## Facts

- Theodore R. Thompson implemented an estate plan marketed as the “Fortress Plan,” which used family limited partnerships (FLPs) and corporate general partners to hold family assets.
- In 1993, Thompson transferred approximately $2.8 million in securities and other property to two newly formed FLPs in exchange for pro rata partnership interests.
- Plan materials and advisor testimony emphasized estate and income tax reduction and stated that “total control” could be retained through the corporate general partners.
- The partnerships primarily held marketable securities and did not conduct meaningful operating business activities.
- The Tax Court found an implied understanding that Thompson would continue to receive the economic benefits of the transferred assets during life, despite the formal transfers.
- After Thompson’s death, the estate reported the partnership interests on the federal estate tax return using a 40% valuation discount for lack of control and marketability.
- The Commissioner issued an estate tax deficiency notice, asserting that I.R.C. § 2036(a) required inclusion of the full date-of-death value of the transferred assets in the gross estate.

## Issues

1. Whether I.R.C. § 2036(a) required inclusion in the gross estate of assets transferred during life to FLPs because the decedent retained possession, enjoyment, income, or control in substance.
2. Whether the transfers qualified for the statutory exception as a bona fide sale for adequate and full consideration in money or money’s worth.
3. Whether the estate could claim valuation discounts by valuing discounted partnership interests rather than the underlying assets.

## Decision

- The Third Circuit affirmed the Tax Court’s decision sustaining the deficiency.
- The court held that § 2036(a) applied because the evidence supported an implied agreement that Thompson retained lifetime enjoyment and economic benefit of the transferred assets.
- The court held that the bona fide sale for adequate and full consideration exception did not apply because the transfers lacked a legitimate, substantial non-tax purpose and did not resemble arm’s-length transactions.
- As a result, the Commissioner properly included the full date-of-death value of the underlying assets in the gross estate and disallowed the claimed 40% valuation discount.

## Legal Principles

- I.R.C. § 2036(a) includes in a decedent’s gross estate property transferred during life if the decedent retained possession or enjoyment, the right to income, or the power to designate who will enjoy the property or its income, unless the transfer was a bona fide sale for adequate and full consideration.
- Retained enjoyment or control may be shown by an implied agreement inferred from the surrounding facts, even without formal reservation of rights.
- The bona fide sale exception requires more than nominal consideration; courts examine whether the transaction had a legitimate, significant non-tax purpose and meaningful arm’s-length characteristics.
- When § 2036(a) applies to FLP transfers, the estate generally may not obtain valuation discounts by valuing partnership interests; instead, the underlying transferred assets are brought back into the gross estate at full value.

## Conclusion

The Third Circuit held that assets transferred to family limited partnerships were includible in the decedent’s gross estate under § 2036(a) because the decedent effectively retained lifetime enjoyment and the transfers were not bona fide sales for adequate and full consideration, defeating the estate’s claimed valuation discounts.


Estate of Thompson v. Commissioner, 382 F.3d 367 (3d Cir. 2004)