Steve Akers' Summary of Estate of Jorgensen, TC Memo 2009-66

Section 2036 Applied to Creation of FLPs; Equitable Recoupment Allowed to Adjust for Prior Income Tax Overpayments in Light of Increase in Basis Attributable to Increased Gross Estate Value

Steve R. Akers, Associate Fiduciary Counsel
Akers@bessemer.com
April 10, 2009

The Internal Revenue Service won another §2036 marketable securities FLP case. Some of the facts were not terrible -- the decedent retained assets for her day-to-day living expenses. However, other facts were pretty bad -- (1) there was no evidence of why one FLP was created but contemporaneous attorney correspondence referred only to estate tax savings as the reason for creating the second (and much larger) FLP, (2) the decedent had control of the FLPs' checkbooks even though she was not the general partner, and (3) she in fact wrote checks out of the partnership accounts for personal purposes (including for making annual exclusion cash gifts). Particularly notable aspects of the §2036 analysis include:

• This is yet another case where the court pointed to post-death payments of estate taxes as reflecting an implied agreement of retained enjoyment of partnership assets to trigger §2036;
• In rejecting the "bona fide" transfer defense, the court found "especially significant that the transactions were not at arm's length and that the partnerships held a largely untraded portfolio of marketable securities;" and
• In dictum, the court observed that §2036 applied even as to assets attributable to partnership interests that the decedent gave to her children and grandchildren more than three years prior to her death, reasoning that the decedent "retained the use, benefit, and enjoyment of the assets she transferred to the partnerships."

In addition, under the equitable recoupment doctrine, the Tax Court allowed an offset in the estate tax liability for the "overpayment" of income taxes, where a refund of the income tax was barred by limitations and where the prior income tax payments did not reflect the increased bases as a result of the increased value included in the decedent's estate under §2036.

Please click here for a more detailed analysis of the Jorgensen case.