In the case of Estate of Strangi v. Comm'r, 417 F.3d 468 (5th Cir. 2005), the Fifth Circuit Court of Appeals upheld that the estate tax deficiency against the Estate of Albert Strangi. The code section in issue was §2036(a) which provides that transferred assets of which a decedent retains de facto possession or control prior to death are included in the taxable estate. 28 U.S.C. § 2036 (a).
As his health began to fail, Strangi transferred approximately ten million dollars of personal assets into a family limited partnership (“FLP). After his death, the estate filed an estate tax return based on the value of his interest in the FLP as opposed to the actual value of the transferred assets. The IRS issued a notice of deficiency for about $2.5 million. The Tax Court found that Strangi had retained an interest in the transferred assets such that they were included in the taxable estate pursuant to I.R.C. § 2036(a).
In August, 1994 the FLP was created and the ten million dollars of assets were transferred into it. Strangi died in October, 1994. After the creation of the FLP and prior to his death, Strangi continue to reside in one of the two houses transferred to the SFLP and the estate later claimed that Strangi was charged rent.
The basis of the IRS notice of deficiency of about $2.5 million was that the taxable estate was the value of the transferred assets of about $11 million and not the approximate $6.5 million that the estate reported. The estate based its lower valuation of the assets using a discount based on a lack of marketability or control of estate property . See 26 C.F.R. §20.2031-1(b) (“The value of every item of property includible in a decedent’s gross estate... is its fair market value at the time of the decedent’s death…”)