Steve Akers' Summary of Keller v. US

40 Million Taxpayer Victory; Partnership Recognized Although Not Formally Funded Before Decedent's Death; 47.5% Discount Allowed For Assignee Interest in Limited Partnership Holding Bond Portfolio; Bona Fide Sale Exception to Sections 2036 and 2038 Applied; Interest on Loan to Borrow Money From Partnership After Death to Pay Estate Taxes and Other Obligations Is Deductible For Estate Tax Purposes

In this $40 million estate tax refund case (published about 2 1/2 years after a four-day trial), the court ruled in favor of the estate on all counts.

• A family limited partnership was recognized even though it had not been formally funded before the decedent's death. The court concluded that the decedent had expressed the clear intent to fund the partnership with specifically identified assets, and under Texas law that caused the assets to become partnership assets.
• The bona fide sale exception to §§2036 and 2038 applied because the partnership was genuine, there was a legitimate business purpose for the partnership (protecting family assets from divorce proceedings and facilitating the administration of family assets) and because the decedent retained significant assets outside the partnership.
• The estate's interest in the partnership was valued as an assignee interest. The court accepted the taxpayer's valuation expert's opinion, resulting in a discount of 47.5% with respect to the bonds and cash in the partnership. (The IRS's expert's opinion was rejected because it violated several of the tenets of the hypothetical willing buyer-willing seller valuation principle.)
• The estate borrowed $114 million from the partnership to pay estate taxes and other debts. The interest on the 9-year loan was deductible for estate tax purposes because the interest expense was actually and necessarily incurred in the administration of the estate.

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