Trusts and Estates

Ca. Trs. & Estates Quarterly 2018, Volume 24, Issue 1

TAX ME OR DON’T… BUT STOP STRINGING ME ALONG AFTER ESTATE OF POWELL, IS GIFTING WITH STRINGS ATTACHED PERMISSIBLE?

By Joy Paeske, Esq.*

I. EXECUTIVE SUMMARY

Estate of Powell v. Commissioner1 is the first case to hold that retention of a limited partnership interest can also be the retention of the right to control the enjoyment of transferred property either alone or in conjunction with others under Section 2036(a)(2) ofthe Internal Revenue Code,2 thus causing the entire value of any assets transferred to the partnership to be included in the decedent’s taxable estate. Powell also advances a new methodology to calculate the valuation of the assets transferred to a family limited partnership, limited liability company, or corporation (hereinafter collectively referred to as "Entity") that should be included in a decedent’s estate whenever Section 2035 or 2036 applies. Such methodology may result in double taxation of any appreciation in the value of Entity interests from the initial contribution to the Entity up to the date of the decedent’s death.

Given Powell‘s unusual fact pattern involving deathbed planning, the ruling for estate tax inclusion of the Entity assets is not surprising. However, prior Tax Court cases involving Entities have generally been focused on estate tax inclusion of Entity assets in a decedent’s estate under Section 2036(a) (1). While the Internal Revenue Service ("Service") has raised arguments for estate tax inclusion under Section 2036(a)(2) in prior cases, very few courts have given credence to these arguments and instead relied on Section 2036(a)(1) as the basis for inclusion of Entity assets in a decedent’s estate. Therefore, while most practitioners have been mindful of the landmine posed by Section 2036(a)(2), the application of that subsection has caused less concern, either because the few cases that have addressed this provision had unusual facts, or because of a reliance on United States v. Byrum,3 discussed below.

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