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BRADFORD UPDIKE COMMENTS ON BONGARD

April 03, 2005

Bradford Updike left an extended comment on a post below that was too good to leave down in the comments, so we post it in full here:

I just completed an article on family limitied partnership law that is available on Westlaw. Cite is 50 S.D. L. Rev. 1 (2005). Much of my commentary echos the comments made recently by Mr. Handler.

Once you get your head into the past FLP cases, it appears that most valid FLPs share two common elements: 1) the older generation partner that contributes most of the assets has changed his relationship to the assets by respecting entity formalities and by keeping the FLP assets separate from his personal property, and 2) the younger family partners are making meaningful contributions in the formation and management of the FLP.

This appears to have carried the day for the taxpayers in Estate of Stone v. Comm'r, nothwithstanding the fact that the parents contributed 97-98% of the assets. Although the presence of adversity and litigation among certain younger family was certainly present, the Tax Court looked very favorably upon the management activities of the younger family members.

What the Tax Court appears to be using is a heightened "substance over form" test that requires the FLP to be operated in a "businesslike" manner, and that requires meaningful management contributions from all partners involved. The biggest question that obviously looms about is how much control by the older family partner is too much. After all, one would think that an FLP would still be a bona fide arrangement if the partnership books and records were in order and the younger family partners were making the type of meaningful contributions that are typically allowed of a limited partner under state law.

Notwithstanding our views on this, current case law clearly favors "more management participation and oversight" by younger family members. This is where we are. The harsh truth is you have to give something up to get something back in way of valuation discounts and other tax benefits. Assuming older family members are willing to use the FLP as a bona fide strategy for "transitioning" ownership and management of assets to their children and grandchildren, then the strategy could make sense. That doesn't mean that the older family members have to be completely cut out of the loop, but it does mean that the younger family members need to be ready, willing, and able to take on meaningful responsibilities of overseeing the FLP business affairs. Until the Tax Court or Supreme Court tells us otherwise, this is were we stand.

Unfortunately, we cannot find a link to Mr. Updike's law review article; If we find one, we will provide it.

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