118] The Tax Court continued that “[i]ntrafamily fiduciary duties within an investment vehicle simply are not equivalent in nature to the obligations created by the [Byrum] scenario.”[119]
The Tax Court’s decision that the transferred property should be included in the gross estate under Section 2036(a)(2) was an “unexpected bombshell” [120] and to many commentators was the most problematic part of the decision.[121] The Tax Court discussion of Section 2036(a)(2) is “the most expansive discussion of [Section 2036(a)(2)] ever, and has drawn considerable criticism.”[122] One primary criticism of the Tax Court decision is that it “misapplied the Supreme Court’s holding in Byrum.”[123] Since the Tax Court had already included the assets under Section 2036(a)(1), the discussion of Section 2036(a)(2) could be taken as dictum.[124] The Fifth Circuit did not address Section 2036(a)(2) when it reviewed the Tax Court decision on appeal because the assets had already be included in the gross estate under Section 2036(a)(1).[125]
Whether dictum or not, the Strangi III result under Section 2036(a)(2) can probably be avoided by avoiding the situation of having the transferor’s attorney in fact manage the FLP.[126] The Tax Court’s decision also emphasizes the need for a FLP to be engaged in an actual business to provide the constraints of fiduciary duties in order to avoid Section 2036(a)(2).[127]
3. The Bona Fide Sale Exception
After determining that the transferred property should be included in Mr. Strangi’s gross estate under both Section 2036(a)(1) and (2) the Tax Court then looked to see if the transfer met the bona fide sale exception. Section 2036 provides, in a parenthetical, that Section 2306 does not apply if the transfer is “a bona fide sale for an adequate and full consideration in money or money’s worth.”[128] At best the Tax Court’s analysis in Strangi III of this exception was short and not fully explained.129] The Tax Court again pointed to the fact that the transfer was designed and completed by Mr. Gulig who was also Mr. Strangi’s attorney in fact.130] In the Tax Court’s opinion the transfer was not a bona fide sale because Mr. Strangi “essentially stood on both sides of the transaction.”131] The Tax Court also found no full and adequate consideration.132] In the view of the Tax Court the SFLP and Stranco structure “fail[ed] to qualify as the sort of functioning business enterprise that could potentially inject intangibles that would lift the situation beyond mere recycling.”133]
In contrast to the Tax Court, the Fifth Circuit Court of Appeals on review paid closer attention to the question of whether the transfer fit within the Section 2036 exception and employed different tests for the bona fide sale and full and adequate consideration prongs of the exception.134] In the end though, the Fifth Circuit also concluded that the transfer did not fall under the exception.135]
In reviewing the Tax Court opinion on the bona fide sale exception, the Fifth Circuit began by addressing the question of full and adequate consideration.136] Rather than look at whether value was recycled, as the Tax Court did to determine there was not full and adequate consideration,[137] the Fifth Circuit simply asked if the assets were transferred into the partnership in exchange for a proportional interest in the partnership.[138] This test for full and adequate consideration had been previously used by the Fifth Circuit in Kimbell v. United States.[139] Since Mr. Strangi transferred 99% of the assets owned by SFLP in exchange for a 99% limited partnership interest there was full and adequate consideration.[140] It is interesting to note that even though the Tax Court had not found full and adequate consideration, the Commissioner, on appeal, conceded this issue.[141]
The Fifth Circuit then turned to the question of whether the transfer was a bona fide sale. The Fifth Circuit again followed the test used in Kimbell.[142] Rather than define a bona fide sale as an arm’s-length transaction as the Tax Court did,[143] the Fifth Circuit defined a bona fide sale as one that is “objectively likely to serve a substantial non-tax purpose.”[144] This test also echoes the test used in the Third Circuit where the court looks to see if the transfers to a FLP were for “legitimate business purposes.”[145]
The Strangi estate advanced five non-tax reasons for Mr. Strangi’s transfer of assets to SFLP.[146] Three of these reasons were fact specific to Mr. Strangi’s situation and the court rejected these reasons.[147] The two other non-tax reasons advanced by the estate were more general and could be advanced for many FLPs. The two general non-tax reasons for the transfer to the limited partnership advanced by the Strangi estate were (1) SFLP would function as a joint investment for its partners; and (2) SFLP would permit active management of working assets.[148]
