Estate of Turner v. Commissioner of Internal Revenue, 112018 FEDTAX, 18911-08

Docket Nº:18911-08
Opinion Judge:MARVEL, JUDGE.
Party Name:ESTATE OF CLYDE W. TURNER, SR., DECEASED, W. BARCLAY RUSHTON, EXECUTOR, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent [*]
Attorney:Charles E. Hodges II and Rose K. Drupiewski, for petitioner. Caroline R. Krivacka and William Walter Kiessling, for respondent.
Case Date:November 20, 2018
Court:United States Tax Court
 
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151 T.C. No. 10

ESTATE OF CLYDE W. TURNER, SR., DECEASED, W. BARCLAY RUSHTON, EXECUTOR, Petitioner

v.

COMMISSIONER OF INTERNAL REVENUE, Respondent [*]

No. 18911-08

United States Tax Court

November 20, 2018

Decedent (D) transferred property to a family limited partnership (FLP) in exchange for general and limited partnership interests and then transferred portions of his limited partnership interest as gifts during his lifetime. In Estate of Turner v. Commissioner, T.C. Memo. 2011-209, we held that the inter vivos transfer of property to the FLP was subject to I.R.C. sec. 2036. In Estate of Turner v. Commissioner, 138 T.C. 306 (2012), we held that D's estate is not entitled to a marital deduction with respect to the value of certain property included in D's gross estate under I.R.C. sec. 2036 because the property was the subject of lifetime gifts and did not pass to D's surviving spouse.

Under I.R.C. sec. 2036 the value of the property transferred to the FLP is included in D's gross estate and results in Federal estate and State death tax liabilities. D's estate's liability for Federal estate and State death taxes arises solely because of the I.R.C. sec. 2036 inclusion.

R filed computations and amended computations for entry of decision pursuant to Rule 155, Tax Court Rules of Practice and Procedure. D's estate objected. The parties disagree as to (1) whether D's estate must reduce the I.R.C. sec. 2056 marital deduction by the amounts of the Federal estate and State death taxes owed that R claims must be paid from estate assets passing to the surviving spouse (marital deduction property) and (2) whether D's estate may increase the marital deduction by postdeath income that was not included in the gross estate but was generated by marital deduction property.

Held: D's estate is not required to reduce the marital deduction by the amounts of the Federal estate and State death taxes it owes because (1) those taxes are attributable solely to the value of property included in the gross estate under I.R.C. sec. 2036, (2) the executor has a right under I.R.C. sec. 2207B to recover from the beneficiaries who received the property during D's lifetime an amount equal to the Federal estate and State death taxes plus interest attributable to those transfers, and (3) the executor must exercise the right of recovery under I.R.C. sec. 2207B to prevent the marital deduction property from bearing D's estate's tax burden contrary to D's intent.

Held,

further, D's estate may not increase the marital deduction by the amount of postdeath income generated by the marital deduction property.

Charles E. Hodges II and Rose K. Drupiewski, for petitioner.

Caroline R. Krivacka and William Walter Kiessling, for respondent.

SUPPLEMENTAL OPINION

MARVEL, JUDGE.

This matter is before the Court on the objection by the Estate of Clyde W. Turner, Sr. (estate), to respondent's proposed amended computation for entry of decision submitted in response to our holdings in Estate of Turner v. Commissioner (Estate of Turner I), T.C. Memo. 2011-209, supplemented by Estate of Turner v. Commissioner (Estate of Turner II), 138 T.C. 306 (2012). The parties ask the Court to resolve the continuing controversy regarding the computation of the marital deduction under section 2056.1 The Court held a hearing, and counsel for both parties appeared and were heard.

The parties' arguments regarding the correct computation of the marital deduction require the Court to decide two questions: (1) whether the estate is required to reduce the marital deduction by the amounts of Federal estate and State death taxes it owes when those taxes are attributable to the values of gifts made during decedent's lifetime but included in the gross estate by reason of section 2036 (sometimes referred to as section 2036 assets) and (2) whether the estate is entitled to increase the marital deduction by postdeath income, generated by estate assets, that was reported on Form 1041, U.S. Income Tax Return for Estates and Trusts, and paid to the surviving spouse.

