IRS is cracking down on wealthy families' using "family limited partnerships" to reduce their gross estates under IRC 26 Sec 2036.Kansas City Star Business.The IRS is intensifying its scrutiny of family limited partnerships, a popular technique for reducing estate and gift taxes. “We think it’s a significant area of abuse,” said Aileen Condon, chief of the estate and gift tax program in the IRS’ small business/self-employed division. Recent cases have helped clarify what are legitimate versus illegitimate "FLPs" and helped the IRS more aggressivle audit and challenge them.Usually wealthy parents anticipating death transfer assets into a partnership formed with their children. Most of the shares in the partnership are eventually given to the children. Parents retain a small ownership stake and sometimes are the general partner, which means they can make management decisions about the assets. Because the children often receive limited partnership interests with less control, the value of their limited shares often can be discounted at least 20 percent, thereby lowering the gift tax bite. Partnership interests given to the children also may be considered out of the parents’ estate.The Fifth Circuit Court of Appeals has issued two signifcant rulings on FLP's, one favorable to them and one favorable to the government. In the Strangi Estate v. the Commissioner of Internal REvenue, the 5th Circuit found no substantial purpose other than tax avoidance for the transaction. Remand opinion here. However in the Kimbell case, the Circuit ruled for the taxpayers, finding that the decedent had left enough assets in her own name to find a legitimate reason for the partnership structure, although there were other considerations including liability for environmental exposure.