The Tax Court found, and the Fifth Circuit Court of Appeals agreed, that SFLP never made any investments after formation; that the majority of SFLP assets did not need active management; and that there was no active management of SFLP assets.[149] In short, SFLP lacked a non-tax purpose because “no active business was conducted by SFLP following its formation.”[150] Since there was no non-tax purpose, the transfer was not a bona fide sale and the Section 2036 exception was not triggered.[151]
The decision by the Tax Court in Strangi III can be contrasted with the decision by the Tax Court in Estate of Stone v. Commissioner.[152] In Stone, the Tax Court found that the transfer of property to five different FLPs were bona fide sales and were not to be included in the transferor’s gross estate.[153] In Stone, the Tax Court found that the separate FLPs had “economic substance and operated as joint enterprises for profit” and that the family members provided active management and respected the [FLPs] as separate entities.[154] The Stone family did not commingle personal and FLP funds and enforced rental agreements on personal residences.[155]
V. A Family Limited Partnership As a Valid Business Will Deflect a Section 2036 Attack
In Strangi III and Strangi IV, the Tax Court and the Fifth Circuit present a Section 2036 attack on a FLP as having three questions to decide. The first question is whether the transfer fits within the bona fide sale exception of Section 2036.[156] If the transfer is not a bona fide sale then the next question is whether the assets should be brought back to the gross estate under Section 2036(a)(1) because there is an express or implied agreement that the transferor will continue to enjoy the transferred property. The third question is whether the assets should be brought back into the gross estate under Section 2036(a)(2) because the transferor retains the right to designate who will enjoy the assets and there are no business obligations or fiduciary duties affecting this right.[157]
While the question whether to bring assets transferred to a FLP back into the transferor’s gross estate is presented as having three parts, based on Strangi III, Strangi IV, and other cases there is really only one question – was the FLP formed for a legitimate business purpose and conducted as a business? Stating the test in this way matches a general test for taxation issues given by the Supreme Court in Gregory v. Helvering,[158] where the Supreme Court stated that when a business entity is formed for no business reasons it is a “contrivance” that should be ignored for tax purposes. [159]
If a FLP was formed and conducted as a business then there should be evidence that the FLP was formed for “substantial business or other non-tax purpose”[160] or for “legitimate business operations”[161] and fit within the bona fide sale exception. If a FLP was formed and conducted as a business then there should be no evidence, such as commingle of funds or leases not being enforced,[162] of an implied agreement giving the transferor continued enjoyment of the property. If a FLP was formed and conducted as a business then there should be evidence of business obligations or fiduciary duties restricting the designation of who will enjoy the transferred property in the future.[163]
It is not enough to follow the formalities of Limited Partnerships. Mr. Gulig followed all of the formal requirements for a Limited Partnership and SFLP was recognized by the State of Texas and the Tax Court as a LP.[164] It is also not enough to have non-tax reasons for a FLP. Mr. Strangi had several non-tax reasons for SFLP.[165] In order to avoid Section 2036 from bringing the transferred assets back to the estate, a FLP has to be conducted as a business.
If Mr. Strangi (and Mr. Gulig) had treated SFLP as an actual business to actively manage the assets then the Fifth Circuit would have found the transfer to be under the bona fide sale exception.[166] If SFLP had been conducted as a business then it would not have commingled funds or would not have enforced the rent on Mr. Strangi’s residence and the Tax Court would not have found a implied agreement for Mr. Strangi to continue to receive the benefit of the property.[167] If SFLP had been conducted as a business then there would have been business obligations and fiduciary duties restricting Mr. Strangi’s ability to designate who would enjoy the benefits of the property.
A Family Limited Partnership can be a powerful tool for estate planning and offer both non-tax and tax advantages. The family that forms a FLP, though, must treat the FLP as a business and conduct the FLP in a business-like manner to achieve business objectives to receive the tax benefit of valuation discounts.
VI. The Bongard Estate
