STATUS OF THE FEDERAL TRANSFER TAX LAW Real Estate, Probate & Trust Law Section Program

Hot Topics and Updates

Harry W. Wolff, Jr. Cox Smith Matthews Incorporated 112 East Pecan Street, Suite 1800 San Antonio, Texas 75205-1521

(210) 554-5500

Friday, June 11, 2010 11:30 a.m. – 12:00 p.m.

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HARRY W. WOLFF, JR. Cox Smith Matthews Incorporated

San Antonio, Texas

EDUCATION St. Mary’s University, J.D., 1980 The University of Texas, B.B.A., 1976

ADMISSIONS / CERTIFICATION Licensed to practice before all Texas state courts; the United States District Court,

Western District of Texas; the United States Supreme Court; the United States Court of Appeals for the Fifth Circuit; and the United States Tax Court

Board Certified in Estate Planning and Probate Law by the Texas Board of Legal Specialization

PROFESSIONAL ACTIVITIES

American Bar Association State Bar of Texas (Chair 2009-2010, Real Estate Probate and Trust Law Section,

Council Member 1999-2003 and 2004- 2005) (Chairperson, Probate Law Committee 2000-2005) (Sub-Committee Chairperson, Texas Uniform Trust Code Committee 2000-2003))

Fellow, The American College of Trust and Estate Counsel San Antonio Estate Planners Council San Antonio Bar Association

SPEAKING ENGAGEMENTS / PUBLICATIONS San Antonio Young Lawyer's Association, Docket Call in Probate Court, "Distribution of

Estates," 1990, 1994, 1996 National Business Institute, "Key Issues in Estate Planning and Probate in Texas," 1994 Houston Bar Association Wills and Probate Institute, "Special Use Valuation I.R.C.

2032A- Problems with Securing the Election," 1994 Texas Bankers Association Texas Trust and Probate Codes Refresher Workshop, "Texas

Trust Code," 1995 University of Houston Law Foundation Wills and Probate Institute, "The Decision to

Die," 1992-1995 Texas Society of Certified Public Accountants, "Life Insurance in Estate Planning," 1996 University of Houston Law Foundation, Wills and Probate Institute, "Marital Property

Agreements," 1996, 1999 Law Education Institute, Inc., and BNA Books, 2000 National CLE Conference ®, "Life

Insurance in Estate Planning" Law Education Institute, Inc., and BNA Books, 2001 National CLE Conference ®, "Life

Insurance Trusts" Law Education Institute, Inc., and BNA Books, 2003 National CLE Conference ®,

"Recent Developments Regarding Family Owned Business Entities And Valuation" State Bar of Texas, 2003 Advanced Estate Planning Strategies Course, "Adapting to

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Change – How do you maintain flexibility ‘after’ the plan" State Bar of Texas, 2003 Legislative Update - "Estate Planning, Probate & Guardianship

Update" Law Education Institute, Inc., and BNA Books, 2004 National CLE Conference ®,

"Recent Developments In Wealth Transfer Planning" American Bar Association Section of Family Law, 2005 Spring Committee Meeting &

CLE Conference, “Estate Planning Basics For The Family Lawyer” State Bar of Texas, 2007 Advanced Estate Planning Course, “Charitable Provisions of

the Pension Protection Act of 2006” San Antonio Estate Planners Council, 2009 Docket Call in Probate Court Course,

“Planning with Family Entities – Where are We?” Texas Society of Certified Public Accountants, 2009 CPE Expo, “Estate and Gift Tax

Update” Midland Memorial Foundation, 2010 Estate Planning Seminar, “Estate and Gift Tax

Update” State Bar of Texas, 2010 Advanced Estate Planning Course, “New Section 2053

Regulations” State Bar of Texas, 2010 Annual Meeting Hot Topics CLE Program, “Estate and Gift Tax

Update”

SELECTED AWARDS / ACHIEVEMENTS Woodward/White, "The Best Lawyers In America," 2001 - Present Texas Monthly, "Texas Lawyer Super Lawyer," 2003 - Present Scene In SA, "San Antonio’s Best Attorneys," 2004 – Present

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ESTATE AND GIFT TAX UPDATE

HARRY W. WOLFF, JR. Cox Smith Matthews Incorporated 112 East Pecan Street, Suite 1800 San Antonio, Texas 78205-1521

(210) 554-5500

STATE BAR OF TEXAS ANNUAL MEETING Hot Topics and Updates

June 11, 2010

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Table of Contents

I. Case Update .........................................................................................................................1 

A. Estate of Mirowski v. Commissioner ......................................................................1 B. Holman v. Commissioner ........................................................................................2 C. Bianca Gross v. Commissioner ................................................................................6 D. Estate of Hurford v. Commissioner .........................................................................8 E. Estate of Jorgensen v. Commissioner ....................................................................12 F. Estate of Miller v. Commissioner ..........................................................................14 G. Linton v. U.S ..........................................................................................................17 H. Heckerman v. U.S ..................................................................................................18 I. Keller v. U.S ..........................................................................................................19 J. Pierre v. Commissioner ..........................................................................................21 K. Estate of Malkin v. Commissioner.........................................................................23 L. Estate of Murphy v. U.S ........................................................................................25 M. Estate of Christiansen v. Commissioner ................................................................26 N. Estate of Petter v. Commissioner ...........................................................................30 O. Estate of Black v. Commissioner ...........................................................................36 P. Estate of Price v. Commissioner ............................................................................38 Q. Estate of Shurtz v. Commissioner ..........................................................................39 R. Fisher v. U.S ..........................................................................................................41 S. Summary. ...............................................................................................................42 

II. Regulatory Update .............................................................................................................45 A. Final Regulations under IRC §2053 ......................................................................45 B. CCA – 11831-08 ....................................................................................................45 C. Notice 2010-19.......................................................................................................45 

III. Legislative Update .............................................................................................................46 A. 2009........................................................................................................................46 B. 2010........................................................................................................................50

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ESTATE AND GIFT TAX UPDATE

Harry W. Wolff, Jr. San Antonio, Texas

I. Case Update

A. Estate of Mirowski v. Commissioner. T.C Memo, 2008-74 (March 26, 2008), represents the first taxpayer victory in a case involving §2036(a) since Estate of Bongard, 124 T.C. 95 (2005).

1. Facts

On August 27, 2001, Anna Mirowski (Anna), a 73 year old widow, formed Mirowski Family Ventures, LLC, a Maryland limited liability company (MFV). On September 1, 2001, Anna transferred patent royalties from the automatic implantable cardioverter defibrillator, a device invented by her late husband, to MFV. Over the three day period from September 5-7, 2001, Anna transferred over $60,000,000 worth of marketable securities to MFV.

Also on September 7, 2001, Anna made gifts of a 16% member interest in MFV to each of three irrevocable trusts she created in 1992, one for the benefit of each of her three daughters (resulting in a gift tax liability of $11,750,623). In addition to the remaining 52% interest in MFV, Anna retained approximately $3,000,000 in cash.

Anna died on September 11, 2001, (four days after being admitted to the hospital). At the time of her death Anna was the sole general manager of MFV, but five days later, her three daughters held a meeting electing themselves as officers of MFV. In 2002 MFV distributed $36,415,810 to Anna’s estate. No pro rata distributions were made to the three irrevocable trusts.

The IRS asserted an estate tax deficiency of approximately $14,200,000, based upon all of the assets of MFV being included in Anna’s estate under § 2036(a). The issues decided by the Tax Court are whether any of the assets owned by MFV are includable in Anna’s estate under §§2036(a)(1), 2036(a)(2), 2038(a)(1) and 2035(a).

2. Holding

The Tax Court (Judge Chiechi) held that: (i) §§ 2036(a)(1), 2036(a)(2) and 2038(a)(1) did not apply to Anna’s contribution of assets to MFV, or, to MFV’s assets attributable to the 16% member interest gifted to each irrevocable trust; and (ii) §2035 was not applicable because Anna did not relinquish any right or power that would have caused inclusion in her estate under §§ 2036 or 2038.

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3. Court’s Analysis

The court concluded that §§ 2036(a)(1) and 2036(a)(2) were not applicable to Anna’s contributions to MFV due to the bona fide sale for adequate and full consideration exception. The court applied the Estate of Bongard legitimate and significant nontax purpose and proportionate interest standards, finding that under the facts of the case (as established by the “completely candid, sincere, and credible” testimony of two of Anna’s three daughters), there were three legitimate and significant nontax reasons for the contributions: (i) joint management of the family’s assets by Anna, her daughters and eventually Anna’s grandchildren, with the objective of fostering family cohesiveness; (ii) maintaining the bulk of the family’s assets in a single pool to take advantage of lower investment fees and to allow access to otherwise unavailable investment opportunities; and (iii) providing for each of her daughters and eventually each of her grandchildren on an equal basis.

In addition to these three legitimate and significant nontax purposes, the court noted that another legitimate, but “not significant,” nontax reason was Anna’s desire to provide additional protection from potential creditors. The court then applied the same facts that supported the application of the bona fide sale for adequate and full consideration exception under §2036 in applying the exception under §2038(a)(1) for a bona fide sale for adequate and full consideration in money or money’s worth to Anna’s transfers to MFV. Judge Chiechi explicitly repudiated the necessity of requiring the activities of the entity to rise to the level of a “business” in order to meet the “bona fide sale” portion of the exception as required in Estate of Rosen v. Commissioner, T.C. Memo. 2006-115, and Estate of Rector v. Commissioner, T.C. Memo. 2007-367.

Judge Chiechi held that Anna’s powers to determine the timing and amount of distributions from MFV were sufficiently limited by the governing documents and by the fiduciary duties imposed on Anna under applicable state law, and accordingly, were not an express retention of a right described in §§ 2036(a)(1) or 2036(a)(2). Judge Chiechi also found no implied agreement of retained possession or enjoyment under §2036(a), notwithstanding the fact that a distribution of funds from MFV was used to pay transfer taxes, legal fees and other expenses of Anna’s estate.

Finally, based upon its holdings under §§ 2036(a) and 2038(a)(1), the court held that §2035(a) did not apply to Anna’s respective gifts to her daughter’s trusts.

B. Holman v. Commissioner. 130 T.C. No. 12 (May 27, 2008), rejected the indirect gift theory for gifts of partnership interests made six days after the partnership was formed, but applied §2703 to disregard transfer restrictions in the partnership agreement in valuing the gifts.

1. Facts

On November 2, 1999, Tom Holman (Tom) and Kim Holman (Kim) executed the following documents: (i) wills; (ii) an agreement establishing “The Holman Irrevocable Trust U/A dated September 10, 1999” (the Trust), which named Tom’s

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mother Janelle Holman (Janelle) (who executed the trust agreement on November 4, 1999) as trustee; and (iii) a partnership agreement establishing the “Holman Limited Partnership” (HLP), a Minnesota limited partnership. Also on November 2, 1999, Janelle as trustee of the Trust, transferred 100 shares of Dell stock to HLP in exchange for a 0.14% limited partnership interest and Tom and Kim transferred 70,000 shares of Dell stock (owned one-half by each of them) to HLP in exchange for a 0.89% general partnership interest for each of them and a 49.04% limited partnership interest for each of them. Pursuant to the partnership agreement and Minnesota law, HLP was formed on November 3, 1999, when a certificate of limited partnership was filed with the Minnesota Secretary of State.

On November 8, 1999, Tom and Kim each transferred 713.2667 HLP limited partnership units to Janelle as custodian for I under the Minnesota UTMA and 3,502.6385 HLP limited partnership units to Janelle as trustee of the Trust. As a result of these transfers, Tom and Kim’s limited partnership interests in HLP was reduced to 6.88% each, the Trust’s limited partnership interest in HLP was increased to 70.20%, and the I Custodianship held a 14.26% HLP limited partnership interest.

On December 13, 1999, each of three custodial accounts maintained for three of Tom and Kim’s children L, C and V under the Texas UTMA transferred 10,030 shares of Dell stock to HLP, and the custodial account for I under the Minnesota UTMA transferred 30 shares of Dell stock to HLP. Tom and Kim each timely filed a 1999 federal gift tax return reporting the value of the gifted HLP limited partnership units at $601,827, which applied a discount of 49.5% to the net asset value of HLP.

On January 4, 2000, Tom and Kim transferred 117.426 HLP limited partnership units to each of L, C, V and I’s UTMA accounts. Tom and Kim each timely filed a 2000 federal gift tax return reporting the value of HLP limited partnership units gifted on January 4, 2000 at $40,000, which applied a discount of 49.5% to the net asset value of HLP.

On January 5, 2001, Tom and Kim each contributed 5,440 shares of Dell stock to HLP in return for an additional 1,552.07 HLP limited partnership units. As of February 2, 2001, Tom and Kim transferred 215.193 HLP limited partnership units to each child’s UTMA account. Tom and Kim each timely filed a 2001 federal gift tax return which valued the HLP limited partnership units gifted as of February 2, 2001 at $40,000 This value was based on estimates of the value in light of the prior independent appraisals of gifted HLP limited partnership interests.

By separate notices of deficiency, the IRS determined deficiencies in each of Tom and Kim’s gift tax returns of $205,473, $8,793 and $16,009 for 1999, 2000 and 2001, respectively.

2. Holding

The Tax Court (Judge Halpern) held that: (i) HLP was formed and the shares of Dell stock were transferred to it almost one week before the 1999 gift, so that

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on the facts the transfer cannot be viewed as an indirect gift to the donees under §25.2511-1(a) and (h)(1) of the Gift Tax Regulations, or, under the step transaction doctrine; (ii) paragraphs 9.1 through 9.3 of the HLP agreement are disregarded for valuation purposes under §2703(a) as the safe harbor provisions of §2703(b) do not apply; and (iii) appropriate discounts for the gifted HLP interests are 22%, 25% and 16.25%, for 1999, 2000 and 2001, respectively.

3. Court’s Analysis

In support of its first alternative argument that Tom and Kim made indirect gifts of Dell stock (as opposed to interests in HLP), the government relied on the illustration under §25.2511-1(h)(1) of the Gift Tax Regulations (treating a contribution to a corporation as indirect gifts of a proportionate part of those assets to the shareholders), Shepherd v. Commissioner, 115 T.C. 376 (2000), aff’d, 283 F 3rd 1258 (11th Cir. 2002) and Senda v. Commissioner, T.C. Memo 2004-160, aff’d, 443 F.3d 1044 (8th Cir. 2006). The court found that the facts of the Shepherd and Senda cases were materially different from this case. In Shepherd, the limited partnership units were transferred before the contribution. In Senda, the contribution to the limited partnership and transfer of limited partnership interests were made the same day.

In addressing the government’s alternative argument to support an indirect gift under the step transaction doctrine, the court assumed the government’s reliance on the “interdependence test” described in Santa Monica Pictures, L.L.C., T.C. Memo. 2005-104, as follows:

“Under the interdependence test, the step transaction doctrine will be invoked where the steps in a series of transactions are so interdependent that the legal relations created by one transaction would have been fruitless without a completion of the series. *** We must determine whether the individual steps had independent significance or whether they had significance only as part of a larger transaction. *** [citations omitted.]”

In applying this test to the facts in Holman, even though the court recognized that Tom and Kim created HLP to make gifts to their children, it declined to find that “the relations created by the partnership agreement would have been fruitless had petitioners not made the 1999 gift,” thereby rejecting the application of the step transaction doctrine. The court distinguished the Senda court’s conclusion that transfers to partnerships coupled with transfers of partnership interests on the same day were “integrated steps in a single transaction base on the fact the Holman transfers did not occur on the same day and because the value of the HLP interests fluctuated between

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November 2 and November 8, 1999, and during that period Tom and Kim shouldered that risk.

Regarding the application of §2703, the court first addressed whether paragraphs 9.1 through 9.3 of the HLP partnership agreement served a bona fide business purpose under §2703(b)(1). After reviewing the legislative history and Estate of Amlie v. Commissioner, T.C. Memo 2006-76, the court rejected the Holman’s argument that the restrictions allow the partnership to pursue its goal of inhibiting the transfer of HLP interests to nonfamily members, and instead found that paragraphs 9.1 through 9.3 of the HLP partnership agreement do not constitute a bona fide business arrangement within the meaning of §2703(b)(1). The court stated:

“There was no closely held business here to protect, nor are there reasons set forth in the Committee on Finance report as justifying buy-sell agreements consistent with petitioners’ goals of educating their children as to wealth management and “disincentivizing” them from getting rid of Dell shares, spending the wealth represented by the Dell shares, or feeling entitled to the Dell shares.”

