Estate of Powell v. Commissioner, 148 T.C. 392 (T.C. 2017)

Facts

  • Nancy H. Powell was terminally ill in August 2008 and died on August 15, 2008.
  • On August 6, 2008, her son, Jeffrey J. Powell, formed NHP Enterprises LP (NHP), a limited partnership; he controlled the general partner and its distribution discretion.
  • On August 8, 2008, approximately $10 million of cash and marketable securities were transferred from Nancy’s revocable trust to NHP in exchange for a 99% limited partnership (LP) interest.
  • Also on August 8, 2008, Jeffrey, acting under a purported power of attorney, transferred Nancy’s 99% LP interest to a charitable lead annuity trust (CLAT) that paid an annuity to charity during Nancy’s life, with the remainder to her sons at death.
  • The partnership agreement permitted dissolution by written consent of all partners, giving Nancy (as an LP) a joint ability with the other partners to dissolve NHP.
  • The estate reported a taxable gift from the LP-to-CLAT transfer, applying valuation discounts and valuing the transferred remainder interest at roughly $7.5 million.
  • The IRS issued estate and gift tax deficiency notices asserting that the contributed assets and/or the LP interest should be included in the gross estate.

Issues

  1. Whether the cash and securities transferred to NHP were includible in the gross estate under I.R.C. § 2036(a)(2) and/or § 2038(a).
  2. Whether Nancy’s ability, in conjunction with other partners, to dissolve NHP constituted a retained right “to designate the persons who shall possess or enjoy” the transferred property or its income under § 2036(a)(2).
  3. Whether the 99% LP interest was includible under § 2033 or § 2038(a) because the power of attorney did not authorize Jeffrey to transfer it to the CLAT.
  4. Whether § 2035(a) required inclusion of value attributable to § 2036(a)(2) where the LP interest was transferred (if at all) within three years of death, and how to address potential duplicative inclusion.

Decision

  • The Tax Court (reviewed opinion) granted the IRS partial summary judgment.
  • The court held that Nancy’s ability, acting with the other partners, to dissolve the partnership was a § 2036(a)(2) right to designate who would possess or enjoy the contributed cash and securities or their income.
  • Because the LP interest was transferred, if at all, within three years of death, the value of the cash and securities contributed to NHP was includible in the gross estate to the extent required by § 2036(a)(2) and/or § 2035(a).
  • The court held that the transfer of the 99% LP interest to the CLAT was unauthorized under the power of attorney and ineffective; therefore, Nancy owned the LP interest at death and it was includible under § 2033 (and potentially § 2038(a)).
  • The court recognized a potential for duplicative transfer tax (inclusion of both underlying assets and the LP interest) but treated it as a later computational or remedial matter rather than a bar to inclusion at summary judgment.

Legal Principles

  • Under § 2036(a)(2), a transfer is brought back into the gross estate if the decedent retained, alone or in conjunction with any person, the right to designate who will possess or enjoy the transferred property or its income.
  • A joint power to dissolve a partnership and thereby affect possession or enjoyment of partnership assets can constitute a retained § 2036(a)(2) right, even when held by a limited partner acting with others.
  • When a § 2036(a)(2) right exists and the relevant interest is transferred within three years of death, § 2035(a) can require inclusion of value attributable to that retained right.
  • Property remaining owned by the decedent at death is includible in the gross estate under § 2033; a purported lifetime transfer may be disregarded if not authorized under applicable state law authority (such as an insufficient power of attorney).
  • The § 2036 bona fide sale exception requires a bona fide sale for full and adequate consideration; the taxpayer bears the burden to show legitimate and significant non-tax motives supporting the transaction.

Conclusion

The Tax Court held that a decedent’s joint ability, as a limited partner, to dissolve a family limited partnership can trigger § 2036(a)(2) inclusion of contributed partnership assets (and § 2035(a) can apply when transfers occur within three years of death), and it further held that an unauthorized power-of-attorney transfer of an LP interest to a CLAT was ineffective, leaving the LP interest includible in the gross estate under § 2033 (and potentially § 2038).