In Uncategorized on 11/20/2018 at 16:17

Not another inadvertent “reply all” that breaches client-attorney privilege; rather, this is the case of assets clawed-back into a decedent’s gross estate by Section 2036 (the blown hand-off). And back again is Estate of Clyde W. Turner, Sr., Deceased, W. Barclay Rushton, Executor, 151 T. C. 10, filed 11/20/18. If you don’t immediately recall the late Clyde Sr., and W. Barc, ex’r, you have only to see my blogposts “To Have and Have Not,” 8/31/11, and “To Have and Have Not – Part Deux,” 3/29/12.

So now you know that the FLP the late Clyde Sr set up cratered, and his estate got hit with additional tax. Ex-Ch J L Paige (“Iron Fist”) Marvel sent W. Barc and IRS off to a Rule 155 beancount, but their numbers don’t jibe.

The issue is the additional estate taxes (Federal and State) resulting from the clawed-back assets. Do these taxes reduce the marital deduction, as all that remains in the ex’r’s hands to pay those additional taxes (and interest) is marital deduction property?

IRS says “yup.” W. Barc, ex’r, says Section 2207B requires those who got the assets have to stump up their shares of the extra taxes (and interest).

The last Clyde Sr.’s will said he wanted Miss Jewell, his everlovin’, to get the full marital deduction property, and set up a credit bypass trust in case she couldn’t get it all. But not only does she get it all, there’s additional tax (and interest) with no deduction to cover.

OK, says IRS, but the taxes (and interest) are due now, and W. Barc, ex’r’s recovery rights, whether under State law (GA) or Section 2207B, come into play only after the taxes are paid. So if Miss Jewell must pay now and sue later, the marital estate is reduced and so is the deduction.

Ex-Ch J Iron Fist: “In an estate that includes the value of section 2036 assets, an executor must find a way to pay the tax liabilities created by the section 2036 assets while dealing with the reality created by section 2036: The actual section 2036 assets are not in the possession or control of the executor and cannot be used by the executor to pay the tax liabilities they create.

“Section 2207B gives an executor a mechanism to replenish estate assets that the executor uses to pay the Federal estate and State death tax liabilities attributable to the values of the phantom section 2036 assets included in the estate.  Because the value of the section 2036 assets is already included in the calculation of the gross estate, any recovery under section 2207B should not increase the gross estate but will enable the executor to distribute to the surviving spouse the net value of the estate, undiminished by the tax liabilities attributable to the section 2036 inclusion.” 151 T. C. 10, at pp. 16-17.

Ah, says IRS, but what about Reg. Section 20.2056(b)-4(c)?

Ex-Ch J Iron Fist: “Section 20.2056(b)-4(c), Estate Tax Regs., does not require a different result when the Federal estate and State death taxes have no effect upon the net value distributable to the surviving spouse.  See, e.g., Estate of Gill v. Commissioner, T.C. Memo. 2012-7 (marital deduction not reduced where marital deduction property does not bear the economic burden of the tax).  Accordingly, we hold that the estate need not reduce the marital deduction by the amount of Federal estate and State death taxes it must pay because the tax liabilities are attributable to the section 2036 assets, the estate has the right to recover the amount paid under section 2207B, and the estate must exercise that right to recover to give effect to Clyde Sr.’s intention that Jewell receive her share of the estate undiminished by the estate’s tax obligations.” 151 T. C. 10, at p. 20.

And interest follows principal per Section 2207B(c), so W. Barc, ex’r, can claw that back as well without diminishing Miss Jewell’s jewels.

W. Barc, ex’r, wants to increase Miss Jewell’s marital deduction by the earnings on estate assets postdeath, on which ordinary income tax was paid by the estate.

No, because no estate tax was paid on those earnings as they weren’t part of the estate. While the regs permit considering postdeath income for calculating administrative expenses, they can’t increase the marital deduction.


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