• Estate of Murphy v. United States, U.S. Dist. Ct. W.D. Ark., Case No. 07-CV-1013 (10/2/09) -- Taxpayer FLP Victory
  • December 11, 2009
  • Law Firm: Proskauer Rose LLP - New York Office
  • The court held that the transfer to a family limited partnership (FLP) of certain of decedent’s assets was a bona fide sale for full consideration under section 2036 of the Code.

    The court found that the transfer was a bona fide sale because, first, the FLP had legitimate non-tax purposes.  One of the main purposes was to pool together what the Court referred to as the family’s “legacy assets” into one entity to be centrally managed in a manner consistent with the decedent’s long-term business and investment philosophy.  Other purposes included: (i) enabling decedent to make lifetime gifts of interests in the assets while ensuring the voting of the underlying assets remained in one place; (ii) enabling decedent to educate his descendants about wealth acquisition, management and preservation; and (iii) to protect the assets from creditors and from being dissipated by future generations.

    Secondly, the court found the transfer was a bona fide sale because two of the decedent’s children were actively involved in the management of the legacy assets.  For example, one child served on the board of directors of the businesses comprising the legacy assets.  Also, the partners met 6-8 times a year to discuss the partnership. 

    Third, the decedent retained $130 million of assets for his personal support.  Fourth, the decedent did not commingle the FLP assets with his own.  Finally, the two children involved in the FLP took an active role in forming it, and one child even was represented by her own attorney. 

    The court found that the transfer was for full consideration because (i) the interests in the FLP were proportionate to each individual’s contributions; (ii) the value of each partner’s contribution was credited to his or her capital account; and (iii) on termination or dissolution, the partners were entitled to distributions from the partnership in amounts equal to their respective capital accounts.

    The court also upheld substantial discounts to the decedent’s interests. The decedent’s interest in the FLP at death consisted of an approximately 95% limited partner interest and a 49% interest in an LLC that owned the approximately 2.3% general partnership interest.  The court upheld a combined control and marketability discount of 41% for the 95% limited partnership interest.  Also, the court allowed tiered discounts in valuing the decedent’s 49% interest in the LLC that owned the 2.3% general partnership interest.  The overall discount for the LLC interest was 52%.

    Finally, the court allowed a deduction of all the interest on an $11 million “Graegin” loan that the estate borrowed from the FLP to pay estate taxes.