Family Limited Partnership Discounts

Reed W. Easton (Seton Hall University School of Businsess) has recently published his article Is the Ultimate Solution to the Viability of the FLP Discount Technique to be Found in Further Litigation?  Here is the abstract of the article as posted on SSRN:

The latest tax court cases to address the D. A. Kimbel case, decided by the Fifth Circuit Court of Appeals on May 20, 2004, which gave new life to Family Limited Partnerships (“FLPs”) are reviewed as well as the recent appellate decision in the Strangi case. Although clear that Section 2036(a) contains an exception for a bona fide sale for adequate consideration, the form of the FLP investment has been found to be significant in determining whether the FLP conducted a legitimate economic activity or was overwhelmingly testamentary in nature, and therefore not to be respected for transfer tax purposes. The Third and Fifth Circuits have issued opinions that appear to be at odds concerning what is a legitimate business activity for the Section 2036(a) exception. The tax advisor is left to determine when a partnership will be deemed engaged in business transactions sufficient for the bona fide sale for the adequate and full consideration exception to apply. The answer might just depend on what circuit has jurisdiction over the client. The possibility of an attack under Section 2036(a)(2) is the focus of the analysis. Left unresolved by these latest cases is whether the Commissioner is foreclosed from raising Section 2036(a)(2) in circumstances where Section 2036(a)(1) or the bona fide sale exception contained in Section 2036(a) do not apply.

Might the better approach be to avoid the courts and take the issue of valuation discounting in the context of an FLP to Congress for a legislative resolution? The success in the codification of the rules regarding grantor retained annuity trusts (GRATS) and grantor retained unitrusts (GRUTS) is referred to as an example.