Tax Court Holds Property Not Part of Decedent’s Estate

Joanne and Roy Stone owned several parcels of woodland they hoped to manage as family assets. They transferred 740 acres of the parcels to the Stone Family Limited Partnership of Cumberland County (SFLP), a FLP set up with the purpose of holding and managing property for family members. The Stones then began making annual gifts to children and grandchildren of partnership interest that were valued based on the fair market value of the real estate.

When Joanne died in 2005, the IRS attempted to tax her estate for the real estate owned by the SFLP. The IRS pointed to two instances to help prove the property was part of Joanne’s estate. The first instance involved two related divorce proceeding entered into by Joanne’s son and daughter. As part of both divorce settlements, the ex-spouses quickclaimed their respective interests in the land held by SFLP to Joanne’s children, but no mention was ever made of the SFLP limited partnership interest owned by the ex-spouses. The second instance the IRS used to prove the property was part of Joanne’s estate was the fact that the SFLP closed its bank account because it earned no income and because the only expenses (property taxes totaling $700 per year) were paid by Joanne and Roy from their personal funds.

The Tax Court ultimately held that the parcels of land were not part of Joanne’s estate because she had a legitimate non-tax purpose for transferring the parcels to the SFLP and because a bona fide sale occurred. In determining that a bona fide sale had occurred, the Court found that the Stones (1) did not depend on distributions from the SFLP, (2) did actually transferred the property to the SFLP, (3) did not commingle their funds with the partnership funds, (4) did not provide discounts of the SFLP interests, and (5) were in good health at the time of the transfer to the SFLP.

See Peter J. Reilly, Land Holding Family Limited Partnership Stands up for Woman of the Year, Forbes, Feb., 26, 2012.

Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.