Following a petition to resolve an ongoing controversy regarding the computation of the marital deduction under Code Section 2056, on November 20, 2018 the United States tax court issued an opinion in Estate of Turner v. Commissioner, 151 T.C. No. 10 (Nov. 20, 2018) holding that an estate is not required to reduce the marital deduction by amounts of the Federal and State estate taxes it owes. The tax court further held that the decedent’s estate may not increase the marital deduction by the amount of post-death income generated by the marital deduction property.
In Turner, the decedent transferred property to a family limited partnership (FLP) in exchange for general and limited partnership interests and then transferred portions of those limited partnership interest as lifetime gifts. In Estate of Turner v. Commissioner, T.C. Memo. 2011-209, the tax court previously held that the inter vivos transfer of property to the FLP was subject to Code Section 2036. In addition, in Estate of Turner v. Commissioner, 138 T.C. 306 (2012), the tax court previously held that the decedent’s estate was not entitled to a marital deduction with respect to the value of certain property included in the decedent’s gross estate under Code Section 2036 because the property was gifted during the decedent’s lifetime and did not pass to the decedent’s surviving spouse.
Under Code Section 2036 the value of the property transferred to the FLP was included in the decedent’s gross estate and resulted in Federal and State estate tax liabilities. The decedent’s estate’s liability for Federal and State estate taxes arose solely because of this inclusion under Code Section 2036. The IRS disagreed with the decedent’s estate as to (1) whether the estate must reduce the Code Section 2056 marital deduction by the amounts of the Federal and State estate taxes owed that the IRS claimed must be paid from estate assets passing to the surviving spouse and (2) whether the estate may increase the marital deduction by post-death income that was not included in the gross estate but was generated by property subject to the marital deduction.
The tax court held that the estate is not required to reduce the marital deduction by the amounts of the Federal and State estate taxes it owes. The court reached this conclusion by reasoning that because (i) those taxes are attributable solely to the value of property included in the decedent’s gross estate under Code Section 2036, (ii) the executor has a right under Code Section 2207B to recover from the beneficiaries who received the property during decedent’s lifetime an amount equal to the Federal and State estate taxes plus interest attributable to those transfers, and (iii) the executor must exercise the right of recovery under Code Section 2207B to prevent the marital deduction property from bearing the decedent’s estate’s tax burden contrary to decedent’s intent, this conclusion was appropriate. The court held further that the estate may not increase the marital deduction by the amount of post-death income generated by the marital deduction property.
This conclusion both helped taxpayers and helped the IRS depending on the situation and circumstances involved. Even though the Federal estate tax exemption has risen under the new Tax Act and fewer people are subject to the estate tax, this is an important conclusion reached by the tax court that practitioners should pay close attention to when working with potentially taxable estates, taxable estates, and lifetime gifts.
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