A 2005 decision by the Tax Court demonstrates that the test for inclusion in the gross estate under Section 2036 of assets transferred to a FLP is whether the FLP was formed and conducted as a legitimate business. The decision, however, also shows that the dimensions of this test are not well defined. It is still unknown what or how much conduct as a legitimate business is required to defeat a Section 2036 attack.
The Tax Court decision in Strangi III was filed May, 2003 and the Fifth Circuit opinion in Strangi IV was filed in July, 2005.[168] In March, 2005, after the Strangi III decision, but right before the decision in Strangi IV, the Tax Court filed its opinion in Estate of Bongard v. Commissioner.[169] In Bongard, the Tax Court again applied Section 2036 to a FLP and valuation discounts for an estate.[170] As with the Strangi Estate and other examples, the Tax Court found the bona fide sale exception did not apply and that an implied agreement existed for the transferor to retain enjoyment of the property.[171]
The Bongard decision agrees with the position that the test for inclusion under Section 2036 of assets transferred to a FLP is whether the FLP was formed and conducted as a legitimate business. Rather than state the test as a single step, the Tax Court first decided whether the transfer to the FLP fit within the bona fide sale and then addressed the existence of an implied agreement for continued enjoyment of the transferred assets.[172] As with the Strangi decisions, the answers to these issues were answered by the same facts. In Bongard, the Tax Court concluded the transfer or assets was not a bona fide sale, and there was an implied agreement, because the FLP did not conduct any business.[173]
According to the Tax Court
“[i]n the context of family limited partnerships, the bona fide sale for adequate and full consideration exception is met where the record establishes the existence of a legitimate and significant nontax reason for creating the family limited partnership, and the transferors received partnership interests proportionate to the value of the property transferred. The objective evidence must indicate the nontax reason was a significant factor that motivated the partnership’s creation. A significant purpose must be an actual motivation, not a theoretical justification.”[174]
The Bongard’s established a FLP, in part, to invest in stocks, bonds, and other securities.[175] The Tax Court accepted this as a legitimate business purpose, and as a significant factor motivating the formation of the FLP.[176] However, the Tax Court decided the transfer to the FLP did not meet the bona fide sales exception because the FLP “never diversified its assets, . . . never had an investment plan, and never functioned as a business enterprise or otherwise engaged in any meaningful economic activity.”[177]
After determining the transfer did the meet the bona fide sale exception, the Tax Court determined that an implied agreement existed for the transferor to continue to enjoy the transferred assets.[178] To find the implied agreement, the Tax Court returned to the lack of business conducted by the FLP. In the opinion of the Tax Court, the transfer to the FLP did not alter the transferor’s control because of the FLP “fail[ed] to perform any meaningful functions as an entity.”[179]
The decision of the Tax Court to include the transferred assets in the gross estate has caused “pained protest” in the estate planning community for the broad definition of a retained interest.[180] One the other hand, the Tax Court in Bongard made it easier to meet the bona fide sale exception.[181] The decision in Bongard is important in defining the boundaries of applying Section 2036 to FLPs because many of the bad facts in other FLP cases, such as commingling of funds or not following the formalities of limited partnerships, are not present.[182] Unlike the decision in Strangi III, Bongard has not been reviewed by an appellate court.[183] Given that the IRS determined a Federal estate tax deficiency of over $52,000,000, an appeal is virtually assured.[184] Hopefully, the appeals court will add clarity to the application of Section 2036 to FLPs how much legitimate business conduct is required.
VII. Conclusion
The use of Family Limited Partnership can be a powerful tool in estate planning. A Family Limited Partnership can offer many non-tax benefits such as control of a family business and creditor protection. The use of a Family Limited Partnership in an estate plan can also reduce taxes through the use of valuation discounts.
If a Family Limited Partnership is misused in an estate plan, the IRS will attempt to use Section 2036 to invalidate the Family Limited Partnership and valuation discounts.
Recent decisions by the Tax Court and the Fifth Circuit Court of Appeals show that to defeat a Section 2036 attack, the Family Limited Partnership must be formed and operated as a legitimate business.

