Strangi v. Commissioner of Internal Revenue

Albert Strangi executed a general power of attorney naming his son-in-law, Michael Gulig, as his attorney-in-fact. Gulig attended a seminar that presented family limited partnerships as vehicles that could help wealthy people to protect their assets from outside claims and to lower estate-tax liability. After attending the seminar, Gulig formed the Strangi Family Limited Partnership (SFLP) and Stranco, Inc. Gulig transferred almost all of Strangi’s assets to the SFLP in exchange for a 99 percent limited partner interest. The partnership agreement imposed strict transfer and control restrictions on the limited partnership interest, which caused the market value of the interest to be considerably less than its pro rata share of the partnership’s assets. Gulig also transferred a much smaller amount of Strangi’s cash to Stranco in exchange for 47 percent of its stock. Strangi’s four children contributed proportionate amounts of cash for the remaining stakes in Stranco. Stranco served as the SFLP’s general partner. After the transfer, Strangi was left with less than $1,000 of liquid assets. Strangi continued to live in a house now owned by the SFLP; he did not pay rent while he was alive, and the SFLP paid for many of his expenses. Additionally, Stranco never actively managed the assets in the SFLP to generate investment returns. Strangi died, and his estate (plaintiff) included only the market value of his partnership interest in his gross estate. The Internal Revenue Service (IRS) (defendant) issued a deficiency, arguing that the interest must be included at a value equal to the transferred assets. The IRS initially lost in tax court but was allowed by the district court on remand to argue in the alternative that the deficiency was valid under § 2036(a) of the Internal Revenue Code. The tax court, on this second hearing, ruled in favor of the IRS, and the estate appealed.