Estate of Powell v. Commissioner
Estate of Nancy H. Powell, Deceased, Jeffrey J. Powell, Executor, Petitioner v. Commissioner of Internal Revenue, Respondent. 148 T.C. No.18 (May 18, 2017)
CASE SUMMARY
- Nancy Powell died August 15, 2008
- On August 6, 2008, Jeffrey Powell (Nancy Powell’s son) created a limited partnership, NHP Enterprises LP (“NHP”) and named himself general partner.
- Jeffrey then transferred approximately $10 million in cash and securities from his mother’s revocable trust to NHP in exchange for a 99% limited partnership interest.
- On August 7, Jeffrey obtained a doctor’s note that allowed him to act as agent under his mother’s durable power of attorney for property due to his mother’s incapacity. He used the power of attorney to create a charitable lead annuity trust (“CLAT”) and transferred the 99% limited partnership interest to the CLAT. The CLAT paid the annuity interest to the Nancy H. Powell Foundation for the remainder of his mother’s life. The CLAT named Jeffrey and his brother as remainder beneficiaries upon his mother’s death.
- The power of attorney Jeffrey used contained two significant provisions:
- Jeffrey had the power to “[t]o grant, convey, sell, transfer, mortgage deed in trust, pledge and otherwise deal in all property real and personal, which the principal may own.”
- The POA also authorized Mr. Powell “[t]o make gifts on the principal’s behalf, including, but not limited to, forgiveness of loans, to a class composed of the principal’s children, any of such children’s issue, or any or all to the full extent of the federal annual gift tax exclusion under Internal Revenue Code Section 2503(b) or any successor statute.”
- Jeffrey later filed a gift tax return for the transfer to the CLAT. He determined the value of the 99% limited partnership interest to be $7.5 million after a 25% discount for lack of marketability and lack of control. This resulted in a gift to the reminder beneficiaries of just over $1.6 million. The IRS issued deficiency notices for the gift tax return and the estate tax return.
KEY ISSUE
- Misuse of Powers of Attorney
- Here the decedent’s son used a power of attorney that granted him the power to make gifts of up to the $14,000 annual gift exclusion to the principal’s family members to make a gift of $7.5 million to his family and his mother’s private foundation. This misuse of the power of attorney caused the Tax Court to disallow the gift.
