Fifth Circuit Affirms Tax Court Ruling on FLP Abuse
On June 8, 2026, the United States Court of Appeals for the Fifth Circuit affirmed the Tax Court’s decision in Estate of Fields v. Commissioner, T.C. Memo. 2024-90, which found that a bad-facts family limited partnership (FLP) caused estate tax inclusion of the property transferred to the FLP under both Internal Revenue Code Section 2036(a)(1) and (2), with loss of discounts for lack of control and lack of marketability. The Fifth Circuit also affirmed the Tax Court’s imposition of a 20% accuracy-related penalty on the tax deficiency. Estate of Fields illustrates what can go wrong with FLP planning that’s not carefully done, and its potential to leave the decedent’s estate worse off than it would have been had no FLP planning been engaged in at all.
The Facts and Procedural History
The decedent, Anne Milner Fields, inherited an oil business when her husband passed away in the 1960s. She ran that business well and, over time, became a successful businessperson. She took a particular interest in her great nephew, Bryan Milner, educating him, mentoring him and designating him as the successor to her wealth. In her later years, she relied on Bryan to take care of her and manage her assets, entrusting him with a general durable power of attorney (POA). Bryan ultimately exercised this POA to implement an estate plan involving an FLP about a month before Anne’s death on June 23, 2016.
On May 20, 2016, Bryan formed AM Fields Management, LLC (AM Fields Management), of which he was the sole member and manager. He then formed AM Fields, LP (AM Fields) on May 26, 2016, for which AM Fields Management was the general partner and Anne was the limited partner. In forming AM Fields, Bryan signed the partnership agreement both as the manager of AM Fields Management and as Anne’s agent under her POA with respect to her limited partner interest. Afterward, he used his POA to transfer approximately $17 million of Anne’s personal assets to AM Fields (constituting more than 85% of her wealth). Of the assets transferred, more than $15.3 million consisted of marketable securities, with the balance comprised of land and interests in closely held entities. He also caused AM Fields Management to contribute $1,000 to AM Fields as its capital contribution. In exchange for the partnership contributions, Anne received a 99.9941% limited partner interest in AM Fields, and AM Fields Management received a 0.0059% general partner interest.
Throughout this time period, Anne suffered from end-stage Alzheimer’s disease and was hospitalized frequently. She ultimately was placed in hospice on June 15, 2026 and died on June 23, 2016.
After Anne passed away, Bryan obtained an appraisal of Anne’s limited partner interest in AM Fields. The appraiser valued the interest at $10.8 million as of Anne’s date of death, reducing the approximately $17 million in assets that she contributed to the FLP approximately one month before her death by a 36.25% aggregate discount for lack of control and lack of marketability. Bryan, as the executor of Anne’s estate, reported this discounted value on the Estate’s Form 706 estate tax return.
The Internal Revenue Service audited the estate tax return and attacked the claimed discount under Section 2036(a)(1) and (2). In a Notice of Deficiency, the IRS asserted that section 2036(a) applies such that the gross estate includes the full date-of-death value of Anne’s assets that were contributed to AM Fields without any discount for lack of control or lack of marketability. The IRS also asserted an accuracy-related penalty against the estate under Section 6662(a) and (b)(1) due to negligence or disregard of rules or regulations. Litigation in the Tax Court followed.
The Tax Court resolved this litigation in favor of the IRS. First, the Tax Court concluded that estate tax inclusion of the underlying assets of the FLP without any discounts for lack of control or marketability was warranted under both section 2036(a)(1) and 2036(a)(2), and that the bona fide sale exception to section 2036 was unavailable here due to the absence of a substantial nontax purpose. In addition, the Tax Court determined that the Estate failed to meet its burden of establishing reasonable cause for its positions on this issue, and consequently was liable for the 20% accuracy-related penalty on the underpayment of estate tax.
The Fifth Circuit’s Affirmance
The estate raised the following two issues on appeal to the Fifth Circuit:
-
Whether the bona fide sale exception applies to prevent the application of Section 2036; and
-
Whether the 20% accuracy-related penalty was properly imposed on the estate tax deficiency.
No Bona Fide Sale Exception to Section 2036. The estate asserted on appeal the following three non-tax reasons for the transfers: (1) to remedy insufficiencies in Anne’s POA with respect to succession and management; (2) to consolidate and streamline management of Anne’s assets; and (3) to protect against fraud and elder abuse. The Fifth Circuit held that the Tax Court properly rejected each of these arguments and was justified in determining that the transfers to the FLP were instead motivated by the desire to save estate taxes, taking into account Anne’s age and health. Moreover, the Tax Court didn’t clearly err in rejecting the estate’s positions as constituting a “post hoc theoretical justification” rather than an “actual motivation.” Accordingly, the Fifth Circuit affirmed the Tax Court’s conclusion that the creation and contributions to the FLP didn’t serve a substantial non-tax purpose upon which to predicate the bona fide sale exception to Section 2036.
No reasonable and good faith reliance on a tax advisor’s judgment to avoid the 20% accuracy-related penalty. The estate also appealed the Tax Court’s assessment of a 20% accuracy-related penalty on the tax deficiency. The Fifth Circuit held that the Tax Court didn’t clearly err in concluding that the estate was negligent in underpaying estate tax, and was justified in finding that the executor should have recognized that such a fabulous opportunity to avoid tax obligations” was “too good to be true.” Moreover, merely engaging tax and legal professionals didn’t, by itself, demonstrate that the estate acted reasonably and in good faith reliance upon their professional advice to invoke the reasonable cause exception to the 20% accuracy-related penalty. Accordingly, the Fifth Circuit affirmed the Tax Court on this issue as well.