The Tax Court again agreed with the IRS that a family limited partnership arrangement (FLP) had run afoul of IRC §2036(a), the IRS’s most successful route to undo such planning due to “bad facts.”  But, in the case of Estate of Powell v. Commissioner, 148 TC No. 18 the Tax Court, for the first time since it proposed a “lack of real fiduciary duties” theory for invoking IRC §2036(a)(2) in the case of Estate of Strangi v. Commissioner¸ TC Memo 2003-145 that the Court invoked that provision, rather than the general “implied life estate” theory under IRC §2036(a)(1) to unwind the plan.  Also, the majority opinion also provided that IRC §2043 served to limit the inclusion in the estate to only the excess value of the assets transferred over the interest received.

The plan in this case was very much a “deathbed” plan, with the transfers occurring one week before Nancy Powell died.  As well, at the time of the transfers Nancy was incapacitated as well as terminally ill, so her son, acting under a Power of Attorney (POA), formed the partnership with himself as general partner and then transferred Nancy’s assets into the partnership in exchange for a 99% limited partnership interest.   On that same day, her son, again acting under the POA, transferred Nancy’s limited partnership interest to a charitable lead annuity trust (CLAT).

Image copyright elwynn / 123RF Stock Photo

The most successful method the IRS has developed to attack claimed discounts in family limited partnerships continues to be to claim the transactions, as actually undertaken by the decedent and the family members, ran afoul of the provisions of IRC §2036(a).  In the case of Estate of Holliday v. Commissioner, TC Memo 2016‑51 the IRS again succeeded in bring the assets back into the decedent’s estate using this same provision of the law

The IRS attempted to include assets transferred during the decedent’s life to a family LLC in her estate in the case of the Estate of Barbara M. Purdue, TC Memo 2015-249 as well as claim that gifts of interests in the LLC did not qualify as gifts of a present interest. 

For purposes of including the assets in the Purdue Estate the IRS turned to its trusty favorite section for including assets, IRC §2036(a).