Next the court found that paragraph 9.3 of the HLP agreement also failed the §2703(b)(2) exception stating:

“Tom participated in the drafting of the partnership agreement to ensure, in part, that ‘asset preservation’ as he understood that term (i.e., to discourage the children from dissipating their wealth) was addressed. Tom impressed us with his intelligence and understanding of the partnership agreement, and we have no doubt that he understood the redistributive nature of paragraph 9.3. and his and Kim’s authority as general partners to redistribute wealth from a child pursuing an impermissible transfer to his other children. We assume, and find, and this intention leads us to conclude, and find, that paragraph 9.3 is a device to transfer LP units to the natural objects of petitioners’ bounty for less than adequate consideration.”

The provisions of the HLP agreement that were disregarded for valuation purposes were a “call” right that permitted a family LLC to purchase a non-permitted transferee’s HLP limited partnership interest for fair market value, but on a five year

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installment basis bearing interest at the applicable federal rate, and a requirement that all partners must consent to the transfer of a HLP limited partnership interest to a person that was neither a family member or a partner. Based on its §§ 2703(b)(1) and 2703(b)(2) rulings, the court held that it need not (and did not) decide if the governments application of the capability test under §2703(b)(3) is correct.

Finally, the court’s analysis of the proper minority and lack of marketability discounts to apply to the transfers included a detailed review of the testimony and methodology of both parties’ experts, and resulted in what might be considered significant (though less than allowed by the audit report) discounts.

C. Bianca Gross v. Commissioner. T.C, Memo 2008-221 (September 29, 2008), rejected the indirect gift theory for gifts of partnership interests made eleven days after the partnership was formed.

1. Facts

By 1998, Bianca Gross (Bianca) a widow with two children, Diane Gross Marks (Diane) and Marian Gross (Marian), had acquired a sizable portfolio of publicly traded securities. Aware of her own mortality and to involve her daughters in managing the portfolio which someday would be theirs, Bianca decided to create a family limited partnership which she believed would encourage her daughters to work together and learn from her experience while allowing her as sole general partner to retain control over the partnership’s assets. This generated several discussions between Bianca and her daughters, cumulating in an agreement among them to form a limited partnership by July 15, 1998 as follows: (i) each daughter would contribute $10 cash and Bianca would contribute $100 cash and securities; (ii) as general partner and majority owner, Bianca would retain ultimate control over management, including decisions about sales, purchases, disposition of partnership assets and the timing and amounts of distributions; (iii) the daughters would not be able to transfer their partnership interests without Bianca’s approval; (iv) the daughters could not withdraw or receive the return of their capital contributions; (v) the daughters could not force a dissolution of the partnership; and (vi) each partner’s interest in the partnership would be based on the amount of her contribution of capital.

Even though no limited partnership agreement had been signed, on July 15, 1998, Bianca caused a certificate of limited partnership for Dimar Holdings, L.P. (Dimar) to be filed with the New York Department of State. Bianca also caused notice of the formation of Dimar to appear in New York newspapers, and on October 14, 1998, she caused an affidavit of publication to be filed in the New York Department of State.

On July 31, 1998, each of Bianca’s daughters drew checks for $10 to the order of Dimar. From the beginning of October 1998 through December 4, 1998, Bianca transferred ownership of securities in well-known traded companies from her name to Dimar’s name, and on November 16, 1998, Bianca drew a check for $100 to the order of Dimar. As the redesignated stock certificates were returned to Bianca she recorded them in a notebook titled “Dimar” and tracked the performance of the portfolio on a computer

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program. Dimar filed a Form 1065 for 1998 signed by Bianca as general partner. The return indicated that Dimar commenced business on July 15, 1998.

On or shortly before December 15, 1998, Bianca and her daughters signed a document entitled “Limited Partnership Agreement of Dimar Holdings, L.P.” which named Bianca as the general partner and each daughter as a limited partner. On the same day, Bianca and each of her daughters also signed a document entitled “Deed of Gift” which provided that Bianca is transferring to each daughter a 22.5% interest as a limited partner.

Bianca timely filed a federal gift tax return for 1998 reporting the gifts of a 22.5% limited partnership interest in Dimar to each of her daughters. The reported value of each gift resulted in an approximately 35% discount to the amount credited to each daughter’s capital account ($480,229) attributed to “minority interest”, “lack of control” and “lack of marketability”.

The IRS issued a notice of deficiency claiming the value of each gift was $480,229.

2. Holding

The Tax Court (Judge Halpern) held that: (i) Dimar was formed as a partnership on July 15, 1998; (ii) the securities were contributed to the Dimar during a period commencing in early October 1998 and ending on December 4, 1998; (iii) on December 15, 1998, Bianca made gifts of interests (not necessarily limited partnership interests) in Dimar to her daughters and did not make indirect gifts of portions of the Dimar securities that she had contributed to the partnership; and (iv) the value of gifts was as reported on Bianca’s gift tax return.

3. Court’s Analysis

In rejecting the government’s contention that Dimar was not formed until December 15, 1998, and therefore the gifts to Bianca’s daughters were made “contemporaneously,” the court found that neither party made a compelling argument for their interpretation of New York partnership law regarding whether Dimar had been formed as a limited partnership on July 15, 1998, and turned to the question of whether New York law would deem Bianca and her daughters to have formed a general partnership on that date. The court concluded that based on the facts of the case, “if they failed to satisfy the requirements necessary to form a limited partnership, we deem them to have formed a general partnership on that day [July 15, 1998] and on those terms.”

Having found that Dimar was formed on July 15, 1998, the court then addressed the government’s remaining argument to support its contention that the securities were not transferred to Dimar until December 15, 1998, which was based on a schedule attached to the gift tax return with the heading “Securities Contributed to the Partnership on December 15, 1998.” Bianca argued that the schedule was clearly intended to be a list of the securities (all contributed by her before December 15, 1998)

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held by Dimar on that date and was not intended to show that the securities had, in fact, been contributed on that date. In rejecting the government’s position, the court stated “Considering the Form 709 as whole, petitioner is convincing as to the purpose of the schedule.”

Finally, the court determined that since it found that the Dimar certificate was filed on July 15, 1998, and Bianca and her daughters had agreed to form a partnership on the terms set forth in the Dimar agreement, the fair market value of the gifted interest (even if a general partnership interest) to each daughter was $312,500.

D. Estate of Hurford v. Commissioner. T.C. Memo 2008-278 (December 11, 2008), applied §§ 2035, 2036 and 2038 to the formation of a family limited partnership and to the sale of assets to the family limited partnership via a private annuity transaction.

1. Facts

On April 8, 1999, Gary Hurford (Gary) died survived by his wife Thelma Hurford (Thelma) and three children Gary Michael Hurford (Michael), David Hurford (David) and Michele Hurford McCandless (Michele). Michele took notes on nearly every meeting she attended and phone call she listened to that involved Gary’s and Thelma’s estates. Thelma also kept detailed notes of seemingly every meeting she had. Michele saved all of these notes and turned them over to the Commissioner during discovery.

David and Thelma amassed an estate valued on Gary’s estate tax return at $14,246,784, which included stocks, bonds, farms, ranches, two personal residences and an interest in Hunt Oil Company phantom stock. Gary’s will, which was prepared in 1993 by Dallas attorney Sandy Bisignano (Bisignano), left his entire estate, with the exception of the marital homestead and personal effects, to two trusts--a bypass trust (Family Trust) and a qualified terminable interest property (QTIP) trust. Thelma was appointed the executor of Gary’s estate and trustee of both trusts created under Gary’s will. Bisignano at first remained part of the “Hurfords’ team” and by April 15, 1999 began implementing a plan to settle Gary’s estate.

In the summer of 1999 Thelma sought Bisignano’s advice on her own estate plan. Bisignano as stated in the opinion “again took a conservative and thoughtful approach, recommending that she first make $225,000 gifts to Michael, David and Michele.” He also recommended that Thelma create a family limited partnership into which she could transfer the farm and ranch properties, unifying the land management within a single entity, perhaps with the “plausible purpose” of reducing the risk of liability from what were then operating businesses.

On January 23, 2000, Thelma was taken to the emergency room with severe back pain and diagnosed with stage three cancer. Near the end of January 2000, Bisignano had begun moving forward with Thelma’s estate plan. In early February, Michael was looking for a new attorney because Thelma had become dissatisfied with Bisignano because he did not relate well to the family, would often speak over their heads, was not completing Gary’s tax return or her estate plan quickly enough, and she

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worried he was too expensive. Michael’s brother-in-law (an orthopedic surgeon in Houston) recommended Joe Garza (Garza) as a replacement for Bisignano. Thelma’s notes of her meetings with Garza show that she thought him one of the most agreeable men (or, at least, lawyers) that she had ever met (in contrast to Bisignano, which the Opinion describes as “reserved and fastidious, and proud of the high quality of his work, but with a manner that on first appearance is perhaps not the most inviting”). Garza swiftly persuaded Thelma that his estate plan was better for her than Bisignano’s. Thelma hired Garza on February 22, 2000 and dismissed Bisignano the next day.

Garza’s plan was to separate Thelma’s assets and the assets of both trusts created under Gary’s will into three groups: (i) cash, stocks and bonds; (ii) the Hunt Oil phantom stock; and (iii) the farm and ranch properties. Each asset group was to be transferred to a separate family limited partnership. Thelma and Gary’s estate would then sell their respective interest in each family limited partnership to Michael, David and Michele in return for a private annuity for the balance of her lifetime.

On February 24, 2000, Gaza filed documents with the Texas Secretary of State creating three limited liability companies: Hurford Management No. 1, LLC (HM-1); Hurford Management No. 2, LLC (HM-2); and Hurford Management No. 3, LLC (HM-3). Thelma, Michael, David and Michele each owned a 25% interest in HM-1, HM-2 and HM-3.

On February 24, 2000, Garza also filed documents with the Texas Secretary of State creating three limited partnerships: Hurford Investment No. 1, Ltd. (HI-1); Hurford Investment No. 2, Ltd. (HI-2); and Hurford Investment No. 3, Ltd. (HI-3). The limited partnership interests of each of HI-1, HI-2 and HI-3 was: Thelma, 48%; the Gary T. Hurford Trust (an entity which did not then exist), 48%; Michael, 1%; David 1%; and Michele, 1%. The opinion notes that the partnership agreements “show an unsteady drafting ability to even an untrained eye” citing incorrect page numbers on the table of contents, granting partnership interests to the non existent trust and signature pages showing the wrong entity as general partner.

The opinion also goes into great detail describing the funding of HI-1, HI-2 and HI-3, which purportedly occurred in March 2000, noting the documentation to Hunt Oil Company to support the transfer of the right to the phantom stock was not provided until January 2001 and mistakes and delays in connection with the deeds to the farm and ranch companies. Finally, the opinion makes note that each child was a 1% limited partner of HI-1, HI-2 and HI-3 even though they made no contribution to the partnerships. Garza testified that showing each child as a 1% limited partner interest but a zero capital account was to avoid gift taxes.

On April 5, 2000, Thelma transferred a 96.25% interest (though she only owned a 48% interest) in each of HI-1, HI-2 and HI-3 to Michael and Michele for a private annuity (nothing was transferred to David because Thelma wanted to limit his control due to concern over his “personal problems”). The explanation for the 96.25% interest was that Thelma had transferred the assets of the Family Trust, Marital Trust and Gary’s estate to herself and then in turn had contributed them to the limited partnerships.

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Based on Garza’s attempted value of the transferred partnership interests, the amount of the monthly annuity payments was determined to be $80,000. The opinion points out numerous valuation mistakes and makes note of the fact that Garza merely estimated the discounts for lack of control and marketability. The monthly $80,000 private annuity payments were made to Thelma by direct transfers from the HI-1 account to her personal account.

Thelma died on February 19, 2001. Michael, as executor of Thelma’s estate filed the estate tax return (prepared by Garza) for Thelma’s estate, reporting total assets of $846,666. Michael also filed Thelma’s 2000 gift tax return (prepared by Tuner & Stone, who had been recommended by Garza in July of 2000) reporting the $775,000 in gifts, $675,000 of which were taxable.

On November 18, 2004, Thelma’s estate received two notices of deficiency asserting a deficiency of $9,805,080 and penalties of $1,956,066 for the estate tax return; and a deficiency of $8,314,283 and penalties of $1,662,857 for the gift tax return.

2. Holding

The Tax Court (Judge Holmes) held that: (i) Thelma’s transfer of HI-1, HI-2 and HI-3 limited partnership interests in return for the private annuity were includable in Thelma’s estate under §§ 2036(a)(1), 2036(a)(2) and 2038; (ii) the assets transferred to HI-1, HI-2 and HI-3, including the assets of the Family Trust under Gary’s will, were includable in Thelma’s estate under § 2036(a)(1); and (iii) no penalties would be imposed for negligence or disregard of the Code.

3. Court’s Analysis

The court concluded that Thelma’s transfer of interests in HI-1, HI-2 and HI-3 for a private annuity was not a bona fide transaction for adequate and full consideration. The court first relied on the fact that Thelma only transferred limited partnership interests to Michael and Michele, trusting them to ignore the effect of the documents and provide for David, (which they ultimately did), which rendered the private annuity a “sham--nothing more than a substitute for a will leaving Thelma’s estate in equal shares to her children.” Second, the annuity payments came directly from the assets transferred to HI-1. The children did not use their own assets let alone income from the assets in the limited partnerships; they “held the assets in exactly the same form they were in before the private annuity, and then slowly transferred bits and pieces of them back to Thelma, planning to divide what was left over (including a share for David) after Thelma died.”

Next, the court found that the payment of the annuity payments to Thelma with the very assets she supposedly sold and her withdrawal of funds to pay her personal income taxes constituted impermissible retained interests under § 2036(a)(1); and the fact that Thelma “made it clear that David was to receive one-third of the partnership

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property” was an impermissible retained interests in the assets transferred through the private annuity under §§ 2036(a)(2) and 2038.

In deciding that the creation of HI-1, HI-2 and HI-3 was not a bona fide transaction for adequate and full consideration, the court concluded that the estate’s reliance on asset protection and asset management as legitimate and significant nontax reasons for establishing the entities were insufficient because placing the assets in the partnerships provided no greater protection than they had while the assets were held in the trust created under Gary’s will, and the partners’ relationship to the assets did not change after the formation of the partnerships. The court then addressed a list of factors under prior cases that if present would incline the court to find that the transferred property to the partnerships was not motivated by legitimate and significant nontax reasons and concluded “This leaves only the Hurford’s drive for a discount as a reason for creating the FLPs.”

To support its finding of an implied agreement that Thelma retained enjoyment of the assets transferred to the partnerships, the court cited her use of partnership assets to pay personal expenses, the fact that she transferred nearly all of her assets to the partnerships and the fact that the annuity payments to her came directly from the contributed assets. Accordingly, the assets Thelma transferred to the partnership were includable in her estate with no discount under §§ 2036(a)(1) and 2035(a). This included the assets in the Family Trust created under Gary’s will. The court found that Thelma had “exercised a general power by distributing all of the Family Trust to herself and selling those assets in the private annuity agreement, and so they became subject to her full control and individual ownership.” Also, in a Footnote 24 of the opinion, the court questioned whether a transfer of the QTIP trust assets into an FLP terminated Thelma’s qualifying income interest under §§ 2511 and 2519.

No penalties were imposed because the estate reasonably relied on professional advice, specifically noting that Bisignano had introduced the family to the concept of the family limited partnership before Garza. The final paragraph of the opinion states:

“We consider it well established that a taxpayer has the right to minimize his tax liability, and it was reasonable for Michael to have relied on professionals in the arcane and complex field of estate-tax law. That his and his family’s choice of advisors proved so unsuitable has led them to their present situation -- unable to enjoy fully the estate built up by old Mr. Hurford, and seeking relief at court instead. But we do find that Michael’s reliance on the professionals he chose, however

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unsuitable they turned out to be, was nevertheless under the circumstances done reasonable and in good faith. We therefore impose no penalty for negligence or disregard of the Code.”

