Turner's third try on taxes

In November 2018, the Tax Court issued its third opinion in the Estate of Turner v. Commissioner determining an estate tax liability. There, the decedent funded a family limited partnership with securities and took back a 0.5 percent general partnership interest along with a 49.5 percent limited partnership interest. The decedent made lifetime gifts of a 21.7 percent limited partnership interest and died owning a 0.5 percent general partnership interest and a 27.8 percent limited partnership interest.

In the first opinion¹, the Tax Court ruled that the decedent’s entire 0.5 percent general partnership interest and 49.5 percent limited partnership interest were includible in his gross estate under Code Section 2036. The Court reasoned that the decedent treated the partnership as his personal account and therefore, the gifted interests were to be included as part of his gross estate. After the first opinion, the decedent argued that he did not have an estate tax liability because his will provided for a maximum marital deduction. In the second opinion² the Tax Court rejected this argument and ruled that the gifted 21.7 percent limited partnership interest could not qualify for the marital deduction by reason that the marital deduction was not available for the gifted property. The marital deduction only applies to property passing to the surviving spouse and this gifted partnership interest did not passed to the surviving spouse.

For the third opinion³, the IRS argued that the marital deduction must be reduced because only marital assets were available to pay the estate tax liability. The Tax Court disagreed and ruled that the marital deduction did not need to be reduced. The Court reasoned that the decedent could recover amounts gifted to pay the estate tax liability.

Successful IRS challenges of limited partnerships in estate tax are increasing. Now is the time to have your estate plan reviewed to determine the best structure to minimize taxes.

This Chuhak & Tecson, P.C. communication is intended only to provide information regarding developments in the law and information of general interest. It is not intended to constitute advice regarding legal problems and should not be relied upon as such.

Client alert authored by: David B. Shiner, Principal