Background

We adopt the findings of fact in Estate of Turner I and Estate of Turner II. For convenience and clarity, we repeat the necessary facts below.

Clyde W. Turner, Sr. (Clyde Sr.), resided in Georgia when he died testate on February 4, 2004. Estate of Turner I, slip op. at 2. W. Barclay Rushton is the executor of the estate. Id. Mr. Rushton resided in Georgia when he petitioned this Court on behalf of the estate. Id.

On April 15, 2002, Clyde Sr. and his wife, Jewell H. Turner, 2 established Turner & Co., a family limited partnership (FLP) that qualified as a Georgia limited liability partnership. Id. at 8. Upon the formation of the FLP, Clyde Sr. and Jewell each contributed assets with a fair market value of $4, 333, 671 (total value of $8, 667, 342) to the FLP. Estate of Turner II, 138 T.C. at 311-312. In exchange, each received a 0.5% general partnership interest and a 49.5% limited partnership interest. Id. By January 1, 2003, Clyde Sr. had transferred, in the aggregate, limited partnership interests totaling 21.7446% to family members as gifts.

In Estate of Turner I, slip op. at 52-53, we held, inter alia, that under section 2036 the value of the property that Clyde Sr. had transferred to the FLP must be included in the value of his gross estate. In Estate of Turner II, 138 T.C. at 306-307, we held that the estate is not entitled to a marital deduction for the value of the property that was brought back into the gross estate by section 2036 (sometimes referred to as the section 2036 inclusion).

Before we filed our report in Estate of Turner II, we received and filed respondent's computation for entry of decision (first computation). Respondent calculated that the estate owed an estate tax deficiency of $362, 822.44. After we filed our report in Estate of Turner II, the estate filed a notice of objection to the first computation, presenting two alternative computations. Respondent filed a response to the estate's notice of objection.

On August 6, 2012, with leave of Court, respondent filed an amended computation for entry of decision (amended computation). As respondent explained in the motion for leave to file the amended computation, in the first computation he allowed a deduction for the interest on the estate tax but did not correspondingly reduce the marital deduction by that amount. According to respondent, the amended computation corrects that mistake. Respondent's amended computation shows an estate tax deficiency of $513, 820.61.

The estate filed a notice of objection to respondent's amended computation, which presented two alternative computations: Option 1 shows an estate tax deficiency of $144, 136, and option 2 shows an estate tax deficiency of $341, 073. After concessions, 3 the parties disagree as to (1) whether the estate must reduce the marital deduction by the amounts of the Federal estate and State death taxes (and related interest) it owes and (2) whether the estate may increase the marital deduction by the amount of postdeath income that was not included in the calculation of the gross estate but was instead reported on Form 1041 and distributed to the surviving spouse.

Respondent filed a response to the estate's notice of objection to respondent's amended computation. The estate, with leave of Court, filed a reply, and respondent filed his response to the estate's reply to respondent's amended computation. The parties' evolving positions are described below.

Discussion

I. Federal Estate and State Death Taxes

The parties agree that the only taxable portion of the estate is the portion attributable to the section 2036 inclusion. The parties disagree as to whether the estate should reduce the marital deduction by the resulting Federal estate and State death tax liabilities (including interest). Respondent's position is that the estate must reduce the marital deduction by the amounts of Federal estate and State death taxes the estate must pay because the only property available to fund the payments is property that would otherwise pass to Jewell and qualify for the marital deduction. Citing the estate's section 2207B right of recovery, the estate disagrees.

We start with the basics of subchapter A of subtitle B of the Code. Section 2001(a) imposes a tax on the transfer of the taxable estate of every decedent who is a citizen or resident of the United States. Section 2031(a) provides that the value of the decedent's gross estate includes the values of interests described in sections 2033 through 2045. An estate may deduct from the value of the gross estate the value of certain property passing from the decedent to his or her surviving spouse (marital deduction). See sec. 2056(a). As relevant to this case, section...

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