Family Limited Partnerships and Section 2036: Not Such a Good Fit

The IRS has struggled to close down abusive family limited partnerships. At first unreceptive to IRS arguments, the courts eventually embraced section 2036 as an estate-tax tool for attacking such partnerships. Because the section was not designed to apply to partnerships, difficulties have arisen as the courts have struggled with the fit. In its most recent encounter, the Tax Court in Powell grappled with a fit-related issue that implicates the Supreme Court’s landmark decision in Byrum.

The Powell court, it will be argued, misread Byrum, conflating the majority opinion with the dissent – and converting the rule-based approach adopted by the majority into the standard-based approach advocated by the dissent. The article examines Powell, its reading of Byrum and its struggle with fit-related issues. Before concluding, planning suggestions will be offered.