Or. Clyde Senior Redivivus
Readers who have sedulously followed my blog may remember ol’ Clyde Turner, Senior, of my blogpost “To Have and Have Not” fame, posted 8/31/11. Then, Judge Marvel found Clyde Senior had, at date of death, the assets he supposedly transferred to the family partnership, and applied the Section 2036 clawback, sending Clyde Senior’s executor off to a Rule 155 faceoff with IRS.
Not surprisingly, Clyde’s trusty executor W. Barc throws a monkey wrench into the Rule 155 by claiming that if the assets belonged to Clyde at date of death, the marital deduction clause in Clyde’s will, a standard “whatever can be excluded from tax if passed to spouse is passed to spouse” means the clawed-back assets go to Miss Jewell, are therefore deductible for estate tax purposes, and game over, IRS.
So here comes W. Barc’s motion for reconsideration under Rule 160, back to Judge Marvel, in Estate of Clyde W. Turner, Sr., Deceased, W. Barclay Rushton, Executor, 138 T. C. 14, filed 3/29/12.
After the usual “Rule 160 is not for rehashing arguments you lost before” invocation, Judge Marvel disposes of some straw-grasping by W. Barc, who’s trying to get Judge Marvel to reverse her previous factual findings. The only point of interest is that “(T)he estate also mistakenly contends that respondent’s lack of objection to certain of its proposed findings of fact creates binding stipulations that the Court must find as relevant facts. Although we have on occasion deemed the lack of objection to a proposed finding of fact to be a concession that it is correct except to the extent that it is clearly inconsistent with the opposing party’s brief, see Fankhanel v. Commissioner, T.C. Memo. 1998-403, aff’d without published opinion, 205 F.3d 1333 (4th Cir. 2000); Estate of Freeman v. Commissioner, T.C. Memo. 1996-372, we find facts on the basis of the record as a whole, and we are not obligated to find facts that we do not consider relevant or necessary to our holdings. The estate has pointed to no instance where we found or failed to find facts inappropriately or erroneously.” 138 T.C. 14, at p. 7.
Now to the marital deduction. Section 2036 claws back the assets transferred to the partnership for computing tax, but Clyde Senior transferred fractional interests in the partnership to persons other than Miss Jewell and used a discounted value for valuing those interests. Now Miss Jewell never owned those interests. “The estate argues that it would be inconsistent to conclude that Clyde Sr. retained a right to possess or enjoy assets he contributed to the partnership and at the same time ignore the values of those assets included in the gross estate under section 2036 in calculating the marital deduction.” 138 T. C. 14, at p. 16.
But here Reg. 20-2056(c)-2(a) rears its ugly head. A property interest passes to a surviving spouse (whether by will, intestacy or whatever) only if it passes to the spouse as beneficial owner. Those assets went first to the partnership and then Clyde Senior gifted partnership interests to persons other than Miss Jewell.
Judge Marvel breaks the bad news: “These regulations read as a whole suggest that irrespective of whether property is included in the decedent’s gross estate, property that passed to a person other than a surviving spouse cannot also be considered as passing to the surviving spouse. Because Clyde Sr. transferred the underlying assets to the partnership and then transferred the portions of the limited partnership interest as gifts during his lifetime, any property interest in either the partnership interest transferred to persons other than Jewell or the assets underlying that interest could not and did not pass to Jewell for purposes of section 2056. Therefore, the estate may not recalculate the marital deduction to include the transferred partnership interest or the underlying assets.” 138 T. C. 14, at p. 19.
The idea behind the spousal deduction is deferral of tax for the life of the surviving spouse (helping widows and orphans). Applying this, if Miss Jewell gets the assets, her estate will pay the tax when Miss Jewell shuffles off this mortal coil. But legally that wouldn’t happen here, because, although the value of the assets would be included in Clyde Senior’s estate for tax purposes, the assets themselves would be in the partnership or the non-spousal partners, and not beneficially owned by Miss Jewell, so not includable in her estate. Thus the deferral becomes indefinite, rather than for the life of Miss Jewell. And there is no comparable clawback provision that would drag those assets into Miss Jewell’s estate.
So good try, W. Barc; Tax Court didn’t consider that argument the first time around, but it loses anyway.