Over the past several years the IRS has had several high profile victories in cases involving taxpayers’ use of family limited partnerships or LLCs as vehicles to achieve valuation discounts to reduce the tax upon transfers of wealth to their heirs. Many of these rulings have come out of “bad facts” cases where the taxpayer either did not respect the formalities of the entity or there was no real purpose to the entity except to achieve tax savings. However, in the recent case of the Estate of Mirowski v. Commissioner of Internal Revenue, T.C. Memo 2008-74, the Tax Court issued a favorable ruling to the taxpayers and rejected many of the arguments the IRS.

Even though Ms. Mirowski died just a few days following the creation of her family LLC and the transfer of nearly 48% of its value to her daughters (facts which in the past most believe would have resulted in a sure win for the IRS), the Tax Court extensively analyzed the surrounding facts and circumstances and found the entity and the transfer of interests in it to have sufficient non tax reasons for its formation. These reasons included:

1. Joint management of the family’s assets by her daughters and eventually her grandchildren;
2. Maintenance of the bulk of the family’s assets in a single pool of assets in order to allow for investment opportunities that would not be available if Ms. Mirowski were to make a separate gift of a portion of her assets to each of her daughters or to each of her daughter’s trusts; and
3. Providing for each of her daughters and eventually each of her grandchildren on an equal basis.

The Tax Court rejected many of the IRS arguments and its reliance on prior case law, finding the facts of this case distinguishable in every instance. This case demonstrates that these entities can still remain a viable solution for estate and gift tax planning in certain scenarios.