E. Estate of Jorgensen v. Commissioner. T.C. Memo 2009-6 (March 26, 2009), was a victory for the government in marketable securities family limited partnership case. The Tax Court found that the assets transferred to the partnership by the decedent were included her gross estate under IRC § 2036, but allowed equitable recoupment of the additional income taxes attributable to the overpayment of income taxes attributable to the basis adjustment under IRC § 1014 resulting from such estate inclusion.

1. Facts

Erma Jorgensen (“Erma”) died on April 25, 2002. On May 15, 1995 Erma, her husband Colonel Jorgensen (“the Colonel”), her daughter (“Jerry Lou”) and her son (“Gerald”) formed a family limited partnership (“JMA-1”). The decision to form JMA-1 was made solely by the Colonel in consultation with the Jorgensen attorney (”Arntson”), and Erma, Jerry Lou and Gerald were not involved in any of the partnership discussions. The Colonel and Erma owned a portfolio of marketable securities valued in excess of $2,000,000. On June 30, 1995, the Colonel and Erma each contributed marketable securities valued at $227,644 to JMA-1 in exchange for 50% limited partnership interests.

Though the Colonel, Jerry Lou and Gerald were general partners of JMA-1, the Colonel made all of the decisions (the children having received their interests by gift). Jerry Lou, Gerald and their six children were all listed as limited partners, such interests also having been gifted.

The Colonel died on November 12, 1996. On January 29, 1997 Arntson wrote to Erma and recommended that the Colonel’s estate claim a 35% discount on the JMA-1 interests. He also recommended that Erma transfer her brokerage accounts to JMA-1. On January 30, 1996, Arntson again recommend that Erma transfer her and the Colonel’s estates brokerage accounts to JMA-1 writing:

“The reason for doing this is so that your limited partnership interest in JMA partnership will qualify for the 35% discount. Instead of your estate having a value in various securities of about $1,934,213.00 it would be about $1,257,238.00. The difference of $675,975.00 would result in a potential savings in estate taxes to the beneficiaries of your estate of $338,487.50. Obviously, no one can guarantee that the IRS will agree to

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a discount of 35%, however, even if IRS agreed to only a discount of 15%, the savings to your children would be $145,066.00, and there can be no discount if the securities owned by you continue to be held directly to you. ”

Arntson never met with Erma regarding the transfers, or any other estate planning. Instead all discussions were among Arntson, Jerry Lou, Jerry Lou’s husband and Gerald. Based on these meetings on May 19, 1997, the decision was made to form a second limited partnership (“JMA-II”). JMA-II was formed on July 1, 1997, and on July 28, 1997 Erma contributed $1,861,116.00 to JMA-II in exchange for a limited partnership interest, and in August of 1997, Erma in her capacity as executrix of the Colonel’s estate contributed $190,254.00 (these transfers resulting in Erma owning a 79.6947%, and the Colonel’s estate owning a 20.3053% interest in JMA-II).

In 1995, 1996, 1998, 1999, 2000, 2001 and 2002,Erma made various gifts of JMA-I and JMA-II to Jerry Lou, Gerald and their children. No gift tax returns were made for the transfers in 1995, 1996, or 1998, but were filed for the transfers made for 1999 and thereafter. Jerry Lou consulted another attorney (“Golden”) regarding the 1999 gifts.

The partnerships held only passive investments, primarily marketable securities. Neither of the partnerships maintained book or records. Jerry Lou and Gerald (the General Partners) received monthly statements and spoke with the broker approximately every 3 months. Gerald inquired about getting “access to some of the money that’s mine” and was told he could take a loan but would have to pay interest. In fact Gerald testified that “it took a while to get my head around the fact that it wasn’t just like a bank account you can get money out of.”

Though not a general partner, Erma signed checks on both partnership accounts in violation of the partnership agreement. In 1998 Erma made cash gifts to her family from the JMA-1 account, and when she attempted to repay the partnership the following year made a deposit in the JMA-II account. Erma also paid her personal expenses out of the partnership accounts, and paid partnership expenses out of her personal accounts. In 1999 Gerald borrowed $125,000.00 from JMA-II, and though the loan was evidenced by a note and secured, no payments were made for several years and then made only interest payments.

Erma died on April 25, 2002. On August 30, 2002, Jerry Lou and her husband wrote Gerald a letter regarding repaying the 1999 loan stating in part: “Phil Golden highly recommends that you pay back Jorgensen Investments II Partnership the $125,000 you borrowed *** Guess we have to be real straight on who borrowed what etc. so the partnership looks very legit.” The government determined a $796,954 Federal estate tax deficiency against Erma’s estate.

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2. Holding

The Tax Court (Judge Haines) held that all of the assets Erma transferred to JMA-I and JMA-II were included in her gross estate under IRC § 2036(a)(1), and that the estate is entitled to equitable recoupment of the 2003 income taxes overpaid by Erma’s children and grandchildren as a result of including the assets in Erma’s gross estate.

3. Court’s Analysis

The Tax Court noted that in order for “efficient management” to constitute a legitimate non-tax purpose, there must be some kind of active management. There was no evidence of economies of scale resulting in lower operating costs to support the purpose of “pooling assets.”

The Court also noted that there were no apparent creditor concerns to support forming the entities. As further evidence the Court made reference to Gerald’s loan and his failure to make payments. In determining that the transfer were not bona fide sales, the Court cited the advice focusing solely on tax savings as the sole reason for creation of the entity, the disregard of partnership formalities, the Colonel having made all of the decisions on formation resulting in the Court stating “...we find especially significant that the transactions were not at arms-length and that the partnerships held a large untraded portfolio of marketable securities.”

Regarding the equitable recoupment claim the Court stated that “…it would be inequitable for the assets to be included in the value of Mrs. Jorgensen’s estate under § 2036 on the one hand, and on the other hand for the estate not to recoup income taxes her children and grandchildren overpaid on their side of the those very same assets but are unable to recover in a refund suit.”

F. Estate of Miller v. Commissioner. T.C. Memo 2009-119 (May 27, 2009), is a case where the Court included the value of a QTIP for which a QTIP election had been made and marital deduction taken upon the death of the decedent’s husband, but for which the decedent received no distributions; and applied IRC § 2036 to some but not all contributions of marketable securities to a partnership.

1. Facts

Virgil J. Miller (“Virgil J.) and Valeria Miller (“Valeria”) were married on February 12, 1938 and had four children Virgil G., Gordon, Donald and Marci. Virgil J. predeceased Valeria, and the value of his gross estate was $7,667,939 (99.6% of which consisted of securities). Virgil G., as executor of Virgil J’s estate, claimed a marital deduction in the amount of $1,060,000 for assets to fund a QTIP trust. Virgil G. also timely made an election pursuant to IRC § 2056(b)(7) to treat QTIP trust property as qualified terminable interest property.

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Virgil G. was the trustee of the QTIP trust and the trust agreement provided that all of the income of the QTIP trust was to be distributed to Valeria at least annually and that income was not to accumulate in the QTIP trust. Valeria did not receive any distributions from the QTIP trust, and all income from the QTIP trust was reported on its own Form 1041.

After Virgil J’s death, Valeria sought estate planning advice from Price, and based on such advice, she decided to form a family limited partnership. On November 21, 2001, (when Valeria was 86) the Indiana secretary of state issued a certificate of limited partnership of V/V Miller Family Limited Partnership (“MFLP”). The MFLP agreement was signed by the partners in February and March of 2002. On March 28, 2002, a revised MFLP certificate and a revised MFLP agreement was sent to Virgil G. Each of the intended partners signed the partnership agreement and issued a certificate representing his or her interest in the partnership (Valeria revocable trust 920 units, Virgil G. 10 general and 10 limited partner units, Donald 20 limited units, Gordon 10 limited units, Gordon 10 limited units and Marcia 10 limited units).

On December 31, 2001, before MFLP had been funded, Virgil G. provided statements to an appraiser of assets that were going to be used to fund the partnership. The December 31, 2001 valuation indicates that MFLP had marketable securities as of that date of $4,336,380, a margin account payable of $499,573 and a net asset value of $3,836,807. The appraisal applied a 35% lack of marketability discount to the purported net asset value and concluded that MFLP had a fair market value of $2,264.73/unit.

Assets were actually transferred to MFLP in April of 2002. Within days of contributing assets to MFLP, it sold securities and transferred cash to Valeria’s revocable trust to pay off her personal margin account. MFLP paid a monthly fee to VGM Enterprises which was owned by Virgil G. to manage its securities. Virgil G., who had been taught how to chart stocks by Virgil J., spent 40 hours per week managing MFLP’s assets.

In 2003 Valeria made additional contribution to MFLP, when as the Court noted “Although decedent had been suffering for certain chronic conditions associated with old age, her day-to-day health was strong.” On April 25, 2003, Valeria fell and broke her hip. On May 19, 2002 a CT scan revealed a traumatic brain injury presumably suffered in the April fall.

On May 9, 2003, (after the fall, but before the diagnosis of the brain injury) Valeria signed a letter requesting Fidelity Investments to transfer all of her assets, except for certain assets in a money market account, into the MFLP Fidelity Investment Account. It appears the Fidelity assets were transferred on May 19, 2003, and that on May 19, 2003 all of the assets in Valeria’s personal Merrill Lynch account were transferred to MFLP’s account. Valeria died on May 28, 2003.

On January 29, 2004, MFLP made a pro rata distribution to its partners. The share passing to Valeria’s trust was $1,100,000, a portion of which was used to pay

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federal and state estate tax liabilities of Valeria’s estate. The 706 did not include the value of the securities used to fund the QTIP trust in the value of the gross estate (but acknowledged that the previous deduction had been claimed in Virgil J’s estate), and valued Valeria’s 920 MFLP units at $2,598,118. The government issued a notice of deficiency increasing the gross estate by $564,702.

2. Holding

The Tax Court (Judge Goeke) held that the QTIP assets were includable in Valeria’s estate and the assets Valeria contributed to MFLP in April of 2002 (approximately $4,000,000), but not the asset contributed in May of 2003 as this transfer satisfied the bona fide sale exception.

3. Court’s Analysis

In support of inclusion of the QTIP assets, the Court relied on: i) the fact that a 2056(b)(7) deduction was allowed in Virgil J’s estate; ii) a QTIP election was made in Virgil J’s estate; iii) Valeria had the right to receive the income for her life; and iv) Valeria did not dispose of her income interest.

In support of its holding that the April 2002 contributions satisfied the bona fide sale for full and adequate consideration exception, the court found Valeria’s “desire to continue her deceased husbands’ investment philosophy is a significant non-tax purpose.” The Court rejected the government’s position that MFLP lacked a “functioning business operation” stating:

“MFLP’s activities need not rise to the level of a “business” under the Federal income tax laws in order for the exception under section 2036(a) to apply. See Estate of Mirowski v. Commissioner, supra; Estate of Stone v. Commissioner, T.C. Memo. 2003-309. Respondent’s argument concerning the types of assets transferred fails for the same reason. The nontax purpose behind formation of MFLP was to continue Mr. Miller’s investment philosophy and to apply it to family assets. This goal could not have been met had the decedent not transferred securities to MFLP.

Respondent’s reliance on Estate of Thompson and Estate of Rose is misplaced. In those cases decedents transferred property that was not actively managed by family limited partnerships. See Estate of

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Thompson v. Commissioner, supra at 379. (The record demonstrates that neither the Turner Partnership nor the Thompson Partnership engaged in any valid, functioning business enterprise.”) Estate of Rosen v. Commissioner, supra (“For the most part, the assets of the LRFLP appear not to have been traded by the LRFLP, which in part, explains the minimal capital gain income and loss reported by the LRFLP.”) As stated above, MFLP was not a passive holder of securities.”

The Court also observed that at the time of these transfers, neither Valeria nor her family expected a significant decline in her health in the near future and the fact that Valeria retained almost $1,000,000 in securities outside of MFLP.

Likewise, in support of holding that the transfers shortly before Valeria’s death did not satisfy the bona fide sale for full and adequate consideration exception, the Court found that the record indicated that the “driving force behind the May 2003 transfers was the precipitous decline in [Mrs. Miller’s] health in the week before the transfers.” Further, “after this contribution, [Mrs. Miller] did not retain sufficient assets to satisfy her estate tax obligations.”

G. Linton v. U.S. 104 AFTR2d 2009-5176 (W.D. Washington July 1, 2009), is a case decided by the Federal District Court for the Western District of Washington which held that transfers of interest in an LLC on the same day that the property was transferred to the LLC was a step-transaction and an indirect gift of the property transferred to the LLC.

1. Facts

On January 22, 2003, husband (“H”) transferred real estate, cash and municipal bonds to WFLB Investments, LLC (“WFLB”), which had been formed by H in November of 2002. Also on January 22, 2003 the following took place: i) H gifted to W 50% of his interest in WFLB; ii) H and W created trust agreements for each of their four children which provided that gifts of interest in WFLB were made to the trust “[a]t the time of signing this Agreement”; iii) and H and W signed (but did not date) documents assigning 90% of their interest in WFLB to the four trusts for their children (H and W’s attorney later dated the assignment document January 22, 2003).

H, W and their attorney testified regarding their intent in the timing of the transfers to the trusts, and H testified that his “team of experts” advised him on creating the LLC and that discounts would be allowed for gifts of the LLC interests. H and W filed gift tax returns reporting that each of them had made gifts of $725,000 after applying discounts in valuing the gifted interests in WFLB. The government disallowed the discounts and took the position that H and W had each made gifts of approximately $1,500,000. H and W paid the additional tax and filed suit for a refund.

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2. Holding

The Court granted the government’s motion for summary judgment and held that the gifts by H and W constituted indirect gifts of underlying assets (not gifts of interest in WFLB) and that the step transaction doctrine was applicable to the transaction.

3. Court’s Analysis

In support of the indirect gift holding, the Court applied Treas, Reg. §25.2511-1(h)(1) (which deals with indirect gifts of contributions to a corporation resulting in a gift to each of the shareholders) to partnerships and limited liability companies, stating that “the distinguishing factor for gift tax purposes is whether the donating partner’s contribution of property was apportioned among the other partners or was attributed only to the donor’s capital account.” Since the transfers of the property increased the interests held by the four trusts for H and W’s children, they are treated as indirect gifts to the trusts of the pro rata share of the real estate, cash and securities transferred to WFLB. The key finding was that the gifts to the trusts of WFLB interests were made before or simultaneously with the contributions of the property to WFLB. Shepherd v. Commissioner, 115 T.C. 376 (2000), aff’d 283 F.3d 1258, 89 AFTR2d 2002-506 (11th Cir. 2002), Senda v. Commissioner, T.C. Memo 2004-160 (July 12, 2004), aff’d 433 F.3d 1044 (8th Cir. 2006).

In support of the holding that the actions taken by H and W on January 22, 2003 were integrated, interdependent and focused toward a particular result and should be treated as a “step transaction,” the Court found that each of the three separate tests for finding a step transaction (the “binding commitment test,” the “end result test,” and the interdependence test”) were all applicable to the facts. The Court distinguished Holman v. Commissioner, 130 T.C. 170 (2008), where there was six days between the contribution to the entity and the gifts, and Gross v. Commissioner, T.C. Memo. 2008-221, where there was eleven days between the contribution to the entity and the gifts. The Court also noted the absence of a real economic risk of a change in value.

H. Heckerman v. U.S. 104 AFTR2d 2009-5551 (W.D. Washington July 27, 2009), was also decided by the Federal District Court for the Western District of Washington (by a different Judge), which held that transfers of interest in an LLC on the same day that the property was transferred to the LLC was a step-transaction and indirect gift the property transferred to the LLC.

1. Facts

On November 28, 2001, to implement a plan to avoid “triggering gift taxes,” H and W created trusts for their two children (the “Trusts”) and three limited liability companies (“Real Estate LLC,” “Investment LLC,” and “Family LLC”). On December 28, 2001, H and W transferred a beach house to Family LLC, which then conveyed it to Real Estate LLC.

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On January 11, 2001, H and W transferred mutual funds to Investment LLC and also transferred a 49% interest in family LLC to the Trusts, by assignments “to be effective January 11, 2001,” claiming a 58% discount. The IRS challenged the transfer of the mutual funds claiming an indirect gift, and alternative a step transaction. H and W paid the gift tax deficiency and filed a claim for refund.

