Article on Estate of Beyer

Owen Fiore recently published an Article entitled, Estate of Beyer: Another 2036 Case, 2479 Steve Leimberg’s Estate Planning Newsletter (Nov. 2016). Provided below is a summary of the Article:

It has been nearly 20 years since this author’s 1997 Tax Court case of Estate of Dorothy Schauerhamer v. Commissioner. That case was the initial Tax Court consideration of applying IRC Sec. 2036(a) to cause gross estate inclusion of assets transferred to an FLP during the decedent’s lifetime. Why have there been so many cases from 1997 to now, nearly 40 in number, considering this issue? Simply put, it appears to be a combination of the following: (i) the broad statutory reach of 2036(a), (ii) the Tax Court’s role, under the Daubert Rule established by the U.S. Supreme Court, as the gatekeeper of expert testimony, and (iii) taxpayer and advisor missteps in planning and implementation of a pass-through entity-based estate plan without carefully documenting qualification for the “bona fide sale for adequate and full consideration” exception to the reach of 2036(a). Indeed, it is the bona fide sale exception to application of 2036(a) that has resulted in taxpayer victories in some 15 of the FLP 2036 cases. Knowledgeable tax litigators representing estates often arrive on scene well after the IRS commences its attacks, as would seem to be the case with nationally known tax litigator John Porter being shown in Beyer as an attorney for the Petitioner estate at trial. Also, as we will see, as the trier of fact, the Tax Court has great leeway in evaluating evidence presented by the parties, which is especially important since usually the taxpayer Petitioner has the burden of proof at trial.

In the Estate of Beyer, Tax Court Judge Chiechi went into great detail with the factual analysis and review of multiple legal documents, including those involving several grantor trusts, an installment sale to an irrevocable grantor trust, and the FLP itself. The court focused in on its perceived absence of any real and significant non-tax reasons for the FLP formation, as well as on mistakes along the way in how assets and income therefrom were handled by the decedent and his advisors. In the valuation area, since ultimately the FLP entity was disregarded for estate tax purposes, the only issue was the discount viability of a restricted management account (RMA), a device touted long ago by the late nationally known tax lawyer, Roy Adams, but rejected by IRS.

The Beyer opinion, 157 pages in length (111 pages of which being devoted to the case facts) perhaps should be compared with (i) Estate of Purdue, the late 2015 case in which the estate was successful in resisting application of 2036(a) (see Estate Planning Newsletter #2374), and (ii) Estate of Holliday, issued in March, 2016, in which 2036(a) was applied to a combination of an FLP and an LLC (see Estate Planning Newsletter #2402).

It would seem that the present day high exemption level under the American Taxpayer Relief Act of 2012 (ATRA 2012, $5,490,000 as of January 1, 2017) might be the only development in recent years that will slow the number of litigated transfer tax cases involving application or non-application of IRC Sec. 2036(a). Now we will review the Beyer case facts, consider the Tax Court’s analysis thereof, and comment on the case outcome for estate tax purposes.