[1] Courtney Lieb, The IRS Wages War on the Family Limited Partnership: How to Establish a Family Limited Partnership That Will Withstand Attack, 71 UMKC L. Rev. 887, 887 (2003).
[2] Andrea B. Short, Comment, “Adequate and Full” Uncertainty: Courts’ Application of Section 2036(a)(1) of the Internal Revenue Code to Family Limited Partnerships, 84 N.C.L Rev. 694, 697 (2006).
[3] The Family Limited Partnership and Its Use in Estate Planning After the Third Circuit’s Ruling in the Estate of Thompson v. Commissioner, 50 Vill. L. Rev. 1183, 1184 (2005).
[4] Short, supra note 2, at 697.
[5] Bishow, supra note 3, at 1186.
[6] Short, supra note 2, at 700.

[7] Revised Unif. Ltd. P’ship Act § 102(11) (2001).

[8] Unif. P’ship Act § 101(6) (1997).

[9] Revised Unif. Ltd. P’ship Act § 406(a) (2001).

[10] Id. § 404(a)

[11] D. Gordon Smith & Cynthia A. Williams, Business Organizations 138 (2004).

[12] Short, supra note 2, at 701.

[13] Id.

[14] Revised Unif. Ltd. P’ship Act § 303 (2001).

[15] Bradford Updike, Article, Making Sense of Family Limited Partnership Law After Strangi and Stone: A Better Approach to Planning and Litigation Through the Bona Fide Transaction Exception, 50 S.D. L. Rev. 1, 7 (2005).

[16] Bishow, supra note 3, at 1186.

[17] Revised Unif. Ltd. P’ship Act § 201 (2001).

[18] Updike, supra note 15, at 7.

[19] Id.

[20] Id.

[21] Bishow, supra note 3, at 1192

[22] Id.

[23] Lieb, supra note 1, at 890.

[24] Id.

[25] Id. at 889.

[26] Id.

[27] Id. at 890-91.

[28] Id. at 890; Bishow, supra note 3, at 1192.

[29] Short, supra note 2, at 702.

[30] Bishow, supra note 3, at 1189.

[31] Elaine Hightower Gagliardi, Article, Economic Substance in the Context Of Federal Estate and Gift Tax: The Internal Revenue Service Has It Wrong, 64 Mont. L. Rev. 389, 433 (2003) (“discount . . . can be as much as sixty-five percent); Ronald H. Jensen, Article, The Magic of Disappearing Wealth Revisited: Using Family Limited Partnerships to Reduce Estate and Gift Tax, 1 Pitt. Tax Rev. 155, 158 (2004) (“discounts . . . ranging from 25% to 35%); Lieb, supra note 1, at 893 (“discounted as much as sixty percent”); Updike, supra note 15, at 8 (“discounts ranging anywhere from about twenty-five to fifty percent”).

[32] Lieb, supra note 1, at 892.

[33] See Rebecca B. Hawblitzel, Case Note, A Change in Planning: Estate of Strangi v. Commissioner’s effect on the Use of Family Limited Partnerships . n Estate Planning, 57 Ark. L. Rev. 595, 603-10 (2004); Jensen, supra note 31, at 173-78; Short, supra note 2, at 706-10.

[34] See Hawblitzel, supra note 33, at 609; Jensen, supra note 31, at 173-78; Short, supra note 2, at 708.

[35] Jensen, supra note 31, at 183.

[36] I.R.C. § 2031(a) (2006); See also Treas. Reg. § 20.0-2(2) (2006).

[37] See I.R.C. §§ 2306, 2308, 2041 (2006).

[38] Updike, supra note 15, at 8.

[39] Id.

[40] Id.

[41] Id.

[42] Id.

[43] I.R.C. § 2036 (2006).

[44] Estate of Reichardt v. Comm’r, 114 T.C 144, 151 (2000).

[45] I.R.C. § 2036 (2006).

[46] Reichardt, 114 T.C. at 151

[47] Id.

[48] Id.

[49] Brett R. Bissonnette, Getting it Right: Avoiding the Seven Deadly Sins in the Formation and Management of the Family Limited Partnership, 30 Ohio N.U.L. Rev. 59, 77-80 (2004).

[50] Craig A. Tamamoto, Focus on Formality in Family Limited Partnerships: Hillgren v. Commissioner, 58 Tax Law. 781, 783 (2005); See also Estate of Hillgren v. Comm’r, 87 T.C. M. (CCH) 1008, 1016 (2004).

[51] Bissonnette, supra note 49, at 79.

[52] Tamamoto, supra note 50, at 789.

[53] See e.g. Estate of Stone v. Comm’r, 86 T.C.M. (CCH) 551, 580 (2003) (FLP had “economic substance.”)

