59 Pages Posted: 17 Sep 2006
The fiduciary duty impact theory developed by the United States Supreme Court in its 1972 Byrum opinion has been one of the most important and controversial developments in estate taxation involving transfers to family controlled entities. In 2003, the Tax Court Strangi III opinion sent shock waves throughout the estate planning community when it became the first case to reject the family limited partnership estate planning technique by expanding the reach of IRC Section 2036. The expansion was largely achieved by rejecting the 1972 Byrum fiduciary duty impact theory that had been utilized, with IRS sanction, to negate the application of Section 2036. Faced with mounting failures on other theories, the Service reversed course and turned to Section 2036 with an attempt to factually distinguish Byrum. In many ways, Strangi III presented government friendly facts. Albert Strangi made a deathbed transfer of 97% of his personal and investment assets to a family limited partnership formed and managed by his son-in-law under a power of attorney. In this highly charged set of facts, the constraining fiduciary duty feature of Byrum was not well served. There was no transfer of an operating business with a substantial unrelated minority ownership interest to add substance and real meaning to the fiduciary duties. No matter how strenuously argued, fiduciary duties owed in a friendly family limited partnership are simply too rarely enforced to add meaning. Unfortunately, armed with its Strangi III victory, the Service ramped up the Byrum-slayer theory and applied it to totally different facts in Bongard and was rewarded with an unwarranted victory. Unlike the deathbed investment asset transfers in Strangi III, the Bongard transfers were by a healthy businessman of his ownership in a successful operating business with a very substantial cadre of unrelated Japanese corporations. In this Article, Professor Bishop analyzes the origins and legacy of the theory to challenge conventional Bongard-styled wisdom. Professor Bishop chronicles the statutory development of IRC § 2036 and the fiduciary duty impact theory to demonstrate that the theory arose to deal with specific instances of control over property transferred to family members rather than transfers to a family entity controlled by the transferor. For this reason, the theory was not initially utilized to attack transfers to controlled entities. The theory's recent deployment arose because of the failure of other theories and not because of its logical force. As a result Bongard and its likely progeny are aberrations and not a proper basis for extending the theory to contravene a valid and existing Supreme Court Byrum opinion. As in 1976 when it enacted Section 2036(b) to negate Byrum in the context of transfers of voting stock while retaining the vote, Congress and not the Courts must remedy the alleged estate tax abuse in the form of family limited partnerships.
Keywords: family limited partner, FLP, estate tax, estate planning, fiduciary duty, Byrum, Bongard
JEL Classification: K10, K34
Suggested Citation: Suggested Citation
Bishop, Carter G., The Ebb and Flow of the Federal Tax Role of Fiduciary Duties in Family Limited Partnerships: From Byrum to Bongard. Capital University Law Review, Vol. 35, p. 61, 2006; Suffolk University Law School Research Paper No. 07-09. Available at SSRN: https://ssrn.com/abstract=930398