The Business Divorce Law Report
Transfers of business interests routinely seek to benefit from the discounts that accompany lack or control and marketability. Reducing the assets in an estate obviously reduces estate tax liability and the application of discounts in the transfer made during one’s life can result in significant tax savings.
The IRS, however, often challenges these “inter vivos” transactions, and a common issue is whether there was a bona fide business purpose or if it was simply a pretext to avoid taxes.
On this issue, timing may be everything. And the price if missteps is significant.
The Tax Court’s decision in Estate of Fields v. Commissioner of Internal Revenue, illustrates how timing, retained interests, and procedural missteps in estate planning can lead to significant tax liabilities.
The case also underscores the potential financial consequences through accuracy-related penalties, which were assessed here against the estate for underpayment of tax. We take a look here at the facts, procedural history, legal principles, the 20 percent penalty assessment, and the key takeaways for estate planning professionals.
As the Tax Court judge noted, if the strategy is too good to be true, it probably is.
Key Facts: Ms. Fields’ Life, Assets, and Planning
Anne Milner Fields, a Texas resident, built considerable wealth managing an oil business she inherited from her late husband. By 2016, Ms. Fields was 91 years old, battling Alzheimer’s, and reliant on her great-nephew Bryan Milner to manage her financial affairs. Mr. Milner held a power of attorney and implemented an estate planning strategy just a month before Ms. Fields passed away.
In May 2016, Mr. Milner formed AM Fields, LP (a limited partnership) and AM Fields Management, LLC (the partnership’s general partner). Acting under his power of attorney, he transferred approximately $17 million of Ms. Fields’ assets—including cash, shares of North Dallas Bank and Trust (NDBT) stock, a tree farm, and interests in two LLCs—into the partnership. Ms. Fields received a 99.9941% limited partnership interest in exchange.
By the time of her death in June 2016, Ms. Fields retained only $2.15 million in assets outside the partnership. The estate’s federal tax return valued the limited partnership interest at $10.877 million, reflecting significant valuation discounts for lack of marketability and control. The estate reported an estate tax liability of $4.6 million, which it lacked sufficient liquidity to pay. Consequently, partnership assets were sold and distributed to the estate to cover taxes and specific bequests.
Procedural History: Audit, IRS Determinations, and Court Challenge
The IRS audited the estate’s tax return and issued a notice of deficiency. It determined that the full value of the transferred assets, $17.062 million, should be included in the gross estate under IRC § 2036(a), which applies when a decedent retains certain interests in transferred property. Alternatively, the IRS argued that the estate undervalued the limited partnership interest. Additionally, the IRS imposed a 20% accuracy-related penalty under § 6662 for the underpayment of tax due to negligence or disregard of rules.
The estate contested these determinations in the Tax Court, where the court ultimately sided with the IRS. The court included the full fair market value of the transferred assets in the gross estate, rejected the claimed valuation discounts, and upheld the accuracy-related penalty.
The Tax Court’s Rationale: Retained Interests and Lack of Bona Fide Sale
Failure to Provide for Estate Tax Liabilities
One critical issue was the lack of liquidity in Ms. Fields’ retained assets. The court noted that the estate relied on distributions from the partnership to pay estate taxes, debts, and specific bequests. This reliance demonstrated that the transferred assets were still available to benefit Ms. Fields (and her estate) despite their formal transfer to the partnership. The court characterized this as an “implied agreement” that Ms. Fields retained enjoyment and control over the assets, triggering § 2036(a).
Retained Rights to Use Assets and Dissolve Entities
The court also found that Ms. Fields retained significant control and rights over the transferred property:
Right to Use Assets: Through Mr. Milner, who managed the general partner and acted as her agent, Ms. Fields had access to the partnership’s assets to meet her personal obligations. This effectively preserved her economic benefit from the assets.
Right to Dissolve the Partnership: The partnership agreement allowed Ms. Fields, jointly with Mr. Milner, to dissolve the partnership at any time. Upon dissolution, the assets would be distributed to the partners in proportion to their capital accounts. This dissolution right provided Ms. Fields with substantial control over the disposition of the partnership’s assets.
Lack of a Bona Fide Sale
While Ms. Fields received proportionate partnership interests in exchange for her contributions, the court found no legitimate non-tax business purpose for the transaction. The estate’s arguments—asset protection, succession management, and streamlined administration—were dismissed as post hoc justifications lacking contemporaneous documentation. The court concluded that the transfers were tax-driven and not bona fide.
Assessment of the Accuracy-Related Penalty
Under IRC § 6662(a), a 20% accuracy-related penalty applies to underpayments of tax attributable to negligence or substantial valuation misstatements. Negligence is defined as a failure to make a reasonable attempt to comply with tax laws. The penalty can also apply if the reported value of property is misstated by 50% or more.
The court found that Mr. Milner and the estate did not exercise reasonable care in determining the proper tax treatment of the AM Fields transfers:
- Lack of Reliance on Informed Advice: Mr. Milner did not seek or receive specific legal advice on whether the transfers and valuation discounts complied with § 2036(a). While the estate retained accountants and appraisers, there was no evidence that these professionals addressed the legal implications of retaining control and dissolving rights over the transferred assets.
- Too Good to Be True: The estate’s position resulted in a $6.2 million reduction in reportable assets due to last-minute transfers into a partnership. The court found that this outcome should have appeared suspicious to a reasonable executor.
Estimated Penalty Amount
The estate reported a gross estate value of $10.877 million for the limited partnership interest, while the court determined the includable value was $17.062 million. Assuming the estate’s marginal tax rate was 40%, the additional tax liability would be approximately $2.5 million. Applying the 20% penalty under § 6662(a), the penalty amount would be $500,000.
Key Takeaways: Penalties and Planning Lessons
The Fields case underscores not only the importance of timing and substance in estate planning but also the potential for costly penalties when tax positions are unsupported. Below are the lessons for estate planners and executors:
Plan Well in Advance
Last-minute transfers, especially when a decedent’s health is in decline, raise red flags. Tax courts closely scrutinize transactions occurring shortly before death for signs of retained control or tax-avoidance motives.
Retain Sufficient Liquidity
Ensure that non-transferred assets can cover anticipated estate taxes, debts, and bequests. Using partnership assets to pay these obligations suggests an ongoing economic benefit to the decedent, risking inclusion under § 2036(a).
Avoid Retained Control
Rights to dissolve entities or direct the use of transferred assets are strong indicators of retained control. Structuring transactions to fully separate the decedent from the property is critical.
Document Non-Tax Purposes
Any entity created for estate planning must have legitimate, documented non-tax purposes. Contemporaneous records—rather than after-the-fact testimony—are essential for demonstrating bona fide motives.
Seek Competent Advice
Executors must rely on informed legal and tax advice. Ensuring that advisers address the implications of retained interests under § 2036(a) can prevent costly errors and penalties.
Beware the Penalties
The 20% accuracy-related penalty can significantly increase the financial burden on an estate. Executors should carefully evaluate whether tax positions are reasonable and supported by professional advice.
Some Key Takeaways
The Tax Court’s decision in Estate of Fields demonstrates the risks of incomplete estate planning and insufficient attention to retained interests. Beyond the inclusion of transferred assets in the taxable estate, the assessment of penalties added significant financial consequences. To avoid such outcomes, taxpayers and their advisers must prioritize thorough planning, rigorous documentation, and professional oversight. This case serves as a powerful reminder that timing, structure, and compliance are critical in successful estate planning.