2. Holding

The District Court held in favor the IRS on both theories.

3. Court’s Analysis

On the indirect gift argument, the Court (like in Linton) focused on the express wording in the assignment documents and also noted that the capital account adjustment were not made until H and W’s 2002 tax returns were prepared.

Also as Linton, on the step transaction claim the Court reviewed the three test and distinguished Holman and Gross and the fact that there was no real economic risk of a change in value. However, unlike Linton, the Court also noted the importance of there being a nontax purpose to balance between “tax avoidance” and “tax evasion,” depending on whether there is an “independent purpose or effect” in addition to the tax savings.

I. Keller v. U.S. 2009 WL 2601611 (S.D. Texas August 20, 2009), recognized a partnership that was not funded until more than one year after the decedent’s death and allowed a 47.5% discount for an assignee interest in the partnership.

1. Facts

In 1998 Roger and Maude Williams, both of whom were 88 years old executed a joint trust which was funded with $300,000,000 in cash, certificates of deposit and bond (Roger and Maude also owned extensive land and mineral holding which were not transferred to the trusts). The joint trust provided that upon the first spouse’s death a Share M would be funded with the deceased spouse’s separate property and one-half of the community property, and a Share A would hold the surviving spouses spouse’s separate property and one-half of the community property. Roger died in 1999 and the joint trust was divided into Trust M and Trust A.

Maude “an impeccably shrewd businesswoman and frugal heiress,” was concerned with safeguarding her family’s fortune and was particularly interested in protecting the family property interests in the event of the divorce of one of her children or grandchildren. In the summer of 1999, Maude met with her longtime accountants and the creation of a series of family partnerships was discussed.

The specific plan was for Trust M and Trust A to each contribute approximately $125,000,000 in bonds and other liquid investments in return for a 49.5% limited partnership interest, and a LLC wholly owned by Maude would own a .01%

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general partnership interest, with the understanding being that Maude would immediately sell her interest in the general partner to one of her daughters and her grandchildren. Maude’s other assets were valued in excess of $110,000,000.

The account’s prepared a spreadsheet which detailed the funding of the partnership, and Maude instructed them to move forward with the creation and funding of the partnership. The family’s estate planning attorney in Dallas was contacted to begin preparation of the documents, and the first draft of the partnership agreement was prepared near the end of September, 1999, and the final daft was competed in January of 2000.

In March of 2000, Maude was diagnosed with cancer, but her doctors did not believe that her death was imminent. On May 9, 2000 Maude’s grandson picked up the papers from the attorney’s office in Dallas and took them to Maude in the hospital, where they were reviewed with one of the accounts for two hours and signed. The amounts of the capital contributions were left blank because the accountant did not have market value of the bonds at that time.

On May 10, 2000, the accountants requested tax identification numbers, spoke with Vanguard Group about creating the necessary new accounts and prepared a $300,000 check to fund the LLC general partner for Maude’s signature. Maude died unexpectedly on May 15, 2000 (before the tax identification numbers were received, the accounts opened or the $300,000 was signed), and all activities regarding the partnership were put on hold.

On February 12, 2001 the estate filed an extension request for filing the Form 706 and estimated taxes in the amount of $147,800,245. On May 17, 2001, one of the family accountants attended a seminar where the case of Church v. U.S., 2000 WL 206374 (W.D. Texas 2000) was discussed. In Church the Court recognized a partnership that had not been formally funded at the time of the death of Mrs. Church and held the interests in the partnership at the time of death were entitle to discounts.

At this point steps were taken to complete the funding of the partnership. Then the estate borrowed $114,000,000 from the partnership to pay estate taxes, state inheritance taxes and other expenses of the partnership evidence by a nine year promissory note at a 5.07% interest rate.

On August 14, 2001, the estate filed a Form 706 which valued the partnership interests without applying a discount. Three months after filing the 706’ the estate filed a Claim for Refund of approximate $40,000,000 based on using a 47.5% discount on the valuation of the partnership.

2. Holding

The Court held that under Texas law “the intent of an owner to make an asset partnership property will cause the asset to be property of the partnership…This being the case whether or not legal title to the property has yet been transferred.” The

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Court further held that the estate satisfied the bona fide sale for full and adequate consideration exception to the application of IRC §§ 2036 and 2038 and accepted the opinion of the tax payers valuation expert applying a 47.5% discount. Finally, the Court also held that the interest paid on the note to the partnership was “actually and necessarily incurred in the administration of the decedent’s estate” and therefore detectable under IRC § 2035 and Treas. Reg. §20.2053-3(a).

3. Court’s Analysis

In support of Maude’s intent to transfer assets to the partnership, the Court noted the careful and detailed planning steps taken by the accountants, including the detailed spreadsheets which outlined the funding, and the fact that the $300,000 check awaiting her signature before her unexpected death. In support of the finding regarding the bona fide sale for full and adequate consideration exception, the partnership was “real, genuine, and not feigned” and was undertaken for the legitimate business purpose of consolidation and protection of family assets.

Specifically the Court found:

“It is clear to the Court that the primary purpose of these partnerships was to protect family assets for management purpose and to make it easier for these assets to pass from generation to generation. Any estate tax savings that resulted from these partnerships were, in the court’s view, merely incidental. It is therefore clear to the Court that the primary purpose of those partnerships was not federal tax avoidance, and the actions taken to form these partnerships were not done so to create a disguise gift or sham transaction as those terms are used in estate taxation.”

Regarding the valuation, the Court found that the nature of Maude’s interest in the partnership were assignee interests and that the government’s expert violated several of the tenets of the hypothetical willing buyer and seller standards including considering the true identities of the parties, speculation as to future owners and aggregation of the interest of the owners.

In support of its holding that the interest on the note was deductible, the Court stated that the “estate lacked sufficient liquid assets to pay its necessary taxes and obligations without forcing the sale of its illiquid assets.”

J. Pierre v. Commissioner. 133 T.C. No. 2 (August 24, 2009), is a reviewed decision where the majority (with 10 concurrences and 6 dissents) held that transfers of interests in a single-member LLC that was treated as a disregarded entity for income tax purposes under

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the “check the box” regulations are valued as transfers of LLC interests (subject to a valuation discounts for lack of marketability and control) rather than as transfers of proportionate shares of the underlying assets of the LLC.

1. Facts

In 2010 Suzanne Pierre (“Suzanne”) received a $10,000,000 cash gift from a friend. Suzanne wanted to provide for her son (“Jacques”) and her granddaughter (“Katie”), but was concerned about keeping her family’s wealth intact. To achieve her goals, on July 13, 2000 Suzanne organized a single-member LLC (“Pierre LLC”). Suzanne filed a Form 8832 electing not to treat the LLC as a corporation for Federal tax purposes.

On July 24, 2000, Suzanne created a trust for Jacques and a trust for Katie (the “Trusts”). On September 15, 2000, Suzanne transferred $4,250,000 in cash and marketable securities to Pierre LLC.

On September 27, 2000, Suzanne transferred her entire interest in Pierre LLC to the Trusts by first gifting a 9.5% interest to each trust and then selling a 40.5% interest in exchange for a $1,092,133 secured promissory note. The amount of the note was established by an appraisal which applied a 30% discount (although a mistake in valuing the underlying assets resulted in a 36.55% discount for gift tax purposes) to the value of Pierre LLC’s underlying assets.

Suzanne filed a Form 709 reporting the 9.5% gifted interest to each trust. The IRS examined the 709 and took the position that the transfers made by Suzanne (both by gift and sale) should be treated as transfers of proportionate shares of Pierre LLC assets and not as transfers of interests in Pierre LLC.

2. Holding

The majority opinion written by Judge Wells held that for purposes of the application of the Federal gift tax, the transfers are to be valued as transfers of interests in Pierre LLC, and Pierre LLC is not disregarded under the “check-the-box” regulations to treat the transfers as transfers of proportionate share of assets owned by the Pierre LLC.

Footnote 3 of the opinion provides “In this Opinion, we decide only the legal issue set forth above. The following issues were argued by the parties but will be addressed in a separate opinion: (1) Whether the step transaction doctrine applies to collapse the separate transfers to the trusts and (2) the appropriate valuation discount, if any.”

Footnote 4 of the opinion provides “Although respondent argues that the step transaction doctrine should apply to the gift and sale transfers in issue, respondent explicitly limits the proposed application of the step transaction doctrine to the events of September 27, 2000 and thus does not advocate applying the step transaction doctrine to

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disregard Pierre LLC. As noted above, this issue will be addressed in a separate opinion.”

Footnote 5 of the opinion provides “Respondent argues that the four transfers in issue should be collapsed into one transfer pursuant to the step transaction doctrine. As noted above this issue will be addressed in a separate opinion.”

3. Court’s Analysis

The majority opinion is based on the fact that Congress has not acted to eliminate discounts for entities generally or for single-member LLC specifically, stating:

“In the absence of such explicit congressional action and in the light of the prohibition in section 7701, the Commissioner cannot by regulation overrule the historical Federal gift tax valuation regime contained in the Internal Revenue Code and substantial and well-established precedent in the Supreme Court, the Courts of Appeals and this Court, and we reject respondent’s position in the instant case advocating an interpretation that would do so.”

K. Estate of Malkin v. Commissioner. T.C. Memo 2009-212 (September 16, 2009), is a victory for the government under IRC §2036, indirect gift and sham theories.

1. Facts

Roger D. Malkin (“Roger”) the CEO of Delta & Pine Land Co. (“DPLC”) created trusts for each of his two children. On August 31, 1989, Roger formed the Roger D. Malkin Family Limited Partnership (“MFLP”) and contributed shares of DPLC valued at approximately $17,000,000 in exchange for a 1% general partnership interest and a 98.494% limited partnership interest. The two trusts collectively contributed $50,000 to MFLP in exchange for a 0.506% limited partnership interest collectively. Also on August 31, 1989, Roger sold 88.594% limited partnership interests to the two trusts collectively, for approximately $880,000 in cash and a 9 year $7.96 million secured self canceling installment note (reflecting a discount of approximate 40%).

In May of 1999, Roger was diagnosed with pancreatic cancer. On September 24, the trustees of the two trusts authorized Roger as general partner of MFLP to pledge almost all MFLP’s shares of DPLC to secure Roger’s personal debts.

On February 29, 2000, Roger signed a partnership agreement forming Cotton Row Family Limited Partnership (“CRFLP”) with two new trusts for his two children which had not yet been formed. Roger contributed all of his interests in five

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LLC’s owned by Roger and his son in exchange for a 1% general partnership interest and a 99% limited partnership interest in CRFLP. Roger also contracted to sell about 89% of his CRFLP limited partnership interests to the two yet to be formed trusts for a combined cash down payment of $80,100 and a nine year secured notes totally $721,000.

The next day Roger formed the two new trusts for each of his children to hold interests in CRFLP. One week later Roger gifted $81,000 to the new trusts collectively. Two days later the trust paid Roger the $81,000 as a cash down payment on the purchase and signed the promissory notes. In November of 2000 Roger transferred 80,000 shares of DPLC which were pledged as collateral for his personal debt to CFLP encumbered by the pledge.

During the period 1998 – 2000, Roger also made direct transfers to his children, paid several million dollars of outstanding debts of the five LLCs he owned with his son, and assigned a $1,000,000 promissory note to one of the LLCs. Roger died on November 21, 2001.

On March 1, 2002, a Form 706 for Roger’s estate was filed by his son and daughter. The return listed assets of $15.5 million and deductions of $18.3 million (including a $12.9 million loan secured by DPLC stock and a $2.3 million obligation to one the LLCs owned with Roger’s son). The service issued both estate tax and gift tax notices of deficiency. The estate tax notice determined that the property Roger had transferred to the partnerships should be brought back into his estate under either IRC §§ 2035(a), 2036(a)(1) or (2) and disallowed certain deductions. The gift tax notice determined that the same transferred property should be taxed as gifts to Roger’s children and that several transfers made within three years of Roger’s death were also gifts to his children.

2. Holding

The Tax Court (Judge Halpern) held that: i) within the meaning of IRC § 2036(a)(1), Roger retained for his life the possession and enjoyment of the DPLC stock he transferred to the partnerships and the transfer was not for full and adequate consideration in money or money’s worth, and accordingly all of the DPLC stock is included in Roger’s estate; ii) Roger made indirect gift to his children of interests in the five LLCs when he transferred the LLC interests to CRFLP; iii) Roger made direct and indirect gifts to his children in the last three years of his life; and iv) five deductions are disallowed and pursuant to IRC § 2053(c)(2) all other deductions may not exceed the value of estate property subject to claims.

3. Court’s Analysis

In support of its 2036 holding, the Court noted there was no nontax reason for the partnerships or Roger’s personal pledge of partnership assets. On the indirect gift holding, the Court noted the timing of the formation of the partnerships and the trusts. On treating various loans to Roger’s children as gifts, the Courted noted the absence of promissory notes and the fact that his daughter “never repaid a dollar on the alleged

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debt.” On the deductions, the Court concluded that the estate failed to meet its burden of proof.

L. Estate of Murphy v. U.S. 07-CV-1013 (W.D. Ark. El Dorado Division October 2, 2009), another Federal district court case that is a victory for the taxpayer involving IRC § 2036, valuation discounts, Rule 144 Blockage discounts and a Graegin loan.

1. Facts

Charles H. Murphy, Jr. (“Charles”) owned certain “Legacy Assets” which included significant shares in Murphy Oil Corporation, 3% of the stock Deltic Timber Corporation and 0.37% of a bank (that later merged with Bancorp South). Charles was involved with the management of all three companies.

Two of Charles’ four children had previously sold and pledged various family assets that had been given to them or to trusts for their benefit. Charles’ attorney recommended that he transfer the Legacy Assets to a family limited partnership “to accomplish his goal of pooling the family’s Legacy Assets together under centralized management and to protect those assets from being dissipated.” Charles had planning sessions with his two other children, one of whom was represented by an attorney.

On February 19, 1998, Charles contributed his interests in the Legacy Assets valued at approximately $89,000,000 (owned by him individually and as trustee of several revocable trusts) to a family limited partnership (“FLP”) in exchange for a 97.75% limited partnership interest, 1% of which Charles gifted to a college. The remaining 2.25% was owned by the general partner, an LLC owned 49% by Charles and 51% by two of his children. Chares and the children contributed approximately $2,000,000 worth of Legacy Assets to the LLC which in turn contributed them to the FLP.

Two of Charles’ children (who shared his “buy and hold” investment philosophy) were active in the management of the FLP, which accomplished the Charles transferring management of the Legacy Assets to the next generation. One of Charles’s sons was active in the management of the three Legacy Asset companies, and the partners met six to eight times a year to discuss partnership business.

Charles died on March 20, 2002, and the assets of the FLP were worth about $131.5 million. Prior to his death he made annual exclusion gifts to his children, their spouses and his eight grandchildren reducing Charles limited partnership interest to 95.25365%, which was valued on Form 706 at $74,082,000 after applying a 41% discount. The estate borrowed funds to raise liquidity to pay estate taxes, including an $11 million from the FLP, and $5.4 million from a Family Trust.

The IRS claimed the FLP assets were includable in Charles’ estate under IRC §§ 2036(a)(1) and 2036(a)(2) and that certain assets were undervalued and issued a Notice of Deficiency for $34,000,000. The estate paid the deficiency and filed a Claim for Refund.

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2. Holding

The Court held that: i) the transfers to the FLP were for full and adequate consideration; ii) the Legacy Assets in the FLP is valued applying Rule 144/blockage discounts of 5%, 10.6%; and 1.3%; iii) the 95.25365% limited partnership interest is valued applying a 41% discount; iv) and interest on the full term of the 9 year note to the FLP is deductible.

3. Court’s Analysis

In finding the bona fide exception was applicable, the Court found the purposes for forming the FLP including pooling the legacy assets for centralized management and implementing a buy and hold investment strategy are a legitimate nontax purpose. The Court also noted the son’s active involvement in management of the Legacy Assets, the fact that Charles retained $130,000,000 of assets outside of the FLP, that Charles did not treat the assets of the FLP as his own, that Charles did not commingle his personal asset with FLP assets and the fact that Charles’ children were active in the formation of the FLP, with one child being represented by counsel.

