The Only Surprise May Be How This Case Made It to Judge Copeland

The Only Surprise May Be How This Case Made It to Judge Copeland

Estate of Fields v. Commissioner, T.C. Memo 2024-90 (September 2024)

October 18, 2024

In May and June of 2016, Mrs. Fields transferred approximately $17 million of her assets to an AM Field Limited Partnership (“Partnership”). The transfer was executed by her great-nephew, who also held her power of attorney, as the two had a very close relationship.

In exchange for the $17 million in assets, Mrs. Fields received a .0095% general partner interest and a 99.9941% limited partner interest in the Partnership. That same month, Mrs. Fields, who had been suffering from Alzheimer’s Disease since 2012, passed away, and an estate tax return was triggered.

The key facts:

  • A sizeable discount of 15% for lack of control and 25% for lack of marketability was applied to the large majority interest includable in the Estate
  • The passing of Mrs. Fields occurred shortly after formation and transfer
  • Mrs. Fields was not involved in the estate planning
  • Insufficient cash was held outside of the entity to allow for normal living expenses
  • The Partnership was used as a personal checkbook to pay for living expenses
  • Partnership assets were used to pay the estate tax
  • The great-nephew was the manager of the Partnership and signed on her behalf as limited and general partner

IRS Position

The assets should be includable in the estate under section 2036(a) without any application of discounts insofar as the decedent’s gross estate must include the value of property transferred before death if they retained the right to possess or enjoy the property. This also applies if they retained the right to income from such property. Additionally, it also includes the right, either alone or in conjunction with another person, to designate the persons who will enjoy or possess the property or the income from the property. An exception is if the transfer was a bona fide sale for adequate and full consideration.

Court’s Position

Based on the facts, it was easy for the Court to determine that Mrs. Fields did not part with use and enjoyment. Further, for the transfer to be bona fide, there must be a substantial non-tax business purpose for the transfer of assets to the Partnership based on the objective evidence.

The Court pointed out that the timeline of events made it more likely that any non-tax business purposes were post hoc justifications, not actual reasons, for the transfers. There had been no discussion of transferring Mrs. Fields’ assets into any partnership until her health “appeared to be in precipitous decline,” Copeland wrote. “Yet thereafter the transfers proceeded rapidly.”

Similarities to Powell

If this sounds all too familiar, it’s because the court applied the Tax Court’s 2017 holding in Estate of Powell v. Comm’r, 148 T.C. 392 (2017). Powell had a very similar fact pattern and very similar result.

Like Powell, the only part of this decision that might ruffle some feathers is the Court’s finding that because Mrs. Fields could participate in the decision to liquidate the partnership, she retained the right in conjunction with another person to designate the persons who could enjoy the property.

Some might hope that the Court would put some additional explanation around that comment, as any partner in conjunction with others will always have that power. Yet clearly this is not the intent of the language.

Penalties

The Court also decided upon a 20% negligence penalty on the underpayment of tax because the great-nephew did not have reasonable cause to believe that a significant discount was warranted in valuing Mrs. Fields’ assets.

It is an interesting assumption that the great-nephew should have known better than the hired professional. But at the end of the day, we see penalties most commonly when every other red flag was already waving, and that was clearly the case.