[54] Kimball v. United States, 371 F.3d 257, 265 (5th Cir. 2004).

[55] Id.

[56] Id.

[57] Id. at 267.

[58] Estate of Strangi v. Comm’r, 115 T.C. 478 (2000) (“Strangi I”); Gulig v. Comm’r, 293 F.3d 279 (5th Cir. 2002) (“Strangi II”); Estate of Strangi v. Comm’r, T.C.M (CCH) 1331 (2003) (“Strangi III”); Strangi v. Comm’r, 417 F.3d 468 (5th Cir. 2005) (“Strangi IV”).

[59] Strangi I, 115 T.C. at 479, 481.

[60] Id. at 479-80.

[61] Id.

[62] Id. at 480.

[63] Estate of Strangi v. Comm’r, 85 T.C.M. (CCH) 1331, 1333 (2003) (“Strangi III”).

[64] Estate of Strangi v. Comm’r Strangi I, 115 T.C. 478, 480 (2000) (“Strangi I”).

[65] Id.

[66] Id. at 480-81.

[67] Id. at 481.

[68] Id.

[69] Id. at 482.

[70] Strangi III, 85 T.C.M. at 1335.

[71] Id.

[72] Strangi I, 115 T.C. at 482, 483.

[73] Id.

[74] Id. at 478.

[75] Id.

[76] Id. (Section 2703 prevents the use of valuation discounts for some businesses.)

[77] Id. at 486-87.

[78] Id. at 486.

[79] Gulig v. Comm’r, 293 F.3d 279 (5th Cir. 2002) (“Strangi II”).

[80] Id. at 282.

[81] Id. at 281.

[82] Id. at 282.

[83] Estate of Strangi v. Comm’r, 85 T.C.M. (CCH) 1331 (2003) (“Strangi III”).

[84] Id. at 1339-40.

[85] See e.g. Mitchell M. Gans & Jonathan G. Blattmachr, Strangi: A Critical Analysis and Planning Suggestions, Tax Notes Today, Sept. 1, 2003 at 1153.

[86] Strangi III, 85 T.C.M. at 1343.

[87] Strangi v. Comm’r, 417 F.3d 468 (5th Cir. 2005) (“Strangi IV”).

[88] Id. at 478.

[89] Id. at 478, n. 7.

[90] Strangi III, 85 T.C.M. at 1337.

[91] Id. at 1337, 1340.

[92] Id. at 1343.

[93] Id.

[94] Id. at 1337.

[95] Id.

[96] Id. at 1338.

[97] Id.

[98] Id.

[99] Id.

[100] Id.

[101] Id. at 1339.

[102] Id. at 1338.

[103] Id. at 1332; Estate of Strangi v. Comm’r, 115 T.C. 478, 478 (2000) (“Strangi I”).

[104] Strangi III, 85 T.C.M. at 1338.

[105] Id. at 1332-35.

[106] 87 T.C.M. (CCH) 1008 (2004).

[107] 87 T.C.M. (CCH) 975 (2004).

[108] Hillgren, 87 T.C.M. at 1012, 1016.

[109] Abraham, 87 T.C.M. at 980.

[110] See e.g. Estate of Harper v. Comm’r, 83 T.C.M. (CCH) 1641, 1649 (2002) (commingling of funds); Estate of Thompson v. Comm’r, 84 T.C.M (CCH) 374, 387 (2002) (transfer of vast bulk of assets to FLP).

[111] Strangi III, 85 T.C.M. at 1340.

[112] Id. at 1343.

[113] Id at 1340.

[114] 408 U.S. 125 (1972)

[115] Strangi III, 85 T.C.M. at 1341-42.

[116] Id. at 1341.

[117] Id.

[118] Id. at 1342.

[119] Id. at 1343.

[120] Jensen, supra note 31, at 186.

[121] Updike, supra note 15, at 28.

[122] Steve R. Akers, Section 2036 – The IRS’S Favorite Weapon? When Retained Interests In Or Powers Over Transferred Assets Trigger Estate Inclusion, ( Bessemer Trust) Dec. 7, 2005, at 91.

[123] Jensen, supra note 31, at 133.

[124] Akers, supra note 122, at 91.