On the valuation issues, the Court found that the estate’s appraiser was the most credible and used its opinion for all but one asset.

On the deductibility of interest, the Court found that borrowing money to pay the estate tax of an illiquid estate is a necessary administrative expense under IRC §§ 2035 and that the total amount of interest is not vague or uncertain but instead is capable of calculation.

M. Estate of Christiansen v. Commissioner. 104 AFTR 2d 2009-7352 (8th Cir. 2009) The Eighth Circuit upheld the allowance of a charitable deduction for amounts passing to charity pursuant to a formula disclaimer.

1. Facts

Christine Christiansen Hamilton (“Christine”) was the only child of the decedent, Helen Christiansen (“Helen”), the sole legatee under Helen’s will and the executor of Helen’s estate (which was valued on the Form 706 at $6.51 million). Under the terms of Helen’s will, 75% of any amounts disclaimed by Christine were to pass 75% to a charitable lead annuity trust (“CLAT”) and 25% to a charitable foundation.

Christine disclaimed her interest in Helen’s estate as follows:

“Partial Disclaimer of the Gift:

Intending to disclaim a fractional portion of the Gift, Christine Christiansen Hamilton hereby disclaims that portion of the Gift

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determined by reference to a fraction, the numerator of which is the fair market value of the Gift (before payment of debts, expenses and taxes) on April 17, 2001, less Six Million Three Hundred Fifty Thousand and No/100 Dollars ($6,350,000.00) and the denominator of which is the fair market value of the Gift (before payment of debts, expenses and taxes) on April 17, 2001 (“the Disclaimed Portion”). For purposes of this paragraph, the fair market value of the Gift (before payment of debts, expenses and taxes) on April 17, 2001, shall be the price at which the Gift (before payment of debts, expenses and taxes) would have changed hands on April 17, 2001, between a hypothetical willing buyer and hypothetical willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts for purposes of Chapter 11 of the [Internal Revenue] Code, as such value is finally determined for federal estate tax purposes.”

The government challenged both the validity of the disclaimer and the amount of marketability discounts claimed by the estate for limited partnership interests in the family ranching enterprise. On audit the parties reached a settlement on the valuation issue resulting in an approximate $3.1 million increase in the value of the estate, thereby resulting in a corresponding increase in the value of the property passing to the charitable foundation.

The Commissioner only allowed the $40,555.80 estate tax marital deduction for the amount passing to the foundation based upon the values reported on the From 706 but denied any charitable deduction for the amount passing to the CLAT or any increased in the charitable deduction for the additional amount passing to the foundation pursuant to the settlement of the valuation issue.

The government claimed that the 75% passing to the CLAT was not a qualified disclaimer because the disclaimed property did not pass “to any person other than the person making the disclaimer” as required under § 2518(b)(4)(B) and Treasury Regulation § 25.2518-2(e)(3). The Commissioner argued that the challenge to the estate tax return and the resulting adjustment to the estate’s value served as post-death, post-disclaimer contingencies that disqualified the disclaimer under 26 U.S.C. § 2518 and Treasury Regulation § 20.2055-2(b)(1) and that the adjustment based on values “finally determined for federal estate tax

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purposes” wase contrary to public policy. The estate appealed to the United States Tax Court.

The Tax Court (Judge Holmes) held that the disclaimer to the CLAT was not effective but rejected the government’s “condition subsequent” and “public policy” arguments. The taxpayer did not appeal the rejection of the validity of the disclaimer of assets to the CLAT, but the government did appeal the Tax Court holding that a partial disclaimer was valid as to an amount that subsequently passed to the charitable foundation.

2. Holding

The Eighth Circuit affirmed the Tax Court and found that the disclaimer was valid as the amounts that passed to the charitable foundation and that the estate was entitled to a charitable deduction for the full amount that ultimately passed to the foundation based on the values as finally determined for federal estate taxes.

3. Court’s Analysis

In rejecting the Commissioners interpretation of Treas. Reg. 20.2055-2(b)(1), the Court found that the regulation does not speak in terms of the existence or finality of an accounting valuation at the date of death or disclaimer. Rather, it, speaks in terms of the existence of a transfer at death, and the foundations right to receive those 25% of those amounts in excess of $6.35 million was certain. Specifically the Court stated:

“It seems clear, then, that references to value “as finally determined for estate tax purposes” are not references that are dependent upon post-death contingencies that might disqualify a disclaimer. Because the only uncertainty in the present case was the calculation of value to be placed on a right to receive twenty-five percent of the estate in excess of $6.35 million, and because no post-death events outside the context of the valuation process are alleged as post-death contingencies, the disclaimer was a “qualified disclaimer.” 26 U.S.C. § 2518(a). We find no support for the Commissioner’s assertion that his challenge to the estate’s return and the ultimate valuation process and settlement are the types of post-death events that may disqualify a partial disclaimer.”

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The Court noted several reasons for rejecting the public policy argument that statutes and regulations should be interpreted in an effort to maximize the incentive to audit:

“First, we note that the Commissioner’s role is not merely to maximize tax receipts and conduct litigation based on a calculus as to which cases will result in the greatest collection. Rather, the Commissioner’s role is to enforce the tax laws. See 26 U.S.C. § 7801 (a)(1) (“[T]he administration and enforcement of [the Tax Code] shall be performed by or under the supervision of the Secretary of Treasury.”); id. § 7803(a)(2) (“The Commissioner shall have such duties and powers as the Secretary may prescribe, including the power to (A) administer, manage, conduct, direct, and supervise the execution and application of the internal revenue laws or related statutes and tax conventions to which the United States is a party…”).

Second, we find no evidence of a clear Congressional intent suggesting a policy to maximize incentives for the Commissioner to challenge or audit returns. The relevant policy in the present context is clear, and it is a policy more general in nature than that articulated by the Commissioner: Congress sought to encourage charitable donations by allowing deductions for such donations. See 26 U.S.C. § 2055(a)(2); Sternberger’s Estate, 348 U.S. at 190 n.3 (“The purpose of the deduction is to encourage gifts to the named uses.”). Allowing fixed-dollar amount partial disclaimers supports this broad policy.

Third, and importantly, even if we were to find a general Congressional intent regarding a need to maximize the incentive-to-audit, no corresponding rule of construction would be necessary in the present context to promote accurate reporting of estate values. The Commissioner premises his policy

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argument on the assumption that executors and administrators will purposefully undervalue assets in order to take advantage of his marginally decreased incentive to audit. In the present context, however, there are countless other mechanisms in place to ensure that fiduciaries such as executors and administrators accurately report estate values. State law impose personal liability on fiduciaries, and state and federal laws impose financial liability or, in some circumstances criminal sanctions, upon false statements, fraud, and knowing misrepresentations. See e.g., S.D. Codified Laws § 29A-3-703(a) (“A personal representative is a fiduciary…”); id. § 55-9-5 (providing that the attorney general is the representative of beneficiaries of charitable foundations and has a duty to enforce their rights in court actions); 18 U.S.C. 1001 et seq. (criminalizing various acts of fraud and knowing misrepresentations); Ward v. Lange, 553 N.W. 2d 246, 250 (S.D. 1996) (“[T}he fiduciary has a ‘duty to act primarily for the benefit’ of the other.”) (quoting High Plains Genetics Research, Inc. v. J K Mill-Iron Ranch, 535 N.W.2d 839, 842 (S.D. 1995)).”

The Court also noted that charitable beneficiaries have an interest in ensuring that the executor does not under-report the estate’s value, pointing out that the fiduciary obligation of the foundation board and citing the self-dealing rules.

N. Estate of Petter v. Commissioner. T.C. Memo 2009-280 (December 7, 2009), is another taxpayer victory upholding the use of a defined value clause in connection with inter vivos gifts and sales to grantor trusts.

1. Facts

Anne Petter (“Anne”) had been a school teacher most of her life. Ann has three children “Donna” a mother and homemaker, “Terry” who owned a tow truck business and “David” who was disabled. Donna and Terry each have three children. (The case involves transfers to Donna, Terry and their children, as Anne provided for David separately.)

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Anne’s uncle, who was one of the first investors in what became United Parcel Service Center of America, Inc. (“UPS”), died in 1982 and left Anne his UPS stock which was then worth millions. In 1998 (when her UPS stock was worth $12 million, Anne realized that she needed an estate planner. She was referred to Richard LeMaster (”LeMaster”), a lawyer with 30 years experience in estate planning and advanced degrees in tax law. Anne told LeMaster that she wanted to provide a comfortable life for her children and grandchildren and that she wanted to give some money to charity. Anne also told LeMaster that she wanted Donna and Terry to learn how to manage the family’s assets, and that she felt that the needed help to learn how to manage money wisely.

In 1998 (in addition to establishing an irrevocable life insurance trust and a charitable remainder unitrust), Anne formed the Petter Family LLC (PFLLC”) which was organized in Washington to be a disregarded limited liability company. LeMaster planned to fund PFLLC with Anne’s remaining UPS stock, but before the stock could be transferred, UPS announced that it was going public. This delayed the transfer of the stock to PFLLC until May of 2001, at which time the stock had a value of $22.6 million.

In mid-2001, LeMaster prepared the Petter Family LLC Operating Agreement which was signed by Anne, Donna and Terry. Anne contributed 423,136 shares of UPS stock (worth $22,633,545) in return for 22,633,545 membership units in PFLLC. The 22,633,545 membership units were divided into three classes: 452,671 Class A Units, 11,090,437 Class D Units and 11090,437 Class T Units. Anne was the manager of the Class A Units, Donna was the manager of the Class D Units and Terry was the manager of the Class T Units. Management decisions required a majority of the three managers, but Anne, as manager of the Class A Units, had veto power over all corporate decisions.

The Operating Agreement also restricted what rights could be transferred. In late-2001, Anne as grantor established the Donna K. Moreland 2001 Long Term Trust (“Donna’s Trust”) for the benefit of Donna and her descendants and the Terrance F. Petter 2001 Long Term Trust (“Terry Trust”) for the benefit of Terry and his descendants (both intentionally defective grantor trusts). The findings of fact provide that “This was undoubtedly the most complex transaction any of the Petters had been a part of. Donna struggled to understand it and even hired an attorney to help her.” LeMaster made reference to some changes in the trust structure that Donna’s lawyer prompted him to make.

On March 22, 2002 Anne gave each of the trusts PFLLC units meant to make up 10% of the trusts’ assets; then on March 25 she sold each trust units worth 90% of the trusts’ assets in return for promissory notes. (Footnote 8 of the opinion provides that “LeMaster said he believed there was a rule of thumb that a trust capitalized with a gift of at least 10 percent of its assets would be viewed by the IRS as a legitimate, arm’s-length purchaser in the later sale.” As part of the

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transfers, Anne also gave PFLLC units to two charities, the Seattle Foundation (in the transfers to Terry’s Trust) and the Kitsap Community Foundation (in the transfers to Donna’s Trust). LeMaster used a formula clause dividing the units between the trusts and the two charities to ensure that the trusts did not get so much that Anne would have to pay gift tax.

The specific language for the gifts is as follows:

“Transferor wishes to assign 940 Class T Membership Units in the Company (the “Units”) including all of the Transferor’s right, title and interest in the economic, management and voting rights in the Units as a gift to the Transferees.” Donna’s document is similar, except that it conveys Class D membership units. Section 1.1 of Terry’s transfer document reads:

Transferor * * *

1.1.1 assigns to the Trust as a gift the number of Units described in Recital C above that equals one-half the minimum dollar amount that can pass free of federal gift tax by reason of Transferor’s applicable exclusion amount allowed by Code Section 2010(c). Transferor currently understands her unused applicable exclusion amount to be $907,820, so that the amount of this gift should be $453,910; and

1.1.2 assigns to the Seattle Foundation as a gift to the A.Y. Petter Family Advised Fund of the Seattle Foundation the difference between the total number of Units described in Recital C above and the number of Units assigned to the Trust in Section 1.1.1.

The gift documents also provide in section 1.2:

The Trust agrees that, if the value of the Units it initially receives is finally

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determined for federal gift tax purposes to exceed the amount described in Section 1.1.1., Trustee will, on behalf of the Trust and as a condition of the gift to it, transfer the excess Units to The Seattle Foundation as soon as practicable.

The Foundations similarly agree to return excess units to the trust if the value of the units is “finally determined for federal gift tax purposes” to be less than the amount described in section 1.1.1. Donna’s documents are similar but substitute the Kitsap Community Foundation for the Seattle Foundation.”

The specific language for the sales is as follows:

“Transferor wishes to assign 8,459 Class T [or Class D] Membership Units in the Company (the “Units”) including all of the Transferor’s right, title and interest in the economic, management and voting rights in the Units by sale to the Trust and as a gift to The Seattle Foundation.” Section 1.1 reads:

Transferor * * *

1.1.1 assigns and sells to the Trust the number of Units described in Recital C above that equals a value of $4,085,190 as finally determined for federal gift tax purposes; and

1.1.2 assigns to The Seattle Foundation as a gift to the A.Y. Petter Family Advised Fund of The Seattle Foundation the difference between the total number of Units described in Recital C above and the number of Units assigned and sold to the Trust in Section 1.1.1.

Section 1.2 of the sale documents differs slightly from section 1.2 of the gift documents. In the sale documents, it reads:

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“The Trust agrees that, if the value of the Units it receives is finally determined to exceed $4,085,190, Trustee will, on behalf of the Trust and as a condition of the sale to it, transfer the excess Units to The Seattle Foundation as soon as practicable.” Likewise, the Seattle Foundation agrees to transfer shares to the trust if the value is found to be lower than $4,085,190.”

On April 15, 2002, LeMaster received a 41-page “Petter Family LLC Appraisal Report,” valuing the units as of the March 22 gift to the trusts. The appraisal applied a 53.2% discount, resulting in a value of $536.20/unit. LeMaster used this value to allocate the transfers between the trusts and the charities.

In August of 2003, Anne filed a Form 709 reporting the gift and sale transactions. The return included detailed documentation of the transactions including the entity documents and a description of the formula clause. On the audit of the gift tax return, which began in January of 2005, the IRS asserted that the PFLLC units were undervalued and that the formula clauses were invalid.

Anne timely filed a petition in the Federal Tax Court. The parties agreed on the value of PFLLC at $744.74/unit. The issues before the Tax Court were whether the formula clauses should be honored and if so, when Anne may take the charitable deduction for the additional units going to the charities.

2. Holding

The Tax Court rejected the government’s public policy argument and upheld the formula clauses. The Court also held that the appropriate date of the gift for tax purposes is March 22, 2002.

3. Analysis

The Tax Court engaged in a thorough analysis of “Savings Clauses” like that used in Commissioner v. Procter, 142 F.2d 824 (4th Cir. 1944) where a donor tries to take something back, compared to “Formula Clauses” like used in McCord v. Commissioner, 120 T.C. 358, 364 (2003), revd. 461 F. 3d 614 (5th Cir. 2006) and Estate of Christiansen v. Commissioner, supra, wherein a donor gives away a fixed set of rights with uncertain value.

The Court begins this analysis by stating that “a gift is valued at the time it is completed, and later events are off limits,” and “gift tax is computed at the value of what the donor gives, not what the done receives” Ithaca Trust Co. v. United States, 279 U.S. 151, 155 (1929); and then describes the difference in the two types of clauses as follows:

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“A shorthand for this distinction is that savings clauses are void, but formula clauses are fine. But figuring out what kind of clause is involved in this case depends on understanding just what it was that Anne was giving away. She claims that she gave stock to her children equal in value to her unified credit and gave all the rest to charity. The Commissioner claims that she actually gave a particular number of shares to her children and should be taxed on the basis of their now-agreed value.

Recital C of the gift transfer documents specifies that Anne wanted to transfer “940 Class T [or Class D] Membership Units” in the aggregate; she would not transfer more or fewer regardless of the appraisal value. The gift documents specify that the trusts will take “the number of Units described in Recital C above that equals on-half the * * * applicable exclusion amount allowed by Code Section 2010(c).” The sale documents are more succinct, stating the trusts would take “the number of Units described in Recital C above that equals a value of $4,085,190.” The plain language of the documents shows that Anne was giving gifts of an ascertainable dollar value of stock; she did not give a specific number of shares or a specific percentage interest in the PFLLC. Much as in Christiansen, the number of shares given to the trusts was set by an appraisal occurring after the date of the gift. This makes the Petter gift more like a Christiansen formula clause than a Procter savings clause.”

