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Taxpayer's Farm Was Included in Gross Estate, Despite Purported Sale Before Death

(Parker Tax Publishing April 2020)

The Tax Court held that (1) the value of a farm transferred by a decedent to a family limited partnership was includible in his estate because the decedent retained possession or enjoyment of the farm until his death, and (2) transfers to the decedent's children within the three-year period preceding his death were gifts rather than loans and thus the gross estate was increased by the amount of gift tax on those transfers. In addition, the Tax Court held that the estate was not entitled to a charitable deduction with respect to the estate's transfer of assets to a charitable trust because the value of the assets transferred was contingent on an examination by the IRS. Estate of Moore v. Comm'r, T.C. Memo. 2020-40.


Howard Moore owned a 1,000 acre farm in Arizona called Moore Farms. Moore had four children. In 2004, Moore became seriously ill and began making an estate plan. His goals included maintaining control over his assets during his life, treating his children equally upon his death, managing and preserving the value of his assets, and reducing or eliminating federal estate taxes.

Moore's estate plan included the creation of a Living Trust, a Charitable Trust, a Children's Trust, an Irrevocable Trust, a Management Trust, and a family limited partnership (FLP). Moore transferred all his real and intangible personal property to the Living Trust, including Moore Farms. The Living Trust provided that upon Moore's death, after payment of Moore's expenses, claims, taxes, and specific distributions, the remaining trust property should be divided between the Charitable Trust and the Children's Trust. The Charitable Trust was established to make charitable donations through a foundation established by Moore. The amount that the Living Trust would distribute to the Charitable Trust was defined not as a fixed sum or a fixed value of property, but as a fraction of the full value of the estate.

The Irrevocable Trust provided that, upon Moore's death, the trustee was instructed to "distribute an amount equal to the value of any asset of this trust which is includible in my gross estate for federal estate tax purposes" to the Living Trust, to be distributed in accordance with its terms. The estate and the IRS agreed that the only way this clause could become operative was by some examination by the IRS that resulted in the inclusion of additional property in the gross estate.

The FLP was formed with Moore's four children as limited partners and Moore in control of the general partnership interest as a beneficiary of the Management Trust. Moore transferred four-fifths of his interest in Moore's Farm to the FLP. Transfer restrictions prohibited any partner of the FLP from transferring or selling any interest unless the family unanimously agreed. The limited partners also had no right to participate in business management or operations. Each of Moore's children entered into the FLP agreement without seeking legal advice or attempting to negotiate the terms of the agreement.

Moore negotiated a sale of Moore's Farm to an unrelated party in the last months of his life in early 2005. After the sale, Moore continued to live on the property, and the terms of the sale also allowed Moore to continue to operate the farm. With part of the farm sale proceeds, Moore directed the FLP to issue a check for $500,000 to each of his four children in exchange for a note promising to pay the money back to the FLP on or before February 2010. Interest on the notes accrued at 3.6 percent. No payment schedule was specified. None of Moore's children made payments of principal or interest, and the FLP made no effort to collect any payments.

Moore died in late March 2005. In the years following Moore's death, the Irrevocable Trust's trustee transferred large sums of money to the Charitable Trust. Each donation had the same origins. First, the Irrevocable Trust received a transfer of a certain sum from the FLP. That sum was used to fund the Charitable Trust, which then made a payment to the Foundation. From 2007-09 the Charitable Trust made three payments to the Foundation: $790,000 in 2007, $433,818 in 2008, and $433,818 in 2009.

Moore's estate tax return excluded the value of the farm and treated the $500,000 distributions to Moore's children as loans. The estate also claimed a charitable deduction for amounts paid to the Charitable Trust. In a notice of deficiency, the IRS asserted that the value of Moore Farms had to be included in the estate despite the transfer of four-fifths of the farm to the FLP and the subsequent sale of the farm by Moore. The IRS further asserted that the purported loans to Moore's children were gifts and disallowed the charitable deduction.


The Tax Court agreed with the IRS that the value of Moore's Farm had to be included in the value of the estate under Code Sec. 2036(a)(1). The court found that the transfer of four-fifths of the farm to the FLP was not a bona fide sale for adequate and full consideration in as much as Moore didn't have legitimate nontax reasons for forming the FLP and because he kept possession and enjoyment of Moore Farms even after its sale.

The Tax Court also held that the purported loans from Moore to his children were in fact gifts. Further, because they were made within three years of Moore's death, Code Sec. 2035(b) dictated that the gross estate had to be increased by the value of the tax paid on these gifts. The factors that the court found to weigh in favor of treating the transfers as gifts included the lack of a fixed payment schedule, the fact that none of the children ever paid interest, and most significantly, that one of Moore's stated planning goals was for each of his children to receive $500,000. In the court's view, Moore's intent to make gifts and the children's course of conduct that treated the transfers as gifts meant that the transfers were not in fact loans.

In addition, the Tax Court held that the IRS properly disallowed the charitable deduction. The court noted that under Reg. Sec. 20.2055-1(a), charitable deductions are allowed only for the value of property in a decedent's gross estate if transferred to a charitable donee by the decedent during his lifetime or by will. The court noted that it has repeatedly denied charitable deductions where the donation turned upon the actions of the decedent's beneficiary or an estate's executor or administrator. The court further noted that a charitable deduction must be ascertainable at the decedent's date of death and that, under Reg. Sec. 20.2055-2(b)(1), no deduction is allowable for a charitable contribution that is subject to a contingency unless the possibility that the charitable transfer will not become effective is so remote as to be negligible. Applying this rule, the court found that whether the Living Trust would get additional funds from the Irrevocable Trust to transfer to the Charitable Trust was not ascertainable at Moore's death but only after an IRS audit, followed by a determination that additional property should be included in the estate, followed by either the successful defense of that position or the estate's acquiescence. According to the court, for the exception to apply, it would have to have been almost certain that the IRS would not only challenge, but successfully challenge the value of the estate - a conclusion that the court thought was not reasonable.

For a discussion of the rules for including FLP interests in an estate, see Parker Tax ¶225,210. For a discussion of the inclusion of gift tax on gifts made within three years of death, see Parker Tax ¶225,330. For a discussion of the estate tax charitable deduction, see Parker Tax ¶227,710.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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