[125] Strangi v. Comm’r, 417 F.3d 468, 478 n. 10 (5th Cir. 2005) (“Strangi IV”).

[126] Jensen, supra note 31, at 189.

[127] Id. at 191.

[128] I.R.C. § 2036 (2006).

[129] Updike, supra note 15, at 29.

[130] Estate of Strangi v. Comm’r, 85 T.C.M. (CCH) 1331, 1343-44 (2003) (“Strangi III”).

[131] Id. at 1343.

[132] Id. at 1344.

[133] Id.

[134] Strangi v. Comm’r, 417 F.3d 468, 478 (2005) (“Strangi IV”).

[135] Id. at 482.

[136] Id. at 478.

[137] Strangi III, 85 T.C.M. at 1344.

[138] Strangi IV, 417 F.3d at 478.

[139] 371 F.3d 257, 266 (5th Cir. 2004).

[140] Estate of Strangi v. Comm’r, 115 T.C. 478, 481 (2000) (“Strangi I”).

[141] Strangi IV, 417 F.3d at 478-79.

[142] Id. at 479.

[143] Strangi III, 85 T.C.M. at 1343.

[144] Strangi IV, 417 F.3d at 479.

[145] Estate of Thompson v. Comm’r, 382 F.3d 367, 379 (3rd Cir. 2004).

[146] Strangi IV, 417 F.3d at 480.

[147] Id. (First, the estate claimed that the transfer to SFLP would deter litigation by Mr. Strangi’s former housekeeper. Second, the estate claimed that the transfer to SFLP would deter a will contest by the children of Mr. Strangi’s second wife. Third, the estate claimed that the transfer to SFLP would deter a corporate co-executor and save the estate executor’s fees.)

[148] Id.

[149] Id. at 481.

[150] Id. (quoting Estate of Strangi v. Comm’r, 115 T.C. 478, 486 (2000) (“Strangi I”)).

[151] Id. at 482.

[152] 86 T.C.M. (CCH) 551 (2003).

[153] Id. at 581.

[154] Id. at 568-71.

[155] Id.

[156] In Strangi III, the Tax Court addressed the bona fide sale exception last. However, if the transfer is within the bona fide sale exception no further Section 2036 analysis is needed. Whether the transfer fits within the bona fide sale exception seems to be a logical starting point. See Stone, 86 T.C.M. 551 (2003) T.C. Memo 2003-309 (Since transfers were bona fide sales other issues under Section 2036 do not need to be addressed); Updike, supra note 15, at 33.

[157] The decision in Strangi III is a rare instance of an application of Section 2036(a)(2) to a FLP. The majority of FLP Section 2036 issues focus on Section 2036(a)(1).

[158] 293 U.S. 465 (1935).

[159] Id. at 469; See also Kimbell v. United States , 371 F.3d 257, 264 (5th Cir. 2004).

[160] Strangi v. Comm’r 417 F.3d 468, 479 (5th Cir. 2005) (“Strangi IV”).

[161] Estate of Thompson v. Comm’r, 382 F.3d 367, 379 (3rd Cir. 2004).

[162] See Estate of Strangi v. Comm’r, 85 T.C.M. (CCH) 1331, 1338, (2003) (“Strangi III”).

[163] See Id. at 1340-41.

[164] Id. at 1333.

[165] Strangi IV, 417 F.3d at 480.

[166] Id. at 481.

[167] Strangi III, 85 T.C.M. at 1337.

[168] Id.; Strangi IV, 417 F.3d at 468.

[169] 124 T.C. 95 (2005)

[170] Id. at 125.

[171] Id. at 131.

[172] Id. at 125-31.

[173] Id. at 128.

[174] Id. at 118.

[175] Id. at 125.

[176] Id.

[177] Id. at 126.

[178] Id. at 130.

[179] Id.

[180] Milford B. Hatcher & Edward M. Manigault, The Tax Court’s “Practical Control” Test in Bongard: More Than FLPS Are in the Balance, 102 J. Tax’n 261, 261 (2005).

[181] Id.

[182] Short, supra note 2, at724.

[183] Bongard, 124 T.C. at 96 (Bongard was a resident of Minnesota so the appeal will go to the Eighth Circuit).

[184] Id. at 110.