The Court then rejected the government’s public policy arguments based on a general public policy encouraging gifts to charities under United States v. Benedict, 338 U.S. 692 , 696—97 (1950) and the warning of the Supreme Court in Commissioner v. Tellier, 383 U.S. 687, 694 (1996) concluding as follows:

“In summary, Anne’s transfers, when evaluated at the time she made them, amounted to gifts of an aggregate and set

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number of units, to be divided at a later date based on appraised values. The formulas used to effect these transfers were not void as contrary to public policy, as there was no “severe and immediate” frustration of public policy as a result, and indeed no overarching public policy against these types of arrangements in the first place.”

The Court stated that the timing of when Anne may take a charitable deduction for the contribution of the additional gifts to the charities is a difficult question, but cited Treas. Reg. 25.2511-2(a) and stated that a donor’s tax treatment should not change based on the later discovery of the true measure of enrichment of two named parties, one of whom is a charity. In finding the reallocation was not a condition precedent, the Court also cited Washington law holding that conditions precedent require the donee to perform some action before the property will become vested and the fact that Anne never expressed an intention to create anything but an immediately vested gift. Richardson v. Danson, 270 P.2d 802, 806 (Wash. 1954).

O. Estate of Black v. Commissioner. 133 T.C. No. 15 (2009), is another taxpayer victory upholding the bona fide sale for adequate consideration exception under IRC § 2036 to exclude assets from the decedent’s estate.

1. Facts

Mr. Black and his family members were the largest shareholders of an insurance company (“E”). In 1993, Mr. Black, his son and trusts for his two grandsons contributed unencumbered E stock to BLP, a family limited partnership. Mr. Black’s advisors had explained the estate tax advantages of placing his E stock in BLP, but the transaction was initiated to implement Mr. Black’s “buy-and-hold” philosophy with respect the Black family’s E stock. Specifically, Mr. Black entered into the transaction to address his concerns that his son’s wife and her parents would require the son to sell or pledge some of his E stock in connection with a divorce to satisfy monetary needs. Son had previously pledged 125,000 shares of E stock as collateral for a loan. Mr. Black was also concerned that his two grandsons would sell some or all of the E stock upon the termination of their trusts.

Mr. Black died in December of 2001. His estate plan established a pecuniary marital trust for the benefit of Mrs. Black and a $20 million bequest to auniversity endowment. Mrs. Black died 5 months after Mr. Black before the marital trust was funded. Son was the executor of both estates had intended to fund the marital trust with a portion of Mr. Black’s E stock.

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Mrs. Black’s estate lacked sufficient liquidity to pay estate taxes and other liabilities. After a secondary offering of E stock, BLP loaned $71 million in exchange for a promissory note that prohibited prepayment. Mrs. Black’s estate deducted the interest in full on Mrs. Black’s estate tax return. Mrs. Black’s estate used the borrowed funds to pay Federal estate taxes, to fund the university endowment, to pay E for expenses incurred in the secondary offering, and to pay $1,155,000 in executor fees and $1,155,000 in attorney’s fees.

The IRS determined that (1) the value of the E stock attributable to Mr. Black’s interest in BLP at his death is includable in his estate under IRC §§2035(a) or § 2036 (a) or (b), (2) Mr. Black’s estate is entitled to a marital deduction limited to the value of the BLP partnership interest that actually passed to the marital trust, (3) the deemed funding date of the marital trust is Mr. Black’s death, (4) the interest payable on the note is not a deductable expense to Mrs. Black’s estate under IRC § 2053(a)(2) and (5) Mrs. Black’s estate is not entitled to deduct the secondary offering cost reimbursed to E, and is entitled to deduct only $500,000 of executors fees and $500,000 of legal fees.

2. Holding

The Tax Court (Judge Halpern) held:

the value of Mr. Black’s estate did not include the value of the transferred E stock apportionable to his date-of-death interest in BLP;

the determination that the value of E stock was not includable in Mr. Black’s estate makes the determination limiting the marital deduction moot;

the deemed funding date of the marital trust is the date of Mrs. B’s death;

the interest on the loan is not deductable by Mrs. Black’s estate; and

Mrs. Black’s estate is entitle to deduct the amounts of reimbursement to E and executor and attorneys fees that correspond the expenditures or efforts on behalf of her estate.

3. Analysis

In examining the bona fide sale for full and adequate consideration exception, the Court found that Mr. Black’s desire to protect his family’s E stock and implementing his buy-and-hold philosophy was a “legitimate and significant non-tax reason.” Estate of Schutt v. Commissioner, T.C. Memo 2005-126, Estate of Bongard, 124 T,C. 95 (2005).

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Regarding the deemed funding date of the marital trust, the Court agreed with the taxpayer that the date of Mrs. Black’s death is the closest to what would have been the actual date of the distribution of the marital trust had Mrs. Black survived.

In denying the deduction for the interest, the Court reviewed Estate of Greagin v. Commissioner, T.C. Memo. 188-477, where an immediate deduction was allowed for interest on funds the estate had borrowed from the decedent’s closely held corporation and other cases where deductibility was upheld when an estate borrowed money instead of selling illiquid assets. The Court concluded that the loan structure constituted an indirect use of E stock to pay the debts of Mrs. Black’s estate and accomplished nothing more than a direct use of the stock would have accomplished except for the substantial estate tax savings. The loan was unnecessary because the result was the same had BLP used E stock to redeem part of the partnership interest, with the only distinction between the loan and redemption scenarios is that the loan gave rise to an immediate deduction for the interest.

P. Estate of Price v. Commissioner. T.C. Memo. 2010-2 (January 4, 2010), is a troubling case wherein the Tax Court held that gifts of limited partnership interests did not qualify for the annual gift tax exclusion.

1. Facts

On September 11, 1997, Mr. and Mrs. Price formed Price Investments Limited Partnership (“PILP”). The general partner of PILP, Price Management Corp., owned a 1% general partnership interest, and Mr. and Mrs. Price’s respective revocable trusts each owned a 49.5% limited partnership interest. When it was initially formed, PILP owned stock in DPEC, a closely held family corporation, and 3 parcels of commercial real estate. On January 5, 1998, PILP sold the DPEC stock and invested the proceeds in marketable securities.

The PILP partnership agreement prohibited any partner from withdrawing from the partnership and contained the following restrictions on the transfer and assignment of partnership interests:

“11.1 Prohibition Against Transfer. Except as hereinafter set forth, no partner shall sell, assign, transfer, encumber or otherwise dispose of any interest in the partnership without the written consent of all partners; provided, however, a limited partner may sell or otherwise transfer his or her partnership interest to a general or limited partner, or to a trust held for the benefit of a general or limited partner.

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11.2 Assignment. Any assignment made to anyone, not already a partner, shall be effective only to give the assignee the right to receive the share of profits to which his assignor would otherwise be entitled, shall not relieve the assignor from liability under any agreement to make additional contribution to capital, shall not relieve the assignor from liability under the provisions of the partnership agreement, and shall not give the assignee the right to become a substituted limited partner. * * * The partnership shall continue with the same basis and capital amount for the assignee as was attributable to the former owner who assigned the limited partnership interest. * * *”

The partnership agreement also granted the remaining partners an option to purchase any partnership interest that was voluntary or involuntarily assigned.

Between 1997 and 2002, Mr. and Mrs. Price gifted 99% of PILP to their 3 children. This case involves the disallowance of annual gift tax exclusions for gifts of partnership interests in 2000, 2001 and 2002.

2. Holding

The Tax Court (Judge Thornton) held that the taxpayers failed to show the gifts of partnership interests conferred on the donees an unrestricted and noncontingent right to immediately use, possess, or enjoy either the property itself or the income from the property.

3. Analysis

In reaching its decision, the Court declined to reconsider its holding in Hackl v. Commissioner, 118 T.C. 279,294 (2002), affd. 335 F.3d 664 (7th Cir. 2003), and applying the Hackl methodology, found that because there was no ability to withdraw their capital accounts or sell their interests without written consent of all other partners, there was no immediate enjoyment of the gifted interests. The Court also noted that there was no immediate enjoyment of income from the gifted interests because the partnership agreement provided that distributions were secondary to PILP’s primary purpose of generating a long-term reasonable rate of return.

Q. Estate of Shurtz v. Commissioner. T.C. Memo. 2010-21 (February 3, 2010), is yet another taxpayer victory upholding the bona fide sale, for adequate consideration exception under IRC § 2036 to exclude assets from the decedents estate.

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1. Facts

Charlene Shurtz (“Charlene”) was one of three children of Charles A. and Bonnie Barge. The Barge family owned and managed first directly, then indirectly through family partnerships timberlands. By 1993 at least 14 family members held separate undivided interests in the Barge timberland located in Mississippi.

An attorney advised the Barge family that having numerous undivided interests could create difficulties in the operation and management of the business. On June 25, 1993, C.A. Barge Timberlands, L.P. (“CABTLP”) was formed. Charlene owned 1/3 of the stock in the corporate general partners (which owned a 2% interest in CABTLP and a 16% limited partnership interest in CABTLP. The partnership agreement required the partnership to distribute not less than 40% of its net income to the partners each year.

The entire Barge family was concerned about the “jackpot justice” they believed existed in Mississippi, and an attorney recommended that each family hold its CABTLP interest in a limited partnership. On November 15, 1996, Charlene and her husband formed Doulos L.P., the purpose of which was to reduce the estate, to provide asset protection, to provide for heirs and to provide for the Lord’s work. Doulos was formed by Charlene gifting to her husband a 1% interest in some undivided interest she owned, and her husband and Charlene then transferred such undivided interests and Charlene’s 16% interest in CATBLP. Charlene received a 1% general partnership interest and a 98% limited partnership interest and her husband a 1% general partnership interest.

The opinion went into detail describing the operation and pointed out several instances where all of the entity formalities had not been followed, such as the failure to keep books of account, a delay in opening the bank account, and disproportionate distributions to the partners. Between 1996 and 2000 Charlene made 26 gifts of a 0.4% limited partnership interest to her children and grandchildren.

Charlene died on January 21, 2002. The value of her gross estate as reported on a late filed Form 706 was $8,768,059.03, with the assets with greatest value being Charlene’s 87.6 limited partnership interest ($6,116,670) and 1% general partnership interest ($73,500) in Dulos.

The government alleged that the value of the assets contributed to Dulos was includable in the value of Charlene’s estate by reason of her retention of control, use and benefit of the transferred assets under IRC §§ 2035(a) and/or 2036, if § 2036 is applicable, that Charlene’s interest in Dulos should be used to determine the amount of the marital deduction, and that failure to file penalties under § 6651(a)(1) were applicable.

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2. Holding

The Tax Court (Judge Jacobs) held that the partnership interests, and not the partnership assets, were includable in Charlene’s estate and that the estate was not subject to late filing penalties.

3. Analysis

The Count found that § 2036 was not applicable because the bona fide sale for full and adequate consideration test was satisfied since there were two primary and legitimate nontax reason for the formation of Dulos. These nontax reason were asset protection and the management of the timberland which represented 15.8% of the assets owned by Dulos.

R. Fisher v. U.S. No. 1:08-cv-0908-LJM-TAB United States District Court, S.D. Indiana (March 11, 2010), is Federal District Court case holding that gifts of limited liability company interests did not qualify for the annual gift tax exclusion.

1. Facts

In 2000, 2001 and 2002, John and Janice Fisher made transfers of limited partnership interests in Good Harbor Partners LLC to each of their 7 children. The Fishers claimed the annual exclusion pertaining to each transfer. The government assessed a deficiency of $625,986.00, which the Fishers paid and then in turn filed a claim for refund.

The Good Harbor operating agreement provided that:

“all powers of the Company shall be exercised by the Management Committee and all decisions of the Management Committee within its scope of authority shall be binding upon the Company and each member;”

“the timing and amount of all distributions shall be determined by the general manager;” and

“Capital proceeds are distributed as follows: first, to the payment of all expenses associated with a ‘Capital Transaction’; second, to the payment of Good Harbor’s debts and liabilities; and third, to establish reserves which the General Manager deems necessary for future investments, capital improvements, debts, expenses, liabilities, or obligations. Any balance leftover shall be distributed to the Interest Holders in proportion to their Percentages.”

The operating agreement also provided that before an Interest Holder could transfer their interest, it had to give the Company a first right of refusal and

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the right to pay for the interest with nonnegotiable promissory notes that were payable over a period of time that could be as long a 15 years.

2. Holding

The District Court concluded that the transfers of interests in Good Harbor from the Fishers to the Fisher children were transfers of a future interest and therefore, not subject to the gift tax exclusion under IRC § 2503(b)(1).

3. Analysis

The Court based its decision on the fact that under the operating agreement, any potential distribution of Good Harbor’s capital to the children was subject a number of contingencies and therefore not a “substantial present economic benefit.” Second, the fact that the children could have unrestricted right to possess, use and enjoy lake front property (the primary asset of Good Harbor) constituted a “right to a non-pecuniary benefit. Lastly, the Court referred to the inability of the children to transfer their interest in exchange for immediate value unless the transfer was to a family member. Hackl v. Commissioner, 118 T.C. 279,294 (2002), affd. 335 F.3d 664 (7th Cir. 2003).

S. Summary.

The majority of the recent cases have addressed the use of family owned entities in estate planning. Barring legislative or regulatory action (see below), the use of entities remains a viable means to transfer assets in a manner that meets a number of our client’s legitimate nontax objectives. This type of planning can also result in reducing the value of assets for transfer tax purposes. Though the march of case law that continued last year did not change this fact, it has confirmed the government’s hostility to planning with family owned corporations, partnerships and limited liability companies.

The cases and the results tend to be very fact specific and give guidance to planners on facts to consider and to avoid at every step of the process -- from the initial discussions, the formation of the entity, the funding of the entity, the operation of the entity, and the transfer of interest in the entity to the possible audit or litigation to defend the entity for a reason other than tax savings. These considerations include:

1. The legitimate and significant nontax purpose for forming the entity should be discussed and documented both preceding the creation of the entity and in the governing documents.

2. The terms of entity such as its purpose, management structure (including powers and compensation), investment policy, distribution policy, transfer restrictions, term, and the use of entity assets should be discussed and negotiated.

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3. The governing documents of the entity should be prepared, signed and filed with the appropriate governmental agency.

4. The governing documents should not waive state law fiduciary duties.

5. The entity should obtain a federal employer identification number.

6. Entity bank and brokerage accounts should be established as necessary.

7. Necessary documents to transfer assets to fund the entity should be prepared, executed and filed as necessary.

8. Each owner’s capital account should reflect the fair market value of the assets contributed and ownership interest received in return.

9. Appraisals of hard to value assets should be secured.

10. Personal use assets should not be contributed to the entity.

11. Owners should retain sufficient assets outside of the entity.

12. Any consents required to transfer assets to the entity should be obtained and fully documented.

13. Leases, insurance and utilities on property transferred to the entity should be assigned/transferred to the entity.

14. Consider IRC. §2036(b) before transferring stock in closely-held corporations to a partnership or limited liability company.

15. Consider income tax consequences of transferring assets to the entity.

16. File appropriate state and federal tax returns for the entity.

17. File required periodic reports with appropriate governmental agencies.

18. Follow the governing documents (are meetings required, are annual distributions required).

19. Properly document transactions with third parties (loans, leases and contracts).

20. Make sure the entity pays to maintain property owned by the entity and for services rendered to the entity.

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21. All contributions to the entity should be credited to the capital account of the contributing owner.

22. Distributions from the entity should be made on a proportionate basis, as reflected by the capital accounts of the entity.

