March 11, 2016

Many of us naively believed family attribution was long ago resolved as inapplicable for estate and gift tax matters after the Estate of Bright v. United States (5th Cir. 1981) and the subsequent issuance of Rev. Rul. 93-12. However, during the past year we were reminded the IRS is undertaking heroic measures to revive the concept.

The first flicker of life for family attribution came in the Spring when Treasury officials indicated that the new regulations under Section 2704 were in process. The potential that disregarded “other restrictions” under Section 2704 regulations may be crafted to effectively reinstate family attribution circulated throughout the estate planning community. No such regulations have been issued yet and it is now believed the initial dire concerns regarding family enterprises may have been overstated.

In a Tax Court decision in July, the issue of family attribution was front and center in a Federal estate tax deficiency case with approximately $1.2 million at stake. In the Estate of Pulling v. Commissioner (T.C. Memo 2015-134) the Estate had ownership interests in five contiguous parcels of land. Three small parcels were owned outright by the decedent and two parcels were owned by a land trust of which the decedent held a 28% interest. The sum value of the individual parcels was substantially less than the value of the five parcels when combined. The three parcels owned by the estate were small and burdened by limited public right-of-way access. It was not disputed that the value of the five parcels could be enhanced by consolidating into a single property for residential development.

The attribution issue was related to the land trust, which held the critical two parcels. The decedent owned a noncontrolling 28% interest in the land trust, but other members of his family held sufficient ownership interests to provide control. The IRS argued that the economic benefits of assembling the parcels and the ties between the owners of the land trust made it reasonably likely that such assemblage would occur and avail the Estate of the higher value. The court found that, without specific evidence that family members would agree to combine the properties, “the mere fact that they are related to decedent is not enough”. Thus, the court concluded that the five parcels should be treated and valued as individual parcels, rather than as an assembled whole.

Is it possible that we may see the IRS extend the argument that clear economic benefits flow to the decedent’s interest and all parties if they agree to act as one in a family limited partnership or limited liability company setting? This is a slight variation on automatic family attribution of interests by inserting economic benefit as the linchpin to attack discounts applicable to standalone noncontrolling interests. Existing case law would appear to protect against IRS success with this argument, but I have seen enough zombie shows that you can never be sure.