Ninth Circuit Bigelow Decision Leaves Issues Unresolved

Steve R. Akers (Managing Director, Bessemer Trust) has recently published his article entitled Bigelow v. Commissioner, RPPT eREPORT (2007).

Here is the synopsis of his article:

The Ninth Circuit now joins the Third, Fifth, and Eighth Circuits in weighing in on the application of §2036 to family limited partnerships. Bigelow v. Commissioner, 100 AFTR2d 2007-xxxx (9th Cir. September 14, 2007), affg, T.C. Memo 2005-65. The Ninth Circuit upheld the Tax Court finding that §2036 caused the inclusion of all partnership assets in the decedent’s gross estate without a discount. The Ninth Circuit decision is not surprising and generally does not plow new ground. The facts of an implied agreement for retained enjoyment of the assets contributed to the partnership are strong. The court focused on the lack of purported non-tax benefits to find that the bona fide sale for full consideration exception did not apply. The court seemed to be looking for actual particular claims or risks to support a liability protection purpose, an actual threat of a partition action to support avoiding partition as a purpose, and particular assets or a business requiring active management to support a management purpose. The court said that a heightened scrutiny analysis would apply, and the court said to consider whether the terms of the transaction differed from those of two unrelated parties negotiating at arm’s length (in effect, suggesting a “comparability” test to determine if unrelated parties would have contributed assets to the partnership in the same situation as the decedent.)

The opinion contains a startling “requirement” for the full consideration exception to §2036. The opinion literally says that there must be more than just transfers to the partnership for a proportional number of units of the partnership, and that there “must” be a “genuine pooling” of assets — which would seem to require significant contributions by other partners. However, the reasoning in the next several pages of the opinion refers to other factors (primarily the absence of non-tax benefits) in addressing the bona fide transfer for full consideration exception to §2036. In fact, there were no significant contributions by other partners in that case, but the court made no mention of that as a reason to refuse application of the full consideration exception. Planners probably will not drastically change their planning for family limited partnerships to urge strongly that clients have other family members make substantial contributions to the partnership in light of this troublesome statement in the opinion —which the court itself did not seem to apply.