Activist Tax Court takes on double inclusion problem in estate and gift tax case

Estate of Powell v. Commissioner, 2017 U.S. Tax Ct. LEXIS 19 (May 18, 2017)

Considering the bad facts, the Tax Court’s recent ruling in an estate and gift tax case should not have come as a surprise. Siding with the Internal Revenue Service, the court found the value of assets transferred from the decedent to a family limited partnership was includible in the value of the decedent’s gross estate. What adds a twist, however, is that the majority of the court proposed a new way of calculating the includible amount—to prevent double inclusion, it said. The new approach provoked opposition from within the court.

One day after doctors declared the decedent incapacitated, one of her sons, acting as trustee, transferred cash and securities to a family limited partnership (FLP) in exchange for a 99% limited partner (LP) interest. There were no business operations. Also, the same day, the son transferred the decedent’s 99% LP interest to a charitable lead annuity trust. The decedent died a week after the transactions. The transferred assets were worth $10 million.

The IRS presented a number of theories why the value of the transferred assets was includible in the gross estate. Ultimately, the court found section 2036(a)(2) of the Internal Revenue Code applied because the decedent, acting with her sons, had the ability to dissolve the partnership and designate the beneficiary of the transferred property or the income from it.

The court’s majority then launched into an extended discussion of how much value was includible. In a departure from prior practice, the majority invoked section 2043(a) to limit the amount includible under section 2036(a). It held that the amount to be included in the gross estate was only the excess of the value of the transferred assets over the value of the partnership interest issued in return.

The majority’s move prompted several judges to agree with the result of the case but not with the inclusion theory. Writing separately, one judge plainly voiced concern that the majority’s new theory was wholly unnecessary and possibly not even correct.