Section of Taxation Publications
  VOL. 58
NO. 3
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 Note: The following is an excerpt from the introduction to the article as published in The Tax Lawyer. Author citations have been omitted for brevity. Tax Section members may read the article in its entirety in Adobe Acrobat format.

Focus on Formality in Family Limited Partnerships: Hillgren v. Commissioner
Craig A. Tamamoto



In Hillgren v. Commissioner, the Tax Court included the values of several income-producing properties in the taxpayer’s gross estate under section 2036(a), despite the transfer of these properties to a family limited partnership. The Tax Court did, however, grant the estate’s requests for discounts for lack of control, lack of marketability, and lack of voting rights, because the properties were subject to a business loan agreement (BLA). Hillgren is one of the most recent in a line of cases that use section 2036(a) to attack family limited partnerships. Section 2036(a) provides that the value of the gross estate shall include the value of transferred property if the taxpayer “retained for life the possession or enjoyment of the property, or the right to the income from the property,” except if the property is the subject of “a bona fide sale for an adequate and full consideration in money or money’s worth.” As this Note will discuss, the Tax Court’s ultimate decision to include the properties relied primarily on the formality of the family limited partnership in question. The taxpayer’s estate argued that the court should not include the value of the properties in the gross estate under section 2036(a) because the taxpayer had transferred ownership of the properties to a bona fide family limited partnership for full and adequate value. The court rejected the estate’s argument, holding that the properties did not fall within the scope of the bona fide sale exception to section 2036(a). The taxpayer’s estate also argued that the court should not include the transferred properties in the gross estate because the taxpayer did not retain the enjoyment of, or the right to the income from, the transferred proper-ties. The court rejected this argument as well, holding that the taxpayer’s estate did not sustain its burden of proving that there was no implied agreement between the taxpayer and Mr. Hillgren, the general partner.

Part I of this Note describes the factual background of the case. Part II recounts the Tax Court’s holding and reasoning. Part III argues that although the court’s ruling is consistent with its most recent decisions under section 2036(a), the court’s analysis is problematic for two reasons. First, it raises questions about the proper application of the first prong of the bona fide sale exception to section 2036(a). Second, the court’s focus on the parties’ post-transfer behavior could result in unequal treatment of taxpayers who die shortly after forming a family limited partnership and transferring property to it. Under its current framework, the court purports to consider the totality of the facts and circumstances surrounding both the transfer of property and the subsequent use of the property to determine whether or not the parties had an implied agreement that the tax-payer would retain the enjoyment of, or the right to the income from, the transferred properties. The court’s application of this framework, even when there is limited subsequent behavior to consider, suggests that the court’s inquiry ultimately turns on the formality of the family limited partnership. Finally, Part IV concludes that although the court invalidated the partnership in Hillgren, the court’s overriding focus on the formality of the partnership suggests that properly structured and operated family limited partnerships will continue to survive, even under the court’s strict application of section 2036(a).


Published by
Section of Taxation, American Bar Association
With the Assistance of
Georgetown University Law Center


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