Archive for the ‘Bongard’ Category

BRADFORD UPDIKE COMMENTS ON BONGARD

Sunday, April 3rd, 2005 by Joe Kristan

Bradford Updike left an extended comment on a post below that was too good to leave down in the comments, so we post it in full here:

I just completed an article on family limitied partnership law that is available on Westlaw. Cite is 50 S.D. L. Rev. 1 (2005). Much of my commentary echos the comments made recently by Mr. Handler.
Once you get your head into the past FLP cases, it appears that most valid FLPs share two common elements: 1) the older generation partner that contributes most of the assets has changed his relationship to the assets by respecting entity formalities and by keeping the FLP assets separate from his personal property, and 2) the younger family partners are making meaningful contributions in the formation and management of the FLP.
This appears to have carried the day for the taxpayers in Estate of Stone v. Comm’r, nothwithstanding the fact that the parents contributed 97-98% of the assets. Although the presence of adversity and litigation among certain younger family was certainly present, the Tax Court looked very favorably upon the management activities of the younger family members.
What the Tax Court appears to be using is a heightened “substance over form” test that requires the FLP to be operated in a “businesslike” manner, and that requires meaningful management contributions from all partners involved. The biggest question that obviously looms about is how much control by the older family partner is too much. After all, one would think that an FLP would still be a bona fide arrangement if the partnership books and records were in order and the younger family partners were making the type of meaningful contributions that are typically allowed of a limited partner under state law.
Notwithstanding our views on this, current case law clearly favors “more management participation and oversight” by younger family members. This is where we are. The harsh truth is you have to give something up to get something back in way of valuation discounts and other tax benefits. Assuming older family members are willing to use the FLP as a bona fide strategy for “transitioning” ownership and management of assets to their children and grandchildren, then the strategy could make sense. That doesn’t mean that the older family members have to be completely cut out of the loop, but it does mean that the younger family members need to be ready, willing, and able to take on meaningful responsibilities of overseeing the FLP business affairs. Until the Tax Court or Supreme Court tells us otherwise, this is were we stand.

Unfortunately, we cannot find a link to Mr. Updike’s law review article; If we find one, we will provide it.

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RABY BROS. REVIEW IMPLICATIONS OF BONGARD

Monday, March 28th, 2005 by Joe Kristan

Thanks to the excellent arrangement between the TaxProf and Tax Analysts, the Raby’s analysis of the Bongard Tax Court case on family limited partnerships (FLPs) is now available to all. You may read it here (pdf format). From the Raby article:

The family limited partnership does offer great
opportunities for preventing family net worth from
splintering, including some degree of asset protection.
In the process, it also offers the opportunity of
transfer tax discounts. If the discounts are all that
is being sought, however, and it appears that the decedent
merely moved the assets into the partnership and nothing
more, little is apt to be accomplished taxwise. There is
a message in all this: Practitioners need to review
not only the basic estate planning strategy but also
periodically review its implementation. The tax devil
often lurks in the details. And that is not true of FLPs
alone.

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WALL STREET JOURNAL TALKS ABOUT BONGARD CASE

Wednesday, March 23rd, 2005 by Joe Kristan

The Wall Street Journal’s weekly tax column covered the Bongard case today. The Tax Court ruled in Bongard that attempted gifts of a family partnership failed because the donor retained an “implied” control. Tom Herman’s weekly Tax Report (subscribers only) says the Bongard decision “is fueling concerns about family limited partnerships, a popular technique used to slash estate and gift taxes.” From Mr. Herman’s WSJ piece:

So how can you create a partnership that is likely to pass muster? The partnership should have “legitimate and significant business reasons” to exist, such as managing a family business, rather than just dodging taxes, says David A. Handler, a lawyer at Kirkland & Ellis in Chicago. Also, if you transfer assets into a partnership, don’t retain total control over them — and avoid dipping into those assets for personal expenses. Retain sufficient assets, “outside of the partnership, to maintain your lifestyle,” he says.

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IS THE TAX LAW IS HARD? $52 MILLION SAYS ‘YES’

Tuesday, March 15th, 2005 by Joe Kristan

Wayne Bongard slipped his mortal coils in his 59th year on a hunting trip to Germany. He left behind a wife, five children, a great deal of wealth, and an estate plan featuring a family limited partnership.
Today the Tax Court tried to sort out the tax consequences of his estate plan. In a 116 page opinion, ten judges signed on to a majority opinion, two judges signed another opinion agreeing with the result but disagreeing with its rationale, one judge agreed with the result but didn’t sign on to any opinions, and four judges dissented in two separate opinions.
Their conclusion? Mr. Bongard’s estate owes $52 million in additional estate tax, if the Tax Court is upheld on appeal. Our conclusion? This stuff ain’t easy.
It’s tax season, and given our time and wisdom constraints we won’t try to read the case carefully, let alone analyze it in depth; anyway, this case that will generate reams of law review analysis by lawyers who can charge a lot more per hour than we can. But for $52 million, we’ll try to hit the high points.
WHAT IS “CONTROL?” WHAT IS “MONEY OR MONEY’S WORTH?”
The tax law (Section 2036(a)) says that gifted property can be pulled back into a donor’s estate if there are too many strings attached – if the donor retained up until 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.


But — if the property had been sold or traded to the family partnership in “a bona fide sale for an adequate and full consideration in money or money’s worth” — the property does not get subjected to estate tax.
The Tax Court majority said that $101 million in value had to be included in Mr. Bongard’s estate because he hadn’t transferred property to his family partnership “in a bona fide sale for an adequate consideration” and had retained “implied” control.
The dissenting judges said that the majority failed to properly apply the Supreme Court case that has controlled this part of the tax law.
This will send estate planners scurrying back to their documents to try to ensure that there is no “implied” control of family partnership assets. It will also send the Bongard Estate’s attorney’s scurrying to file appeal papers with the Eighth Circuit Court of Appeals.
There is a good chance that this will end up in the Supreme Court in a year or two. The Third and Fifth Circuits have ruled in cases with similar issues, and the results are confusing.
Code Section 2036(a) is reproduced in the extended entry below.
We will keep an eye on this case. Much more thoughtful commentary than this will come out on Bongard, and we will link to it as we come across it.
Cite: Estate of Wayne C. Bongard v. Commissioner, 124 T.C. No. 8

(more…)

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