ns were published on September 10, 2015.Regulations under §7520 regarding the use of actuarial tables in valuing annuities, interests for life or terms of years, and remainder or reversionary interests. Proposed regulations were published on May 5, 2022.Important Cases Decided in 2022Estate of Levine v. Comm'r, T.C. Memo 2022-158On February 28, 2022, the Tax Court issued a decision in Estate of Levine v. Comm'r, T.C. Memo 2022-158, which determined the viability of an economic benefit split-dollar transaction that reduced the size of the taxpayer's gross estate. A split-dollar transaction generally involves two parties who come to an agreement regarding a life insurance policy with such agreement containing the details as to how the parties will pay for the premiums on the life insurance policy and how the insurance benefits will be enjoyed. Ultimately, in an opinion that relied heavily on the specific facts of the case, the Tax Court ruled in favor of the taxpayer on issues regarding IRC Sections 2036, 2038 and 2703.By way of background, the matriarch of the Levine family, Marion Levine (the Decedent), owned and invested in a variety of high-valued properties, ranging from mobile home parks to shopping centers and Renaissance fairs. The Decedent's entrepreneurial success translated into a net worth of approximately $25 million at the time of the planning in question. The Decedent instituted a succession plan that involved the creation of a revocable trust and an Irrevocable Life Insurance Trust (ILIT). The ILIT had an independent trustee. The beneficiaries of the Decedent's ILIT were her children and more remote descendants.As designed, the Decedent's revocable trust made a taxable gift of $6.5 million to the ILIT and the ILIT then purchased $17 million in life insurance policies on the lives of the Decedent's daughter and her daughter’s husband in the form of two second-to-die policies. The ILIT entered into a split-dollar agreement with the Decedent's revocable trust and only the

Primary Holdings:The split-dollar arrangement in this case met the specific requirements of the Treasury Regulations. The policies in question were purchased and owned by the irrevocable trust, not Levine, and the arrangement expressly gave the power to terminate only to the trust’s investment committee. Thus, neither IRC Section 2036(a)(2)—the general “catch-all” statute for estate assets—nor Section 2038—the “claw-back” provision for certain estate assets transferred before death—do not require inclusion of the policies’ cash-surrender values because Levine did not have any right, whether by herself or in conjunction with anyone else, to terminate the policies.As such, and as of her death, Levine possessed a receivable created by the split-dollar life insurance, which was the right to receive the greater of premiums paid or the cash surrender values of the policies when they are terminated.Contrary to the Commissioner’s position, the transaction was not merely a scheme to reduce Levine’s potential estate-tax liability and there was a legitimate business purpose.

Ms. Powell’s estate tax return did not include the value of the limited partnership interest or the securities transferred to the limited partnership. The IRS issued an assessment, arguing that the assets transferred were includable in the decedent’s estate under IRC § 2036(a)(2) and IRC § 2035. Specifically, the IRS argued that the transfer from Ms. Powell to the limited partnership was includible under IRC § 2036(a)(2) because under the terms of the partnership agreement, which required unanimous consent of the partners to dissolve the partnership, Ms. Powell effectively retained the ability to designate who could possess or enjoy the property or its income.

Ms. Powell’s estate tax return did not include the value of the limited partnership interest or the securities transferred to the limited partnership.The IRS issued an assessment, arguing that the assets transferred were includable in the decedent’s estate under IRC § 2036(a)(2) and IRC § 2035. Specifically, the IRS argued that the transfer from Ms. Powell to the limited partnership was includible under IRC § 2036(a)(2) because under the terms of the partnership agreement, which required unanimous consent of the partners to dissolve the partnership, Ms. Powell effectively retained the ability to designate who could possess or enjoy the property or its income.

The Tax Court accepted the estate's valuation of one painting at $1.2 million (valued by the IRS at $2.3 million) and the other painting at $750,000 (valued by the IRS at $2 million).9th Circuit upholds finding that transfers to FLPs are includible in estate – Estate of Jorgensen v. Comm'r., No. 09-7325 (9th Circuit 5/4/2011) In Jorgensen, the 9th Circuit upheld the Tax Court's finding that certain transfers decedent made to two family limited partnerships were includible in the decedent's estate under IRC Section 2036(a). Husband and Wife formed a family limited partnership with their sons.

This essentially allows individuals to make full use of the $12.06 million of gift exemption currently, without negative tax consequences if the individual's death occurs after 2025.However, certain gifts may be complete at the time of the transfer but may be included in the donor's estate if the donor retains rights or control in the gifted property. Such inclusion is provided for in sections 2035, 2036, 2037, 2038, and 2042 of the Internal Revenue Code. These types of gifts, while complete and that may use the donor's increased lifetime gift exemption at the time of the gift, do not qualify for the preferential treatment provided for in the 2019 final regulations.

For estate tax purposes, the mother’s estate valued the $30 million of premiums at roughly $7.5 million.The IRS attempted to argue that the full $30 million of the premium payments should be includable in the mother’s estate, or alternatively the $32.6 million cash surrender value of the underlying policies under Internal Revenue Code Sections 2036(a)(1), 2036(a)(2), and 2038.The Tax Court held that neither Internal Revenue Code Section 2036 nor Section 2038 would effect a clawback of any amounts transferred from the mother’s revocable trust pursuant to the split-dollar agreements because the transfers qualified for the bona fide sale exception to both sections. The Tax Court further held that the cash surrender values of the underlying policies weren’t included in the mother’s estate under Section 2703 because there was a bona fide business arrangement that was born from serious and long-standing business needs for the mother’s trust to have entered into the split-dollar agreements.

Therefore, the Estate was required to include the transferred assets in full in the value of the Estate. (See, IRC §2036 and Reg. §20.2036-1(c)(1)) A “bona fide sale for full and adequate consideration” will not cause the transfer to be included in an estate.

IRC § 2036:Code Section 2036 provides that a decedent’s gross estate shall include the value of property transferred by the decedent in trust, if the decedent retained or reserved “the right, either alone or in conjunction with any person, to designate the persons who shall possess or enjoy the property or the income therefrom.” I.R.C. § 2036(a)(2). The Regulations state that:With respect to such a power, it is immaterial (i) whether the power was exercisable alone or only in conjunction with another person or persons, whether or not having an adverse interest; (ii) in what capacity the power was exercisable by the decedent or by another person or persons in conjunction with the decedent; and (iii) whether the exercise of the power was subject to a contingency beyond the decedent’s control which did not occur before his death.

Decedent paid insurance premiums on trust policies directly from a joint checking account he maintained with his wife. After decedent's death, the IRS argued that the assets decedent contributed to the FLP should be included in his gross estate under I.R.C. § 2036(a), and the Tax Court agreed. The IRS also sought to treat the insurance premiums paid by decedent as adjusted taxable gifts.