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Tax Apportionment /2036

Turner Cases
In the first case of Turner (Tax Court Memorandum 2011-209), the Court found that the transfer of assets to the limited partnership was includable in the decedent’s estate under section 2036; “the possession or enjoyment of, or the right to the income from the property…” The Court based its decision on a number of facts: the transferor did the following: receiving disproportionate distributions from the partnership; using personal funds to invest on behalf of the partnership; comingling personal partnership assets; using partnership assets to pay legal fees for his own estate planning; using partnership assets to pay insurance premiums on policies held in a different trust. As a result, the Court held that proper procedures were not followed; that there was lack of respect for legal boundaries of a separate entity; and the partnership entity was used as a personal account. Further, there was no significant nontax purpose for the formation of the limited partnership, and the assets were not properly titled. Additionally, Section 2036 also applied because there was no bona fide sale.
In the second case of Turner (138 T. C. 306 (2012), the decedent’s Executor argued that the decedent’s trust provided a formula clause so that his spouse was to receive sufficient assets to reduce the estate tax to zero, and therefore, the marital deduction should be increased to reduce the estate tax liability as increased in Turner case of 2011 under section 2036. The IRS argued that under section 2056 the marital deduction only applies to assets that actually pass to the spouse. The Court found that section 2036 is a phantom inclusion statue that includes the assets in the decedent’s estate and often occurs with a family partnership when the interests are already given away and under state property law no longer included in the decedent’s probate estate, and such asset cannot pass to the spouse and therefore not allowed as a the marital deduction.
In the third case of Turner (151 T. C. 10 (2018), which was decided November, 2018, the estate argued that although the Last Will did not contain an apportionment clause under section 2007B of the Internal Revenue Code (regarding property included under section 2036), the estate had a right to reimbursement for estate taxes paid on property included in the gross estate under section 2036, because unless that apportionment section is waived, it is preserved. And, if transfer taxes are paid from any property which was to transfer to the surviving spouse , it would reduce the marital deduction and reduce assets to the spouse. The Court found that it’s reasonable to assume that the decedent was to do what was necessary to ensure that whichever property is passing to his surviving spouse and qualifying for the marital deduction not be impaired by estate taxes, and therefore the Court found that the executor must exercise a right of recovery under section 2207 B of the Internal Revenue Code regarding tax apportionment. Thus, the estate should attempt to retrieve the estate tax amount from the transferee of the partnership assets.
Obviously, rather than a court determining such provisions of tax apportionment, it should be specifically included when preparing testamentary documents.

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