Estate of Korby v. Commissioner

In 1993 Austin and Edna Korby created a revocable inter vivos trust, which they fully controlled. On the recommendation of their attorney, they also created a family limited partnership, Korby Properties Limited Partnership (KPLP), in 1994, with Austin making all the arrangements. In 1995, the Korbys personally funded KPLP in exchange for a 98 percent limited partnership interest, and the Korbys’ trust contributed additional assets in exchange for the remaining 2 percent general partnership interest. Afterward, the Korbys gifted their 98 percent limited partnership interest to their four sons. From then until both Korbys died, KPLP made significant distributions to the Korbys’ trust and relatively insignificant distributions to the sons. Although the estates would later claim that the payments to the Korbys’ trust was for management fees, the Korbys made no formal agreement to be managers of the partnership, nor did they follow other business formalities that a manager normally would. The partnership was also not structured properly to provide protection from creditor claims. Following the Korbys’ deaths, their estates (plaintiffs) did not include in their gross estates the value of any assets transferred to KPLP in 1995. The Internal Revenue Service (defendant) found that the estate taxes paid were deficient. The estates petitioned for a redetermination of the taxes owed. The United States Tax Court found that the Korbys and their sons had an implied arrangement that the Korbys would continue to have access to income from the partnership whenever they needed it and that the KPLP assets should have been included in the gross estates. The Korbys’ estates appealed.