Planning for the Return of Subjective Analysis to Partnership Planning

In the most recent round of reported cases in the continuing limited partnership wars, courts have begun to focus more intently on the underlying motives that impelled clients to establish partnerships. This pattern in the case law is almost certain to continue, and it will inform how clients are counselled for years to come on the formation of business entities for clients who are motivated to protect their estate from the impact of the estate tax. The legal battleground in partnership planning continues to be in the application of Section 2036. After pursuing unsuccessful strategies for several years, the IRS finally found in Section 2036 an argument that resonated with the courts. This section was introduced as a way of capturing transfers that are essentially testamentary. There is one important exception, however, which provides that neither Section 2036(a)(1) nor 2036(a)(2) applies in situations in which the transfer was the result of a bona fide sale for full consideration.