23. Personal use of entity property should be avoided.

24. Payment of personal expenses of the owners should be avoided.

25. Commingling of assets of the owners and entity should be avoided.

26. Interests in the entity should not be transferred simultaneously with formation of the entity.

27. Properly document transfers of interests in the entity.

28. Obtain appraisals of transferred interests.

29. Consider income tax consequences of the transfer of interests in the entity.

30. Consider adequately disclosing the transfer of interest in the entity on federal gift tax return of transferor.

31. Ensure changes in ownership, ownership percentages and capital accounts are properly adjusted and documented.

32. Make necessary amendments to governing documents to reflect transfers.

33. Follow governing documents and law upon the death of an owner.

34. Any distributions to a deceased owner’s estate should be handled appropriately.

35. Carefully review the provisions in operating agreements regarding distributions and restrictions on the ability of owners to transfer interests in the entity.

In addition to the FLP/FLLC cases, very important decisions approving the use of “defined value clauses” have been decided. These cases give practitioners guidance as to what type of clauses will be followed and how to structure transactions. They have also rejected the government’s position that the use of such clauses is against public policy.

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II. Regulatory Update

A. Final Regulations under IRC §2053

On October 16, 2009 the Treasury released final regulations relating to the amount deductible from a decedent’s gross estate under IRC §2053(a)(3). The regulations which became effective on October 20, 2009, clarify that events occurring after a decedent’s death are to be considered when determining the amount deductible under all provisions of IRC §2035 and that deductions under IRC §2053 are generally limited to amounts actually paid by the estate in satisfaction of deductible expenses and claims. The regulations also provide for a protective claim of refund to preserve the estate’s right to claims and refunds that are not paid or do not otherwise meet the requirements of deductibility until after the expiration of the period of limitation for filing a refund.

B. CCA – 11831-08

In this advice the service addressed the issue of whether assets held in a trust in which the grantor retained a power to substitute assets in a non-fiduciary capacity under IRC §675(4)(c) will receive an adjusted basis under IRC §1014 upon the grantor’s death The advice denies a §1014 adjustment absent inclusion in the grantor’s estate and reinforces prior rulings (Rev. Rul. 2008-22 and PLR 20082007) that the retention of such a “swap power” will not cause the trust assets to be included in the grantor’s estate for Federal estate tax purposes.

C. Notice 2010-19

On February 2, 2010 the IRS issued Notice 2010-19, 2010-7, IRB 404 to address concerns raised by §2511(c) added to the Internal Revenue Code by the 2001 Tax Act. This section which only applies to gifts made in 2010, reads as follows:

“TREATMENT OF CERTAIN TRANSFERS IN TRUST. Notwithstanding any other provisions of this section and except as provided in regulations, a transfer in trust shall be treated as a transfer of property by gift, unless the trust is treated as wholly owned by the donor or the donor’s spouse under subpart E of part I of subchapter J of chapter 1.”

A literal reading of the language of §2511(c) raised concerns that a transfer to trust wholly owned by the grantor or the grantors spouse for fiduciary income tax purposes would be incomplete gifts for federal gift tax purposes. The notice states that this is not the case and that §2511(c) broadens the types of transfers to trusts that before 2010 would have been considered incomplete and therefore not subject to gift tax. The notice goes on to say that “Accordingly, each transfer made in 2010 to a trust that is not treated as a wholly owned by the donor or the donor’s spouse under subpart E of part I of subchapter J of chapter 1 is considered to be a transfer by gift of the entire interest in the property.” This has raised a concerned that if

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this language is read literally, it could be construed as providing new rules for charitable remainder trusts. To date this concern has not been clarified by the IRS.

III. Legislative Update

A distracted Congress adjourned last year without passing badly needed legislation to address the changes made to Federal estate, gift and generation-skipping transfer taxes by the Economic Growth and Tax Relief Reconciliation Act of 2001, Public Law 107-16 (“EGTRRA”). Under EGTRRA, the estate tax and the generation- skipping transfer tax are “not applicable” to the estates of decedent’s dying in 2010. Also, recipients of property from a decedent dying in 2010 will receive a basis equal to the lesser of the decedent’s adjusted basis or the property’s fair market value on the date of death. Further, an additional $1,300,000 (indexed for inflation in $100,000 increments) of basis can be allocated by the executor to appreciated property, and an additional $3,000,000 can be allocated to property transferred to a surviving spouse (including transfers to “QTIP-like” trust. The gift tax remains in effect for 2010, with a maximum rate of 35%. However on December 31, 2010 the provisions of EGTRRA “sunset” and its provisions will not apply to the estates of decedents dying, gifts made, or generation-skipping transfers made after such date. In general, the estate, gift and generation skipping rates and exemptions as in effect prior to January 1, 2002 will apply for estates of decedents dying, gifts made, or generation skipping transfers made on or after January 1, 2011.

This has given rise to what Senate Finance Committee Chairman Max Baucus characterized as “massive, massive confusion.” To further “confuse” matters, it is possible, if not probable, that Congress will reenact some form of the old estate tax rules retroactively for 2010. On December 16, 2009, in response to the failure of Congress to address the one-year estate tax repeal before the end of 2009, Senator Baucus stated “Clearly the correct public policy is to achieve continuity with respect to the estate tax. We clearly will work to do this [reenact the estate tax] retroactively, so that when the law is changed, it will have retroactive application.” While this indicates that some members of Congress will want to reenact an estate tax for 2010, it is impossible to predict what action, if any, Congress will take in an election year and the ultimate ramifications of any additional legislation passed in this arena.

This section will summarize the various proposals being discussed, possible timing of legislative action and the real problems that planners have been trying to address since January 1, 2010.

A. 2009

In 2009 H.R. 436, H.R. 498, H.R. 2023 and H.R 3905 were introduced (but not passed) in the House of Representatives, and (though Tax Legislation must be introduced in the House) S. 722 and S 2784 were introduced (but not passed) in the Senate. On May 11, 2009, the Treasury Department released its “General Explanations of the Administration’s Fiscal Year 2010 Revenue Proposals” (commonly referred to as the “Greenbook”). On September 8, 2009, the Joint Committee on Taxation (”JCT”) released the “Description of Revenue Provisions in President’s Fiscal Year 2010 Budget Proposal, Part One Individual Income Tax, Estate and Gift Tax Provision (“JCT Description”).

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1. H.R. 436

This bill was introduced on January 9, 2009, by Rep. Earl Pomeroy (D-ND) and would:

Freeze the exemption equivalent at $3,500,000;

Freeze the maximum rate at 45%;

Add a 5% surtax for amounts between $10,000,000 and $41,500,000;

Eliminate entity-based valuation discounts on transfers of non-tradable interests in entities holding non-business assets; and

Eliminate a minority discount or discount for lack of control on the

transfer of any non-tradable entity controlled by the transferor and the transferor’s ancestors, spouse, descendants, descendants of a spouse or parent, and spouses of any such descendants.

2. H.R. 498

This bill was introduced on January 14, 2009, by Rep. Harry Mitchell (D-AZ) and would:

Increase the applicable exclusion amount from $3,500,000 to $5,000,000 in phases between 2010 and 2015;

Adjust the applicable exclusion amount for inflation;

Freeze the maximum rate at 45%;

Retain adjusted basis at death;

Restore the full unified credit amount for gift tax purposes; and

Allow a surviving spouse to use the unused unified credit of a deceased spouse.

3. S.722

This bill was introduced on March 26, 2009, by Sen. Max Baucus (D-MT) and would:

Freeze the exemption equivalent at $3,500,000;

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Freeze the maximum rate at 45%;

Retain adjusted basis at death;

Restore the full unified credit amount for gift tax purposes; and

Allow a surviving spouse to use the unused unified credit of a deceased spouse.

4. H.R. 2023

This bill was introduced on April 22, 2009, by Rep. James McDermott (D-WA) and would:

Reduce the applicable exclusion amount to $2,000,000;

Adjust the applicable exclusion amount for inflation;

Increase the maximum rate to 55%;

Retain adjusted basis at death;

Restore the credit for state death taxes;

Restore the full unified credit amount for gift tax purposes; and

Allow a surviving spouse to use the unused unified credit of a deceased spouse.

5. Treasury “Greenbook”

On May 11, 2009, the Treasury Department released its “General Explanations of the Administration’s Fiscal Year 2010 Revenue Proposals” (commonly referred to as the “Greenbook”) which proposes the following:

Freezing the exemption equivalent at $3,500,000 and freezing the maximum rate at 45%;

Requiring consistency in value for transfer and income tax purposes;

Modifying “marketability” valuation discounts; and

Requiring a minimum 10 year term for grantor retained annuity trusts.

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6. Joint Committee on Taxation Description of Greenbook Proposals

On September 8, 2009, the Joint Committee on Taxation (”JCT”) released the “Description of Revenue Provisions in President’s Fiscal Year 2010 Budget Proposal, Part One Individual Income Tax, Estate and Gift Tax Provision (“JCT Description”). The JCT Description expands the proposal in the Greenbook as follows:

Providing that if the estate tax value of an asset is increased on audit, the heir or donee’s basis is not correspondingly increased;

Additional approaches to valuation discounts including “look through” and “aggregation” rules; and

Valuation of the remainder interest in a GRAT for gift tax purposes at the end of the GRAT term when the remainder is distributed.

7. H.R. 3905

This bill, (the “Estate Tax Relief Act of 2009”) was introduced on October 22, 2009, by Rep. Shelley Berkley (D-NV) and Rep. Arthur Davis (D-AL) and would:

For each of the years 2010 – 2019, increase the applicable exclusion amount by $150,000 ($5,000,000 in 2019) and decrease the maximum transfer tax rate by 1% (35% in 2019);

For each of the years 2010 – 2019, reduce the state death tax credit by 10% (resulting in total elimination in 2019);

Index the applicable exclusion amount for inflation for years after 2019; and

Make certain other 2001 transfer changes permanent.

On November 19, 2009, Rep. Earl Pomeroy (D-ND) introduced H.R. 4145, the Permanent Estate Tax Relief for Families, Farmers, and Small Business Act of 2009. This bill was very simply proposed to permanently freeze 2009 law ($3.5 million estate tax exemption, $1 million gift tax exemption, 45% maximum rate, adjusted basis at death, a deduction (and no credit) for state death taxes, special rules for conservation easements and §6166 and allocation of generation-skipping tax exemption) for estates of decedents dying and gifts made, after December 31, 2009. On December 2, 2009 the House passed H.R. 4145 by a vote of 225-200. No Republicans voted for, and 26 Democrats voted against. Ten Representatives (3 Republicans and 7 Democrats) did not vote.

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On December 16, 2009, Senator Max Baucus (D-MT) asked the Senate for

unanimous consent to bring H.R. 4145 to the floor, approve an amendment to extend 2009 law for two months, and approve the bill as amended. In response, Senator Mitch McConnell (R-KY) asked Senator Baucus to consider an amendment reflecting “a permanent, portable, and unified $5 million exemption that is indexed for inflation, and a 35% top rate.).

On December 24, 2009 before it adjourned for the year, the Senate leadership

arranged without objection to place H.R. 4145 on the Senate calendar as “read for the first time” and scheduled the second reading for the Senates next legislative day (sometime in January of 2010).

B. 2010

On January 20, 2010, H.R. 4145 was considered as having been read for the second time in the Senate. Accordingly, it now be can considered by the Senate at any time. On January 28, 2010, by a vote of 60-39 the Senate passed the Pay-As-You-Go Act, H. J. Res. 45, which contained a two year exception for continuing the 2009 estate tax law. On March 16, 2010 H.R. 4849, the Small Business and Infrastructure Jobs Act of 2010 was introduced in the House. Section 307 of the bill contained a provision requiring a minimum 10 year term for grantor retained annuity trusts (as provided for in the Treasury “Green Book.”) On March 17, 2010 H.R. 4849 was favorably reported to the House by a vote of 25-15, and on March 24, H.R. 4849 was passed in the House by a vote of 246-178.

Also on March 16, Representative Sander Levin, the new acting chairman of the House Ways and Means Committee, that commented that the committee would begin work on retroactively reinstating the estate tax which expired on December 31, 2009. Mr. Levin stated that “the sooner we do it the better” and added that one possibility being considered would let heirs choose to pay the capital gains tax that replaced the estate tax if that is more beneficial. “I think the main point is we have to act,” Levin said. “I think this interval is not helpful; people need to be able to plan.” Unfortunately, as of the deadline for submitting this article, Congress has done nothing to address the one year suspension of the federal estate and generation-skipping-transfer tax. This raises a number of issues in 2010. Further, the “sunset” provision contained in §901(b) of EGRTTA provides “The Internal Revenue Act of 1986 and the Employee Retirement Income Security Act of 1974 shall be applied and administered to estates, gifts, and transfers described in subsection (a) as if the provisions and amendments described in subsection (a) had never been enacted.” This creates a number of concerns for planning that will continue into 2011 and beyond. Some of these issues and concerns include:

The interpretation of wills and trusts that include formula provisions based on estate and generation-skipping-transfer tax concepts that do not apply

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in 2010 (to address this issue, some states have passed remedial legislation);

Calculation of the estate tax for decedent’s who make gifts in 2010 at the

35% rate and die after 2010;

How to allocate generation-skipping-transfer tax exemption to trusts created in 2010 and transfers made to pre-2010 GST trusts;

The identity of the “transferor” and “skip persons” and the tax

consequences of distributions and taxable terminations from trusts created in 2010;

The application of the “move down rule” for 2010 trusts created for the

exclusive benefit of grandchildren and their descendants;

The ability to make a “reverse QTIP election” under IRC §2652(a);

The effect of the “had never been enacted” sunset language on inclusion ratio of trusts to which more than $1 million of GST exemption had been previously allocated;

The effect of the “had never been enacted” sunset language on a qualified

severance of a GST trust from 2001 – 2009;

The effect of the “had never been enacted” sunset language on a late allocation of GST exemption;

The effect of the “had never been enacted” sunset language on deemed

allocations of GST exemption;

The effect of the “had never been enacted” sunset language on the basis of assets received from decedent’s dying in 2010; and

The effect of the estate tax not applying in 2010 on the estate tax inclusion

period (“ETIP”).

4/19/2010

1

Estate and Gift Tax Update

Harry W. Wolff, Jr.

Cox Smith Matthews Incorporated

112 East Pecan Street Suite 1800112 East Pecan Street, Suite 1800

San Antonio, Texas 78205-1521

(210) 554-5500

State Bar of Texas Annual Meetingg

Hot Topics and Updates

June 11, 2010 1

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Estate of Petter v. Commissioner. T.C. Memo 2009-280 (December 7, 2009

Another taxpayer victory upholding the use of adefined value clause in connection with inter vivor giftsdefined value clause in connection with inter vivor giftsand sale to grant trusts.

The specific language used for the gifts was asfollows:follows:

“Transferor wishes to assign 940 Class T MembershipUnits in the Company (the “Units”) including all of theT f ’ i ht titl d i t t i th iTransferor’s right, title and interest in the economic,management and voting rights in the Units as a gift to theTransferees.”

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Petter Gift Language Cont’d

Transferor * * *1.1.1 assigns to the Trust as a gift the number

of Units described in Recital C above thatequals one-half the minimum dollaramount that can pass free of federal gifttax by reason of Transferor’s applicabley ppexclusion amount allowed by CodeSection 2010(c). Transferor currentlyunderstands her unused applicable

l i t t b $907 820 th texclusion amount to be $907,820, so thatthe amount of this gift should be$453,910; and

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Petter Gift Language Cont’d

1.1.2 assigns to the Seattle Foundation asga gift to the A.Y. Petter Family AdvisedFund of the Seattle Foundation the

ff fdifference between the total number ofUnits described in Recital C above andthe number of Units assigned to thethe number of Units assigned to theTrust in Section 1.1.1.

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Petter Gift Language Cont’d

The gift documents also provided in section 1.2:

The Trust agrees that, if the value of the Units itinitially receives is finally determined for federalinitially receives is finally determined for federalgift tax purposes to exceed the amountdescribed in Section 1.1.1., Trustee will, onbehalf of the Trust and as a condition of the giftbehalf of the Trust and as a condition of the giftto it, transfer the excess Units to The SeattleFoundation as soon as practicable.

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Petter Gift Language Cont’d

The Foundations similarly agree to returnexcess units to the trust if the value of theunits is “finally determined for federal gift tax

” t b l th th tpurposes” to be less than the amountdescribed in section 1.1.1.

