Strangi Case Could Increase Tax Value of Many Entities
- R. Lee Allen

Owners of family limited partnerships, family limited liability companies, and even family owned corporations may be adversely affected by a new decision of the United States Tax Court that could result in a larger estate tax bill when the owners die. The new case, known as Estate of Strangi, has been before the Tax Court for several years. The entire case is about the value of a partnership Mr. Strangi created before he died. Although initially valuing the partnership interests at a discount, the court later found a much higher value based upon a very technical, and according to many estate planning lawyers, very questionable reading of the estate tax law. The higher valuation resulted in a higher estate tax for this particular decedent. Families often create partnerships and similar entities for many reasons. Historically, one of the collateral benefits of owning partnership and similar type interests at death has been the ability to value such interests at a discount from the pro rata value of the underlying assets. Since estate tax is imposed upon the interest’s “fair market value” when you die, these discounts historically resulted in significant estate tax reduction. These discounts were often available due to the fact that any third party who would consider purchasing such interest would take into account in determining the purchase price whether the purchase is for the assets the partnership owns or a non-controlling interest in the partnership that owns the assets. The accepted wisdom has long been that a third party would pay less for a non-controlling interest in a partnership than the third party would pay for the partnership’s assets. The reason is that the buyer of a non-controlling interest in the partnership cannot directly gain access to the underlying partnership’s assets and, therefore, cannot directly benefit from the entity’s assets. But in the Strangi case, the Tax Court used a different approach, simply ignoring the existence of the partnership. Unfortunately, such approach greatly increased the value of what was included in the taxpayer’s estate and, therefore, the estate tax. The full scope of the court’s decision is not yet known. The facts in the Strangi case may be viewed by some as extreme. The partnership was formed just before Mr. Strangi’s death, and he transferred 98% of his wealth to it, including the “personal asset” of his home, in a situation of questionable business intent. But the court did not limit its decision to such extreme circumstances. As written, some estate planning commentators believe that the case could apply to a partnership or other business entity formed years before death and even with respect to interests given away years ago. Quite conceivably, the IRS could now argue that the ruling in Strangi applies to an everyday family business that was formed by only one person. Accordingly, many estate planning lawyers are not taking any chances and are urging clients who have formed partnerships, corporations, and other business entities to come in and have those matters reviewed now. Another provision of the Internal Revenue Code may require that certain changes to avoid this adverse case be made at least three years before death. Waiting to see how the law develops in the future could result in additional estate taxes for the family in the long run. We suggest that if you have an interest in family limited partnerships, family limited liability companies, or other closely-held family businesses, you consult with your estate planning attorney to discuss this new legal development and whether it may have a negative impact on your estate plan. The estate planning attorneys at Sorling are prepared to undertake such review and discuss with you how best to react to this new development. For more information regarding this article, please contact the author or any Sorling attorney who practices estate planning law by clicking: R. Lee Allen www.sorlinglaw.com/practice-estates.htm Click here to review the Sorling disclaimer: http://www.sorlinglaw.com/About-Disclaimers.htm

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