Powell v. Comm'r
| Decision Date | 18 May 2017 |
| Docket Number | Docket No. 24703-12,Docket No. 24731-12.,148 T.C. No. 18 |
| Parties | ESTATE OF NANCY H. POWELL, DECEASED, JEFFREY J. POWELL, EXECUTOR, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
On August 8, 2008, D's son, J, acting on her behalf, transferred cash and securities to LP, a limited partnership, in exchange for a 99% limited partner interest. LP's partnership agreement allowed for the entity's dissolution with the written consent of all partners. Also on August 8, 2008, J, purportedly acting under a power of attorney, transferred D's LP interest to T, a charitable lead annuity trust, the terms of which provided an annuity to a charitable organization for the rest of D's life. Upon D's death, T's corpus was to be divided equally between D's two sons. D died on August 15, 2008.
Held: D's ability, acting with LP's other partners, to dissolve the partnership was a right "to designate the persons who shallpossess or enjoy" the cash and securities transferred to LP "or the income therefrom", within the meaning of I.R.C. sec. 2036(a)(2).
Held, further, because D's LP interest was transferred, if at all, less than three years before her death, the value of the cash and securities transferred to LP is includible in the value of her gross estate to the extent required by either I.R.C. sec. 2036(a)(2) or I.R.C. sec. 2035(a).
Held, further, neither I.R.C. sec. 2036(a)(2) nor I.R.C. sec. 2035(a) (whichever applies) requires inclusion in the value of D's gross estate of the full date-of-death value of the cash and securities transferred to LP; only the excess of that value over the value of the limited partner interest D received in return is includible in the value of D's gross estate. I.R.C. sec. 2043(a).
Held, further, J's transfer of D's LP interest to T was either void or revocable under applicable State law because D's power of attorney did not authorize J to make gifts in excess of the annual Federal gift tax exclusion; consequently, the value of the 99% limited partner interest in LP, as of the date of D's death, is includible in the value of her gross estate under I.R.C. sec. 2033 or I.R.C. sec. 2038(a).
David B. Shiner, for petitioner.
Gorica B. Lakic and Alexander R. Roche, for respondent.
By separate notices of deficiency, respondent determined a deficiency of $5,870,226 in the Federal estate tax of the Estate of Nancy H. Powell (decedent) and a deficiency of $2,961,366 in decedent's Federal gift tax for 2008. The estate has moved for summary judgment in its favor that there is no deficiency in either estate or gift tax. Respondent has moved for partial summary judgment in his favor that (1) the value of cash and securities transferred from decedent's revocable trust to NHP Enterprises LP (NHP), a limited partnership, in exchange for a 99% limited partner interest is includible in the value of decedent's gross estate under section 2038(a);2 (2) the value of those same assets is includible in the value of her gross estate under either paragraph (1) or (2) of section 2036(a); and (3) the value of the limited partner interest in NHP decedent received is includible in the value of her gross estate because her son, Jeffrey Powell, did not have the authority to transfer that interest to a charitable lead annuity trust (CLAT) before decedent's death. The estate tax notice of deficiency characterizes those three claims as alternative grounds for increasing the value of decedent's gross estate by $10,022,570, which respondent apparently determined to be the value, as of the date of decedent's death, of the cash and securities transferred to NHP. By contrast, respondent's motion does not explicitlyidentify the three grounds on which he seeks partial summary judgment as alternatives to each other.
We will grant respondent's motion for partial summary judgment that the transfer of cash and securities to NHP was subject to a retained right "to designate the persons who shall possess or enjoy" those assets "or the income therefrom", within the meaning of section 2036(a)(2), and that the purported transfer to the CLAT of the 99% limited partner interest that decedent received for those assets was either void or revocable. Because the purported transfer of decedent's NHP interest to the CLAT, if valid, occurred within three years of decedent's death, the date-of-death value of the cash and securities transferred to NHP is includible in the value of decedent's gross estate to the extent required by either section 2036(a)(2) or section 2035(a). Our conclusion that either section 2036(a) or section 2035(a) applies to the cash and securities renders moot the question of whether enjoyment of those assets was subject to change at the date of decedent's death through the exercise of a power described in section 2038(a). Our granting of respondent's motion on the grounds indicated requires that we deny the estate's motion for summary judgment in regard to the estate tax deficiency but grant its motion in regard to the gift tax deficiency. Our disposition of the parties' motions resolves or renders moot the legal issues raised by the determined deficiencies and leaves no material contested questions of fact, thereby obviating the need for a trial. We round all dollar amounts to the nearest dollar.
