Background
Anne Milner Fields suffered from progressively worsening Alzheimer’s disease. In May and June 2016, as her health rapidly declined, her great-nephew and agent, Bryan Milner, formed AM Fields, LP and transferred approximately $17 million of her assets into it. Fields received a 99.9941% limited-partner interest, while an LLC solely owned by Milner served as general partner. Fields died on June 23, 2016, ten days after the final major transfer.
The Estate reported Fields’s partnership interest at approximately $10.9 million rather than including the approximately $17 million value of the transferred assets in her gross estate. The IRS determined that Internal Revenue Code § 2036 required inclusion of the transferred assets and assessed a 20% accuracy-related penalty. The Tax Court upheld the IRS’s position, determining an estate-tax deficiency of $1,828,594 and a penalty of $270,417.
The Court’s Holding
The Fifth Circuit affirmed. The Estate disputed only whether the transfers qualified for § 2036(a)’s bona fide sale exception, arguing that the partnership addressed power-of-attorney limitations, streamlined asset management, and protected Fields against fraud and elder abuse. The court held that the Tax Court did not clearly err in finding that none of those asserted reasons was a substantial, genuine non-tax purpose.
The court relied on the timing of the partnership’s creation during Fields’s final illness, the absence of evidence that her largely passive assets required consolidated management, the occurrence of the cited elder-abuse incidents years earlier, an attorney’s request for a “deeper discount,” Milner’s position on both sides of the transactions, and the depletion of liquid assets needed to pay testamentary bequests. Because the bona fide sale exception did not apply, § 2036(a) required the gross estate to include the transferred assets rather than the discounted partnership interest.
The court also upheld the 20% accuracy-related penalty. It concluded that the Tax Court did not clearly err in finding negligence or in rejecting the Estate’s reasonable-cause and good-faith defense. The roughly $6 million reduction in reported value should have appeared potentially too good to be true to Milner, given his finance education and experience, and the Estate did not prove that any lawyer or accountant advised him that its reporting treatment was proper.
Key Takeaways
- A transfer to a limited partnership qualifies for § 2036(a)’s bona fide sale exception only when objective evidence shows that a substantial non-tax purpose actually motivated the transaction.
- Purported business or protective purposes may be rejected as post hoc justifications when the assets do not require active management and the timing and structure indicate estate-tax planning.
- Hiring tax and legal professionals does not establish reasonable cause without evidence that the taxpayer received and reasonably relied on professional advice approving the challenged return position.
Why It Matters
The decision underscores the scrutiny applied to deathbed transfers into family limited partnerships. A discounted partnership valuation will not keep the underlying assets outside the gross estate when the transaction lacks a genuine, significant non-tax motivation and the decedent retains the relevant interest or enjoyment.
It also emphasizes that professional involvement alone does not insulate an estate from penalties. An estate invoking adviser reliance must establish the substance and quality of the advice received, including that a professional actually approved the reporting position at issue.