Hey folks,
Sid here – Lawyer, MythBuster, Legal Reporter.
Today, I want to share a landmark case because it addresses and clarifies one of the CORE issues in estate planning – What is included in the estate, subject to probate and estate taxes?
Let’s dive in…
I. The Issue: Did Strangi Retain Control?
The core legal question was whether assets transferred to a Family Limited Partnership (FLP) were includible in the gross estate of Albert Strangi.
The estate sought a significant valuation discount on the limited partnership interests, which would drastically reduce the estate tax liability.
The Internal Revenue Service (IRS) argued that the full value of the underlying assets should be included in the gross estate.
The IRS claimed that Strangi had effectively retained control and enjoyment of the transferred property under IRC Section 2036(a).
II. The Rule: IRC Section 2036(a)
Internal Revenue Code Section 2036(a) is the anti-abuse statute for retained interests in transferred property.
Section 2036(a)(1) mandates estate inclusion if the decedent retained the possession or enjoyment of the property.
Section 2036(a)(2) mandates inclusion if the decedent retained the right to designate who shall possess or enjoy the property.
A crucial exception exists if the transfer was a bona fide sale for adequate and full consideration.
The “bona fide sale” exception requires a legitimate and significant non-tax business purpose for the transaction.
III. The Facts: FLP Formation and Operation
Albert Strangi’s attorney-in-fact, his son-in-law, established a Family Limited Partnership (FLP) and a corporate general partner (SFLP, Inc.).
Strangi transferred approximately $10 million in marketable securities and real estate, representing 98% of his total wealth, to the FLP.
In exchange, he received a 99% limited partnership interest in the FLP.
His children held the remaining FLP interests and owned the shares of the corporate general partner, SFLP, Inc.
Strangi, however, owned 47% of the stock in SFLP, Inc., which served as the general partner with management control.
Strangi continued to reside in his personal residence, which was now owned by the newly formed FLP.
The FLP made various distributions to cover personal expenses for Strangi, including medical costs and funeral expenses.
The FLP also made payments for Strangi’s personal debts and even back surgery for his housekeeper.
The partnership’s operational formalities were routinely disregarded, suggesting a non-business arrangement.
The Tax Court analyzed these facts to determine if an implied agreement existed for Strangi to retain economic benefits.
IV. The Application: The Court’s Analysis
The court first addressed the “bona fide sale” exception, which the estate failed to meet.
The court found that the claimed non-tax reasons for the FLP’s creation were not significant and were secondary to testamentary goals.
The Tax Court concluded the transfer was a mere recycling of value, transferring assets from one pocket to another without meaningful change.
The second, and more pivotal, step was applying IRC Section 2036(a)(1), the retained enjoyment test.
The court determined there was an implied agreement that Strangi would continue to benefit from the transferred assets as needed.
This implied agreement was evidenced by the FLP’s repeated distributions for Strangi’s personal, non-business expenses.
The court found the commingling of personal and partnership finances indicated a clear understanding of retained access to the assets.
The court then applied the alternative holding of IRC Section 2036(a)(2), the retained control test.
Despite his limited partnership status, Strangi’s 99% interest and his voting control over SFLP, Inc. were paramount.
As a director on the general partner’s board, Strangi held the power to decide distributions of the FLP’s income and assets.
This retained power allowed Strangi to shift economic benefits among the partners, thereby controlling the “enjoyment” of the property.
The court found that the Strangi case facts were distinguishable from the Supreme Court’s holding in United States v. Byrum.
In Byrum, the decedent’s control was limited by fiduciary duties to minority shareholders, which the Tax Court found lacking or irrelevant in this family context.
Therefore, Strangi retained the right, in conjunction with others, to control the beneficial enjoyment of the property.
V. The Conclusion: Retained Control = Estate Inclusion
The Tax Court ruled that the transferred assets were includible in Strangi’s gross estate under both Section 2036(a)(1) and Section 2036(a)(2).
The decision effectively disregarded the FLP for estate tax purposes, including the full date-of-death value of the assets.
Closing Thoughts:
Estate of Strangi v. Commissioner became a landmark case defining the limits of valuation discounts using FLPs. It also addresses other broader issues that led to this valuation dispute in the first place – retained control. Had he disposed of all control – there would be no valuation issue as it would not be a part of the estate.
It firmly established that estate planners must demonstrate genuine, significant non-tax reasons and strict FLP operation to avoid inclusion.
The key takeaway is that retaining even indirect control or benefit over assets you transfer will trigger Section 2036(a) and defeat the planning goal.
I’d love to hear your thoughts on this – were you aware of this case? Are you well versed with the topics covered here, because all the businesses, assets, investments, and big plans that you have for your life, and for your beneficiaries comes down to whether you understand this core concept.
That’s it for me.
Talk soon,
Sid Peddinti, Esq.
Law and Tax magazine 
Leave a comment