Estate of Powell v. Commissioner

On August 6, 2008, Jeffrey Powell established NHP Enterprises LP (NHP). Jeffrey, the general partner, had sole discretion to determine partnership distributions. His mother, Nancy, was terminally ill. On August 7, two of Nancy’s doctors wrote to indicate that Nancy was incapacitated and unable to act on her own behalf. On August 8, cash and securities worth $10 million were transferred from Nancy Powell’s revocable trust to NHP in exchange for a 99 percent limited-partner interest. Later that day, Jeffrey, acting under Nancy’s power of attorney, assigned to a charitable lead annuity trust (CLAT) Nancy’s 99 percent interest in NHP. The CLAT’s terms gave the Nancy H. Powell Foundation (a nonprofit) an annuity for the remainder of Nancy’s life, with the remaining assets to be divided on her death between Jeffrey and his brother. Nancy Powell’s estate (plaintiff) had numerous tax issues. The estate reported a taxable gift of $1.6 million from her transfer of the 99 percent interest in NHP to the CLAT. The remainder interest was valued at $7.5 million after a 25 percent discount for lack of control and marketability. The government (defendant) sought to increase the value of the gross estate by almost $13 million and issued a notice of deficiency of approximately $5.8 million in estate tax and $2.9 million in gift tax for 2008. The government asked the tax court for summary judgment that the value of the assets transferred from Nancy’s revocable trust to NHP were includible in her gross estate and that the value of the interest in NHP was includible because Jeffrey had not had authority to transfer that interest to the CLAT before her death. The estate argued that the transfer of interests were bona fide sales for value. However, if consideration was not complete (as the government argued), Internal Revenue Code § 2043 limited the amount includable in the estate only to the extent necessarily to prevent depletion of the estate.