• U.S. Court of Appeals for the Fifth Circuit upholds Tax Court decision regarding limited partnership interest—In Estate of Streightoff v. Commissioner (No. 19-60244, March 31, 2020), the issue on appeal to the Fifth Circuit was the nature of a limited partnership (LP) interest transferred and its value for estate tax purposes.
The decedent, Frank Streightoff, had established a revocable trust and an LP in which he owned an 88.99% LP interest. The general partner was a limited liability company (LLC), of which his daughter Elizabeth was the managing member. Other family members owned the remaining LP interests. On the same day that he established the revocable trust, he assigned his 88.99% LP interest to that trust. The trust and the LP were created on the same day as the transfer. His daughter, Elizabeth, under his power of attorney, executed the assignment. She also signed as managing member of the general partner and as trustee of his revocable trust.
On the estate tax return, the value of the LP interest was discounted for lack of marketability, lack of control and lack of liquidity. The Internal Revenue Service issued a notice of deficiency to the estate, asserting that the only applicable discount should be for lack of marketability.
The estate disagreed and petitioned the Tax Court. Both parties stipulated that the transfer was a “permitted transfer” under the LP agreement. The estate argued that the revocable trust didn’t hold a true LP interest because under a Texas statute, there was no consent by the general partner, the LLC. Instead, the estate contended that the revocable trust only held an unadmitted assignee interest. Under the LP agreement, an assignee will receive the assignor’s allocations and distributions but won’t have access or a right to any information or accounting.
However, the Tax Court held for the IRS, that terms of the LP agreement transferred Frank’s full partnership interest to his revocable trust (T.C. Memo. 2018-178). And, his daughter Elizabeth’s signature and approval constituted the requisite consent to the transfer and to admit the trust as a partner.
The Fifth Circuit affirmed the Tax Court and concluded that the language of the assignment transferred more than a mere assignee interest and, even if there were any defects in the language of the assignment, the “economic substance” of the transaction was to convey an LP interest (that is, substance over form).
• Fiduciary is discharged, both as executor and trustee, from liability for unpaid estate tax under Internal Revenue Code Section 2204—In United States v. John Michael Paulson, Case No.: 15-cv-2057 (March 21, 2020), a federal U.S. district court in California ruled on an issue of personal liability for an executor and trustee. Allen E. Paulson died in 2000, having executed a will and a revocable trust. The revocable trust was obligated to pay his debts and any estate taxes. Initially, Michael Paulson was an executor and co-trustee.
The estate itself only owned one asset, which was declared to have no value on the estate tax return. All other assets included in the taxable estate (in total, almost $200 million) were held by Allen’s revocable trust. When filing the estate tax return in October 2001, Michael submitted a letter to the IRS requesting a discharge from personal liability as fiduciary under IRC Section 2204.
In 2005, the IRS determined that Allen’s estate had an estate tax deficiency of nearly $6.7 million. The estate agreed to pay this sum in installments over 15 years. Over the next eight to 10 years, other individuals were appointed as co-executor and co-trustee. Ultimately, the Probate Court removed Michael as trustee in 2009, and he resigned as executor as part of a court-approved settlement agreement in 2013. In the intervening time, in 2010, the estate missed several installment payments of the estate tax, and the IRS issued a Notice of Final Deficiency noting that IRC Section 6166 no longer applied.
Section 2204 has two subsections relating to the discharge of personal liability: Subsection (a) is relevant to executors, and Subsection (b) is applicable to trustees. Michael’s 2001 letter wasn’t clear in what capacity he was requesting discharge: executor, trustee or both. The IRS acknowledged receipt of the letter requesting discharge from personal liability but didn’t respond to it.
Twelve years later, the IRS asserted that Michael was discharged only as executor. The court agreed that neither Michael’s letter nor his signature clearly indicated in what capacity he was seeking relief. But, the court noted that the government couldn’t produce any case law or authority requiring a certain form or format for the request or his signature or that he was required to submit two letters, one in each capacity. Lastly, because all the assets of the taxable estate were held by the trust, the court found it to be logical only if Michael sought discharge in his capacity as trustee as well as executor.
For all of those reasons, and because it had been over 12 years since Michael had requested discharge, the court held that Michael was discharged from liability in both capacities.
• IRS issues notices to extend filing and payment due dates due to COVID-19—Several IRS notices have extended various tax filing and payment deadlines as a form of national relief relating to the COVID-19 pandemic. As we went to press, the most recent such notice was Notice 2020-23, published on April 9, 2020, which amplifies and adds to the previous notices (2020-17, 2020-18 and 2020-20) and provides a list of the forms and payments that are now extended. Under these notices, in addition to extending the time to file and pay income taxes for individuals, corporations, partnerships, trusts and estates, the federal government has extended the time to file and pay estate, gift and generation-skipping transfer taxes. For any form or payment that was due (originally or pursuant to a valid extension) on or after April 1, 2020 and before July 15, 2020, the new filing and payment due date is July 15, 2020. The extension also applies to other filings relating to the Form 706, such as elections under Section 6166 and the Form 8971. Certain income tax payments and return filings on the Forms 990-T, 990-PF and 990-W for private foundations, and certain exempt organizations, are also covered. The relief includes not just the filing of the covered forms but all related schedules, returns and forms that are filed as attachments to any of the covered forms. The extension is automatic, without any need to file. Interest and penalties won’t accrue during this time.