February, 2007



In October of 2006, the Internal Revenue Service released its “Appeals Coordinated Settlement Guidelines” for dealing with family limited partnerships and family limited liability companies. In the opening lines, the Service identifies four issues, as follows:

1. Whether the fair market value of transfers of family limited partnership or corporation interests, by death or gift, is properly discounted from the pro rata value of the underlying assets.

2. Whether the fair market value at date of death of I.R.C. §§ 2036 or 2038 transfers should be included in the gross estate.

3. Whether there is an indirect gift of the underlying assets, rather than the family limited partnership interests, where the transfers of assets to the family limited partnership (funding) occurred either before, at the same time, or after the gifts of the limited partnership interests were made to family members.

4. Whether an accuracy-related penalty under I.R.C. § 6662 is applicable to any portion of the deficiency.

After a brief review of the background on FLPs and FLLCs, the Service says, “Thus, the IRS generally considers two basic issues with family limited partnerships: the validity issue (often known as the IRC § 2036 and § 2038 issue) and the valuation issue. The issue of indirect-type gifts, where the transfers of family limited partnership interests are made before, at the same time as funding, or shortly thereafter, is also raised where facts and circumstances support it.”

What follows are four sections, each addressing the four numbered issues quoted above. Each section begins with a summary of the IRS’s position and what the Service views as the taxpayers’ argument. Two things are noteworthy ab out the IRS’ analysis. One is that a brief examination of the sections reveals that cases which have gone against the Service may not be mentioned or are dismissed, and that should reveal to the practitioner a possible point of discussion when dealing with an audit. A second point is the lack of depth in the analysis.

On the first of those two obser vations, and by way of example, in the first section dealing with valuation discounts, noticeably absent is any mention of the Dailey case in which the Tax Court gave a 40% discount on an FLP holding marketable securities. And the Service takes pains to refer to the “recent” case of Kelly wherein the Tax Court gave a 32% discount for a FLP holding nothing but cash and certificates of deposit, saying the case is an “anomaly … and should not be considered valuable guidance.”


The Service’s guidance is also noteworthy in its lack of depth, presumably absent so that personnel who are not estate tax attorneys can have some grasp of the concepts. For example, in the section dealing with Section 2036(a), the Service’s guidance on Harper is limited to: “In Estate of Harper, the taxpayer commingled personal funds, delayed in transferring funds to the partnership, and made disproportionate distributions to the donor. The Tax Court held that the amount of the transfers was includible in the estate under § 2036(a).” Harper was a 75 page long decision. While that summary is correct in one sense, it is incomplete and even misleading in its lack of any detail ab out the extensive analysis of the Court. In its decision, the Court went through a detailed examination of the partnership agreement to lay the foundation for some parts of the rest of its decision. The court carefully looked at the alleged commingling, how long the delay was in funding and why it occurred, “post-mortem accounting manipulations,” indifference to the formalities of the partnership, linkage of distributions to the decedent’s personal needs, the analysis of fiduciary obligations of the partners to each other and the court’s view that they were breached or ignored, and numerous other points. With out this detail, it would be easy to create a three item checklist from the Service’s short summary, and from that create unwarranted difficulty for an estate’s personal representative.


Jim Roberts


2200 One Galleria Tower

13355 Noel Road, LB 48

Dallas , Texas 75240

The text of the guidelines may be viewed at


Estate of Dailey v. Commissioner, 82 T.C.M. ( CCH) 710 (2001).

Kelly v. Commissioner, T.C. Memo 2005-235 (2005).

Estate of Harper v. Commissioner, 83 T.C.M. ( CCH) 1641 (2002)