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We begin by examining whether the estate has proven that the
Partnership was formed for a legitimate and significant nontax
purpose. The nontax reason for forming the partnership must have
been a significant factor and must be established by objective
evidence. Id. The purpose must be the actual motivation, not
simply a theoretical justification. Id.
We have identified several factors indicating that a
transaction was not motivated by a legitimate and significant
nontax purpose. Id. These factors include the taxpayer’s
standing on both sides of the transaction, the taxpayer’s
financial dependence on distributions from the partnership, the
partners’ commingling of partnership funds with their own, and
the taxpayer’s actual failure to transfer money to the
partnership. Id. at 118-119.
We have found a significant nontax purpose where the
justification for the transaction was the decedent’s personal
views and concerns regarding the operation of an income-producing
activity and not a business exigency. See Estate of Schutt v.
Commissioner, T.C. Memo. 2005-126 (family limited partnership had
a significant nontax purpose of facilitating the decedent’s buy
and hold investment strategy and assuaging the decedent’s worry
that his heirs would sell his investments after his death).
There is no significant nontax purpose, however, where a family
limited partnership is just a vehicle for changing the form of
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