Decedent died on August 15, 2008, at Marin General Hospital in Greenbrae, California. When the petitions were filed in these cases, Mr. Powell, executor of decedent's estate, resided in California.
On August 8, 2008, cash and securities were transferred from decedent's revocable trust to NHP in exchange for a 99% limited partner interest. By stipulation, the parties agree on the date of the transfer. They also agree that, on that date, the transferred assets were worth $10,000,752. The stipulated value appears on a statement of NHP's account with Polaris Equity Management, Inc. (Polaris), the wealth management firm Mr. Powell founded, as the balance of that account as of August 8, 2008.
NHP had been formed two days earlier, on August 6, 2008, when Mr. Powell, as general partner, executed and filed with the Delaware secretary of state a certificate of limited partnership. NHP's limited partnership agreement gives Mr. Powell, as general partner, sole discretion to determine the amount and timing of partnership distributions. That agreement also allows for the partnership's dissolution with the written consent of all partners.
On August 8, 2008, Mr. Powell, purportedly acting on behalf of decedent under a power of attorney (POA), assigned to the CLAT decedent's 99% limited partner interest in NHP. Decedent's POA authorized Mr. Powell to take specified actions on her behalf in the event of her incapacitation. In a letter dated August 7, 2008, two doctors at Marin General Hospital expressed their opinion that decedent was incapacitated and could not act on her own behalf.
The terms of the CLAT entitled the Nancy H. Powell Foundation, a Delaware nonprofit corporation, to an annuity of a specified amount for the remainder of decedent's life. Upon decedent's death, the remaining assets in the CLAT were to be divided equally between two trusts for the benefit of Mr. Powell and his brother.
The powers granted to Mr. Powell by the POA included the ability "[t]o grant, convey, sell, transfer, mortgage deed in trust, pledge and otherwise deal in all property real and personal, which the principal may own". The POA also authorized Mr. Powell "[t]o make gifts on the principal's behalf, including, but not limited to, forgiveness of loans, to a class composed of the principal's children, any of such children's issue, or any or all to the full extent of the federal annual gift tax exclusion under Internal Revenue Code Section 2503(b) or any successor statute." A ratification provision in the POA states: "The principal hereby ratifies and confirms all that the agent shall do, or cause to be done, by virtue of this power of attorney."
Decedent's gift tax return for 2008 reported a taxable gift of $1,661,422 as a result of the purported transfer to the CLAT of her 99% limited partner interest in NHP. The amount of the taxable gift--that is, the remainder interest in the CLAT given to decedent's sons--was computed on the basis that the trust corpus (the 99% limited partner interest in NHP) was worth $7,516,773. The value assigned to the limited partner interest, in turn, was based on an appraisal conducted by Duff & Phelps, LLC. In determining the value of the limited partner interest, Duff & Phelps applied a 25% discount for lack of control and lack of marketability. Duff & Phelps attached as an exhibit to its appraisal a statement of NHP's Polaris account as of August 8, 2008, which shows a balance of $10,022,570.3
Respondent issued notices of deficiency in both estate and gift tax. In the gift tax notice, respondent determined that the 99% limited partner interest in NHP was worth $8,518,993 on August 8, 2008, and that the remainder interests in the CLAT were worth $8,363,095. Respondent determined the value of the remainder interests on the premise that decedent was terminally ill when the gift was made.
The estate tax notice increased the value of decedent's gross estate by $12,983,936. The notice explains the principal adjustment, an increase of $10,022,570, on three alternative grounds:
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