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The specific language for the sales was as follows:

“Transferor wishes to assign 8,459 Class T [orClass D] Membership Units in the Company (theClass D] Membership Units in the Company (the“Units”) including all of the Transferor’s right, titleand interest in the economic, management andoting rights in the Units b sale to the Tr st andvoting rights in the Units by sale to the Trust and

as a gift to The Seattle Foundation.”

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8

Petter Sale Language Cont’d

Transferor * * *

1.1.1. assigns and sells to the Trust thenumber of Units described in Recital Cabove that equals a value of $4,085,190as finally determined for federal gift taxas finally determined for federal gift taxpurposes; and

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Petter Sale Language Cont’d

1 1 2 i t Th S ttl F d ti1.1.2 assigns to The Seattle Foundation asa gift to the A.Y. Petter Family AdvisedFund of The Seattle Foundation theFund of The Seattle Foundation thedifference between the total number ofUnits described in Recital C above and thenumber of Units assigned and sold to theTrust in Section 1.1.1.

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Petter Sale Language Cont’d

“The Trust agrees that, if the value of theUnits it receives is finally determined toexceed $4,085,190, Trustee will, on behalf ofthe Trust and as a condition of the sale to itthe Trust and as a condition of the sale to it,transfer the excess Units to The SeattleFoundation as soon as practicable.”Likewise, the Seattle Foundation agrees totransfer shares to the trust if the value isfound to be lower than $4 085 190 ”found to be lower than $4,085,190.

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Analysis – Savings Clause vs. Formula Clause

The Court distinguished the difference between “savingsclauses” and “formula clauses”. “A shorthand for thisdistinction is that savings clauses are void, but formulaclauses are fine But figuring out what kind of clause isclauses are fine. But figuring out what kind of clause isinvolved in this case depends on understanding just what itwas that Anne was giving away. She claims that she gavestock to her children equal in value to her unified credit andgave all the rest to charity. The Commissioner claims thatg yshe actually gave a particular number of shares to herchildren and should be taxed on the basis of their now-agreed value. The plain language of the documentsshows that Anne was giving gifts of an ascertainabled ll l f t k h did t i ifidollar value of stock; she did not give a specificnumber of shares or a specific percentage interest inthe PFLLC. The number of shares given to the trustswas set by an appraisal occurring after the date of thegift This makes the Petter gift more like a Christiansengift. This makes the Petter gift more like a Christiansenformula clause than a Procter savings clause.

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Analysis - Public Policy Argument Rejected

The Court rejected the government’s public policy arguments based on a general public policy encouraging gifts to charities under United States v. Benedict, 338 U.S. 692 , 696—97 (1950) and the warning of the Supreme Court in(1950) and the warning of the Supreme Court in Commissioner v. Tellier, 383 U.S. 687, 694 (1996) concluding as follows:“In summary, Anne’s transfers, when evaluated at the ytime she made them, amounted to gifts of an aggregate and set number of units, to be divided at a later date based on appraised values. The formulas used to effect these transfers were not void as contrary to public policy,these transfers were not void as contrary to public policy, as there was no “severe and immediate” frustration of public policy as a result, and indeed no overarching public policy against these types of arrangements in the first place ”first place.

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Estate of Price v. Commissioner T.C.Memo. 2010-2 (January 4, 2010), is atroubling case wherein the Tax Court heldth t ift f li it d t hi i t tthat gifts of limited partnership interestsdid not qualify for the annual gift taxexclusionexclusion.

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Partnership Agreement Language

The PILP partnership agreement prohibited anypartner from withdrawing from the partnership andcontained the following restrictions on the transfercontained the following restrictions on the transferand assignment of partnership interests:“11.1 Prohibition Against Transfer. Except ashereinafter set forth no partner shall sell assignhereinafter set forth, no partner shall sell, assign,transfer, encumber or otherwise dispose of anyinterest in the partnership without the writtenconsent of all partners; provided, however, a limitedp ; p , ,partner may sell or otherwise transfer his or herpartnership interest to a general or limited partner,or to a trust held for the benefit of a general orlimited partner.

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Partnership Agreement Language – Cont’d

11.2 Assignment. Any assignment made toanyone, not already a partner, shall be effectiveonly to give the assignee the right to receive theonly to give the assignee the right to receive theshare of profits to which his assignor wouldotherwise be entitled, shall not relieve the

i f li bilit d t tassignor from liability under any agreement tomake additional contribution to capital, shall notrelieve the assignor from liability under theg yprovisions of the partnership agreement, andshall not give the assignee the right to become asubstituted limited partner * * *substituted limited partner.

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Analysis

In denying the annual exclusion, the Court declined toreconsider its holding in Hackl v. Commissioner, 118

hT.C. 279,294 (2002), affd. 335 F.3d 664 (7th Cir. 2003),and applying the Hackl methodology, found that becausethere was no ability to withdraw their capital accounts or

ll th i i t t ith t itt t f ll thsell their interests without written consent of all otherpartners, there was no immediate enjoyment of the giftedinterests. The Court also noted that there was noimmediate enjoyment of income from the gifted interestsimmediate enjoyment of income from the gifted interestsbecause the partnership agreement provided thatdistributions were secondary to PILP’s primary purposeof generating a long term reasonable rate of returnof generating a long-term reasonable rate of return.

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Economic Growth and Tax Relief Reconciliation Act of 2001 (“EGTRRA”)

Under EGTRRA:

The estate tax and the generation-skipping transfer taxare “not applicable” to the estates of decedent’s dying inare “not applicable” to the estates of decedent’s dying in2010.

Recipients of property from a decedent dying in 2010 willi b i l t th l f th d d t’receive a basis equal to the lesser of the decedent’s

adjusted basis or the property’s fair market value on thedate of death.

A dditi l $1 300 000 (i d d f i fl ti i An additional $1,300,000 (indexed for inflation in$100,000 increments) of basis can be allocated by theexecutor to appreciated property, and an additional$3 000 000 b ll t d t t t f d t$3,000,000 can be allocated to property transferred to asurviving spouse (including a “QTIP-like” trust).

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EGTRRA CONT’D

The gift tax remains in effect for 2010, with amaximum rate of 35%.

On December 31 2010 the pro isions of On December 31, 2010 the provisions ofEGTRRA “sunset” and its provisions will notapply to the estates of decedents dying, giftsmade, or generation-skipping transfers madeafter such date. In general, the estate, gift andgeneration skipping rates and exemptions as ingeneration skipping rates and exemptions as ineffect prior to January 1, 2002 will apply forestates of decedents dying, gifts made, orgeneration skipping transfers made on or aftergeneration skipping transfers made on or afterJanuary 1, 2011.

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How Did We Get Here - 2009

In 2009, H.R. 436, H.R. 498, H.R. 2023 andH.R 3905 were introduced (but not passed) in

f (the House of Representatives, and (though TaxLegislation must be introduced in the House) S.722 and S 2784 were introduced (but not(passed) in the Senate.

On May 11, 2009, the Treasury Departmentreleased its “General E planations of thereleased its “General Explanations of theAdministration’s Fiscal Year 2010 RevenueProposals” (commonly referred to as the“Greenbook”).

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2009 Cont’d

On September 8, 2009, the JointCommittee on Taxation (”JCT”) released( )the “Description of Revenue Provisions inPresident’s Fiscal Year 2010 BudgetP l P t O I di id l I TProposal, Part One Individual Income Tax,Estate and Gift Tax Provision (“JCTDescription”)Description ).

On December 22, 2009 the House passedH.R. 4145. The Senate did not act onH.R. 4145. The Senate did not act onH.R. 4145 before adjorning in 2009.

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H.R. 436 - Introduced 1/9/2009

Freeze the exemption equivalent at $3,500,000;

Freeze the maximum rate at 45%;

Add a 5% surtax for amounts between $10,000,000 and$41,500,000;

Eliminate entity-based valuation discounts on transfersyof non-tradable interests in entities holding non-businessassets; and

Eliminate a minority discount or discount for lack ofycontrol on the transfer of any non-tradable entitycontrolled by the transferor and the transferor’sancestors, spouse, descendants, descendants of apspouse or parent, and spouses of any suchdescendants.

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H.R. 498 – Introduced 1/14/2009

Increase the applicable exclusion amount from$3,500,000 to $5,000,000 in phases between2010 2012010 and 2015;

Adjust the applicable exclusion amount forinflation;inflation;

Freeze the maximum rate at 45%;

Retain adjusted basis at death;j

Restore the full unified credit amount for gift taxpurposes; and

All i i t th d Allow a surviving spouse to use the unusedunified credit of a deceased spouse.

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S.722 – Introduced 3/26/2009

Freeze the exemption equivalent at $3,500,000;

F th i t t 45% Freeze the maximum rate at 45%;

Retain adjusted basis at death;

Restore the full unified credit amount for gift tax Restore the full unified credit amount for gift taxpurposes; and

Allow a surviving spouse to use the unusedunified credit of a deceased spouse.

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H.R. 2023 – Introduced 4/22/2009

Reduce the applicable exclusion amount to$2,000,000;

Adjust the applicable exclusion amount forinflation;

Increase the maximum rate to 55%; Increase the maximum rate to 55%;

Retain adjusted basis at death;

Restore the credit for state death taxes;

Restore the full unified credit amount for gift taxpurposes; and

All i i t th d Allow a surviving spouse to use the unusedunified credit of a deceased spouse.

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Treasury “Greenbook” – 5/11/2009

Freeze the exemption equivalent at $3,500,000and freezing the maximum rate at 45%;

Requiring consistency in value for transfer andincome tax purposes;income tax purposes;

Modifying “marketability” valuation discounts;and

Requiring a minimum 10 year term for grantorretained annuity trusts.

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Joint Committee on Taxation Description of Greenbook Proposals – 9/8/2009

Provide that if the estate tax value of an asset isi d dit th h i d ’ b i iincreased on audit, the heir or donee’s basis isnot correspondingly increased;

Additional approaches to valuation discountsAdditional approaches to valuation discountsincluding “look through” and “aggregation” rules;and

V l ti f th i d i t t i GRAT Valuation of the remainder interest in a GRATfor gift tax purposes at the end of the GRAT termwhen the remainder is distributed.

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H.R. 3905 – Introduced 10/22/2009

For each of the years 2010 – 2019, increase theapplicable exclusion amount by $150 000 ($5 000 000 inapplicable exclusion amount by $150,000 ($5,000,000 in2019) and decrease the maximum transfer tax rate by1% (35% in 2019);

For each of the years 2010 2019 reduce the state For each of the years 2010 – 2019, reduce the statedeath tax credit by 10% (resulting in total elimination in2019);

Index the applicable exclusion amount for inflation for Index the applicable exclusion amount for inflation foryears after 2019; and

Make certain other 2001 transfer changes permanent.

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H.R 4145 – The “Last Shot” in 2009

On November 19, 2009, Rep. Earl Pomeroy (D-ND)introduced H.R. 4145, the Permanent Estate Tax Relieffor Families, Farmers, and Small Business Act of 2009.This bill was very simply proposed to permanently freeze2009 law ($3.5 million estate tax exemption, $1 milliongift tax exemption, 45% maximum rate, adjusted basis atdeath, a deduction (and no credit) for state death taxes,special rules for conservation easements and §6166 andallocation of generation-skipping tax exemption) for

t t f d d t d i d ift d ftestates of decedents dying and gifts made, afterDecember 31, 2009.

On December 2, 2009 the House passed H.R. 4145 by avote of 225-200. No Republicans voted for, and 26Democrats voted against. Ten Representatives (3Republicans and 7 Democrats) did not vote.

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H.R. 4145 Cont’d

On December 16, 2009, Senator Max Baucus (D-MT) asked the Senate for unanimous consent tobring H.R. 4145 to the floor, approve an amendmentgto extend 2009 law for two months, and approve thebill as amended. In response, Senator MitchMcConnell (R-KY) asked Senator Baucus toconsider an amendment reflecting “a permanentconsider an amendment reflecting a permanent,portable, and unified $5 million exemption that isindexed for inflation, and a 35% top rate.).

On December 24, 2009 before it adjourned for thejyear, the Senate leadership arranged withoutobjection to place H.R. 4145 on the Senate calendaras “read for the first time” and scheduled the secondreading for the Senates next legislative dayreading for the Senates next legislative day(sometime in January of 2010).

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How Did We Get Here - 2010

On January 20, 2010, H.R. 4145 was consideredOn January 20, 2010, H.R. 4145 was consideredas having been read for the second time in theSenate. Accordingly, the Senate it now be canconsidered by the Senate at any time Onconsidered by the Senate at any time. OnJanuary 28, 2010, by a vote of 60-39 the Senatepassed the Pay-As-You-Go Act, H. J. Res. 45,which contained a two year exception forcontinuing the 2009 estate tax law.

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H.R. 4849

On March 16, 2010 H.R. 4849, the SmallBusiness and Infrastructure Jobs Act of 2010

S 30 fwas introduced in the House. Section 307 of thebill contained a provision requiring a minimum10 year term for grantor retained annuity trustsy g y(as provided for in the Treasury “Green Book.”)

On March 17, 2010 H.R. 4849 was favorablyreported to the Ho se b a ote of 25 15reported to the House by a vote of 25-15.

On March 24, H.R. 4849 was passed in theHouse by a vote of 246-178.y

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Remarks By Rep. Levin

Also on March 16, Representative Sander Levin, thenew acting chairman of the House Ways and MeansCommittee that commented that the committeeCommittee, that commented that the committeewould begin work on retroactively reinstating theestate tax which expired on December 31, 2009.Mr Levin stated that “the sooner we do it theMr. Levin stated that the sooner we do it thebetter” and added that one possibility beingconsidered would let heirs choose to pay thecapital gains ta that replaced the estate ta ifcapital gains tax that replaced the estate tax ifthat is more beneficial. “I think the main point iswe have to act,” Levin said. “I think this intervali t h l f l l d t b bl t l ”is not helpful; people need to be able to plan.”

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Problems Cause by EGTRRA

Unfortunately, as of the deadline for submitting thisarticle, Congress has done nothing to address the oneyear suspension of the federal estate and generation-year suspension of the federal estate and generationskipping-transfer tax. This raises a number of issues in2010. Further, the “sunset” provision contained in§901(b) of EGRTTA provides “The Internal RevenueAct of 1986 and the Employee Retirement IncomeSecurity Act of 1974 shall be applied andadministered to estates, gifts, and transfersdescribed in subsection (a) as if the provisions anddescribed in subsection (a) as if the provisions andamendments described in subsection (a) had neverbeen enacted.” This creates a number of concerns forplanning that will continue into 2011 and beyond.

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Problems Caused By EGTRRA Cont’d

Some of these issues and concerns caused byEGTRRA include:EGTRRA include:

The interpretation of wills and trusts that includeformula provisions based on estate andgeneration-skipping-transfer tax concepts thatdo not apply in 2010 (to address this issue,some states have passed remedial legislation);some states have passed remedial legislation);

Calculation of the estate tax for decedents whomake gifts in 2010 at the 35% rate and die after2010;

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Problems Caused By EGTRRA Cont’d

How to allocate generation-skipping-transfer taxexemption to trusts created in 2010 and transfers madet 2010 GST t tto pre-2010 GST trusts;

The identity of the “transferor” and “skip persons”and the tax consequences of distributions andand the tax consequences of distributions andtaxable terminations from trusts created in 2010;

The application of the “move down rule” for 2010 The application of the move down rule for 2010trusts created for the exclusive benefit ofgrandchildren and their descendants;

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Problems Caused By EGTRRA Cont’d

The ability to make a “reverse QTIP election” under IRC§2652(a);§ ( )

The effect of the “had never been enacted” sunsetlanguage on inclusion ratio of trusts to which more thanlanguage on inclusion ratio of trusts to which more than$1 million of GST exemption had been previouslyallocated;

The effect of the “had never been enacted” sunsetlanguage on a qualified severance of a GST trust from2001 2009;2001 – 2009;

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Problems Caused By EGTRRA Cont’d

The effect of the “had never been enacted” sunsetlanguage on a late allocation of GST exemption;

The effect of the “had never been enacted” sunsetlanguage on deemed allocations of GSTexemption;exemption;

The effect of the “had never been enacted” sunsetl th b i f t i d flanguage on the basis of assets received fromdecedent’s dying in 2010; and

The effect of the estate tax not applying in 2010 onthe estate tax inclusion period (“ETIP”).

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