One of the more interesting telephone calls last week was a discussion with a taxpayer regarding his CPA's advice that assignment of income and transfer of assets to a trust would prevent a sale of real property from being taxable at all. According to his CPA, the sale would be neither taxable to the taxpayer nor, by some wishful thinking, the trust as well.
Another example of this wishful thinking was also present in Harlan D. Edwards, et al. v. Commissioner, (2005) TC Memo, where the IRS determined that business owner's transfer to a trust was a sham, lacked economic substance where the owner retained the economic rights and control over the trust assets and thus the income was therefore taxable to taxpayer individually. The business owner transferred business and other assets for tax avoidance reasons.
I often see this in Family Limited Partnerships as well, where the economic rights and control of the ownership by the older generation is functionally unchanged. A decedent's gross estate includes transfers under which he retained the possession or enjoyment of, or the right to the income from, the transferred property. The decedent need not have a legally enforceable right, but there must be an agreement, either expressed or implied, that the decedent will retain the benefit. An individual who transferred an interest in, or relinquished a power over, any property, within three years of death, must include the value of the property in his gross estate to the extent it would have been included in his gross estate under, among other provisions, Code Sec. 2036 , if the interest or relinquished power had been retained.
The recent tax law changes in the area of tax shelters and transactions which are substantially tax motivated provide for substantial penalties for taxpayers and advisors alike, where the economic reality of such transactions do not comport with the documents. Before you set up a Family Limited Partnership or other more aggressive tax motivated strategies, make sure everyone involved understands the substantial risks involved, including potential malpractice for exposing your client to tax penalties and taking positions contrary to the rules and regulations.
Rely on Stephen L. Robison to help you navigate the tax rules for you and your clients.