Estate of Korby v. Commissioner
Steve R. Akers covered the 8th circuit case of Estateof Korby v. Commissioner in the latest issue of the Real Property andProbate eReport, wherein the 8thcircuit upheld including partnership assets under I.R.C. Section 2036.
The basic facts are reproduced below from Akers article:
Husband and wife funded an FLP withmarketable securities worth about $1,850,000 in return for a 98% limitedpartnership interest, which they gave equally to irrevocable trusts for theirfour sons (24.5% to the trust for each son). These assets represented almostall of their assets, other than their residence and their right to receivesocial security checks (and a few other assets) which they retained in a livingtrust. Soon afterward, the FLP purchased an annuity, showing the FLP as theowner, but entitling the husband to receive annuity payments (and the sons asirrevocable beneficiaries if husband died during the payout period.) The FLPmade substantial distributions to the living trust, which it used in turn topay “many of the Korbys’ household expenses.” The expenses paid by the livingtrust and the FLP directly included payments to a nursing home, medical careproviders, drug stores, utility and heating bills, property taxes, andinsurance payments for the residence. The estate later claimed that these paymentsto the living trust (ranging from roughly $19,000 to $39,000; and ranging from27% to 50% of the FLP income) were for management fees rather thandistributions, although the Korbys did not report any self employment incomefor the first three years of the FLP and although the distributions were notbased on a percentage of assets under management as is normal for determiningmanagement fees.
Summary of the Tax Court’s holding:
The Tax Court (Judge Goeke), inboth related cases, held that §2036(a)(1) applies because of an impliedagreement that the partnership income would be available to the Korbys, andheld that the bona fide sale for full consideration exception to §2036 does notapply.
Summary of the Eighth Circuit’s holding:
The Eighth Circuit affirmed the TaxCourt in an opinion filed on December 8, 2006. The court upheld under a“clearly erroneous” standard the factual findings of an implied agreement andof the lack of a bona fide sale.