On April 7, 2020, the Tax Court issued a Memorandum Opinion in the case of Estate of Moore v. Commissioner (T.C. Memo. 2020-40). The general issues before the court in Estate of Moore v. Commissioner were (1) whether the petitioner’s complex estate plan actually reduced the size of his taxable estate and (2) whether the petitioner’s estate planning resulted in unintended taxable gifts. The Tax Court answers these questions through a most thorough analysis of IRC § 2035 and IRC § 2036. This post only scratches the surface of the analysis.
Background to Estate of Moore v. Commissioner
Petitioner Moore began his life poor as dirt, but being an enterprising man, he took that dirt and built a large and very lucrative farm in Arizona. In September 2004, he began negotiating the sale of the farm, but he became seriously ill. He went into hospice care, and that is when (Judge Holmes explains) he began to put his affairs in order with the help of an estate “planning” lawyer. The lawyer created five trusts and a family limited partnership whose relationships with one another were more incestuous than the Hatfields and McCoys’ family trees.
Though Moore’s four children (Virgil, Milton, Lynda, and Ronnie), who hated each other, were put in charge of everything after Moore’s death. Moore chose to require the trusts and FLP’s decisions be made (practically) unanimously. This did not turn out well for the family, which Moore characterized as “sometimes fractious.”
The family was “fractious” in part because of one particular incident that Judge Holmes takes a fair bit of pleasure describing, in which Milton “borrowed” Ronnie’s tractor without asking. To pay Milton back for the defalcation, Ronnie (and I am quoting the opinion here) “pulled out his semiautomatic rifle and emptied a clip into [his own] tractor.” In the typical Judge Holmes fashion that I have come to admire deeply, he notes that, although the bullets “cost thousands of dollars to the tractor’s radiator,” they caused “even more damage to the Moore family.”
The lesson that should be learned from this delightful little anecdote is that (a) the family was more than “fractious” and some, if not all of the siblings, were playing rummy with a less-than-full deck. This turns out, unsurprisingly, to be the downfall of the estate “planning,” which was performed by the petitioner with one foot firmly in the grave.
Judge Holmes does an admirable job trying to distill (in 63 pages) the intertwined (and often confused for one another) entities, but the various transfers back, forth, and through each other are outside the purview of this post. I will try to focus on the big picture, but it is rather like a Pollock painting or the Rauschenberg sculpture of the angora goat with a tire around its midsection. Some may understand it as art, but the IRS viewed the goat-and-spare arrangements, rife with disguised gifts and unavoidable tax consequences, as unmitigated crap.
When Moore died at the age of 89, he left his dueling children with a rat’s nest of an estate plan and a hornet’s nest of tax issues. When the estate ultimately a Form 706 (Estate and GST Return) and a Form 709 (Gift and GST Tax Return), as Judge Holmes notes “something in all this caught the IRS’s attention.”
The IRS examined the returns (which I imagine went about as well as a hillbilly trying to read Dostoyevsky) and issued two notice of deficiency to the estate determining a deficiency of nearly $6.4 million on the Form 706 and $1.3m for the Form 709 in 2005, the year when Moore finally decided that his affairs were in order, and his progeny could manage things from there.
The IRS’s Issue with Deathbed Transfers
A decedent’s gross estate includes the value of any property that a decedent had an interest in at the time of his death. IRC § 2033. Various other provisions in the Code include certain other property and interests in property in the gross estate. IRC §§ 2034-2045. One such provision is contained in IRC § 2035(b), which “looks back” three years from the time of the death of the decedent to see if any inter vivos transfers were made during this period. If there were transfers (for less than adequate, bona fide consideration under IRC § 2036) the transfers are included in calculating the gross estate (as defined by IRC § 2033).
The IRS took a rather skeptical look at the transfers Moore made from his deathbed as mere “last-minute, last ditch” efforts “to avoid paying tax.” Specifically, the IRS argues that the major part of the estate plan fails under IRC § 2035 and IRC § 2036 because the transfers were made within months (sometimes days) of Moore’s death, including the transfer of four-fifths of the farm to the FLP, which the IRS argued was not a bona fide sale for full and adequate consideration inasmuch as Moore didn’t have legitimate nontax reasons for forming the FLP, and because he kept possession and enjoyment of the farm even after its sale.
The IRS next argued that the sale of the living trust’s interest in the FLP to the irrevocable trust was also not bona fide under IRC § 2036 and that Moore retained the living trust’s interest in the FLP until death. Finally, the IRS argued that the $500,000 loans to Moore’s children were gifts, and, because they were “given” within three years of Moore’s death, his gross estate includes the amount of gift tax paid with respect to the gifts.
The (Very) Quick and Dirty of Moore
The Tax Court spends the next 30+ pages going through an incredibly thorough examination of the application of IRC § 2036 and IRC § 2035. If you are looking for the application of any aspect of these statutes, you will find it within the pages of the Estate of Moore decision. The 30+ pages dedicated to these two statutes (with a brief interlude where Judge Holmes breaks out the algebra and discusses IRC § 2043, which analyzes transfers for insufficient consideration) are as condensed an analysis of the issues as you will find.
Ultimately, the Tax Court either found in favor of the IRS on the issue or indicated that it was inclined to do so without Moore’s children providing persuasive evidence why their father’s deathbed estate plans were not intended with the chief motive of avoiding taxes and generally lacking any substantial nontax motive. This is a complicated case with a lot of ins and outs and what have yous, but it is also a wonderful compendium of cases and analysis on some of the more common issues faced by practitioners in the area of estate tax controversy.
(T.C. Memo. 2020-40) Estate of Moore v. Commissioner
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