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Lexis Fed. Tax J. Q., Dec. 2018 at ch. 1


The Tax Court’s 2017 holding in Estate of Powell v. Commissioner1 followed by its 2018 decision in Estate of Cahill v. Commissioner,2 signals a need to rethink how best to structure the family limited partnership and the terms of the partnership agreement. In a shift away from its historical approach to analyzing gross estate inclusion of family limited partnership assets, the Powell court endorses application of Section 2036(a)(2)3 to include the value of partnership assets in decedent’s gross estate, and in an unprecedented step employs Section 2043 to determine the value of family limited partnership assets includible in the gross estate. Going forward, these decisions impact how best to plan with family limited partnerships for both those clients who will owe estate tax and those who will not. This article discusses the estate planning consequences of these decisions with regard to the family limited partnership and the impact of the Powell decision on the determination of income tax basis of partnership assets included in the gross estate.

After Estate of Powell, the mere ability of a donor to join in a decision to terminate the partnership, regardless of whether the donor could have controlled the outcome, causes inclusion of assets in donor’s gross estate absent showing of a bona fide sale for adequate and full consideration. The court’s opinion in Estate of Powell, as delivered by Judge Halpern, for the first time determines the value included in the gross estate under Section 2036(a)(2) by applying Section 2043, and consequently includes in the gross estate only that portion of partnership assets equal to the “discount” attributable to the partnership interests received by decedent on formation of the family limited partnership, with any remaining value accounted for under Section 2033 based on the limited partnership interests held by decedent at death. This latter of the two holdings in Powell prompted a concurrence by Judge Lauber, and a divided court on the issue of whether to change the manner in which the court has historically determined the value included in the gross estate when Section 2036 causes inclusion of limited partnership assets in decedent’s gross estate. Following Estate of Powell, the question becomes whether Powell signals a seismic shift or no more than a mere ripple on the estate planning landscape in the Tax Court’s approach to family limited partnerships.

To eliminate any doubt about the Tax Court’s willingness to rely on Section 2036(a)(2) in the context of family limited partnerships and other estate planning techniques, the Tax Court a year later issued its 2018 decision in Estate of Cahill v. Commissioner4 applying a similar analysis in the context of generational split dollar life insurance arrangements. Not surprisingly both cases, Estate of Powell and Estate of Cahill, rest on facts that some would characterize as egregious. The nature of the underlying facts in these cases leave open the question of whether these holdings will apply in cases where planning is completed well before the anticipated death of the donor and while donor remains in good health. Both make clear formation of a family limited partnership falling within the bona fide sale for adequate and full consideration exception escapes inclusion of its assets in the gross estate.

The article begins with a discussion of the estate planning implications of Estate of Powell and Estate of Cahill for family limited partnerships. It next moves to a discussion of the income tax basis implications of the Powell opinion in light of the Tax Court’s 2017 decision, Hurford Investments No. 2, Ltd. v. Commissioner,5 addressing income tax basis of family limited partnership assets. Whether going forward the Tax Court embraces Judge Halpern’s analysis or that of Judge Lauber will impact the answers to the issue of income tax basis. Income tax basis at death becomes important for many in light of the current increase in the applicable exclusion amount to $11,180,000 for 2018, and $11,400,000 for 2019.


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