Tax Law Update: July/August 2026
• U.S. Court of Appeals for the Fifth Circuit rules that assets transferred to a family limited partnership (FLP) are included in the decedent’s estate—In Estate of Anne Milner Fields v. Commissioner, 2026 WL 1642415 (June 8, 2026), the Fifth Circuit affirmed the Tax Court’s holding that assets transferred to an FLP weeks before Anne Fields’ death are included in her estate under Internal Revenue Code Section 2036 because the transfers weren’t part of a bona fide sale and lacked a significant nontax purpose.
In 2011, Anne was diagnosed with Alzheimer’s, broke her hip and had multiple surgeries. Cognizant of her declining health, she named her great-nephew, Bryan, with whom she had a great deal of confidence, as executor of her estate and her agent under a durable power of attorney (POA). Under her will, she left specific bequests totaling $1.45 million to various family members and friends and left the balance of her estate to Bryan.
In 2015, Bryan consulted with an attorney about the potential for restructuring Anne’s asset holdings. Under the advice of this attorney, Anne established an FLP in which she received a 99.9941% limited partner interest. A limited liability company (LLC), of which she was the sole member, owned a .0059% general partner interest. Bryan signed all the FLP and LLC agreements for her, using the durable POA, and for himself, as LLC manager. One LLC held cash, notes and collectible guitars; the other held real estate in Texas. The LLCs were established and funded in May 2016, entirely by Bryan. One month later, Anne died.
The Tax Court found that Anne didn’t retain sufficient assets outside of the LLCs for her own support and the bequests under her will and determined there was an implied agreement that the partnership would make distributions to Anne for her expenses and, after her death, to fulfill the bequests in her estate plan. As a result, the partnership assets were included in her estate under IRC Section 2036(a)(1). Further, she retained the right to dissolve the partnership, along with Bryan, which gave her the right to designate the persons who will enjoy the property, thereby causing estate tax inclusion under Section 2036(a)(2).
Further, Section 2036(a) doesn’t apply to a transfer that’s a “bona fide sale for an adequate and full consideration in money or money’s worth.” Precedent indicates that a transfer is a “bona fide sale” when it’s “objectively likely to serve a substantial nontax purpose.”1 Any nontax reason must be “a significant factor that motivated the partnership’s creation. A significant purpose must be an actual motivation, not a theoretical justification.”2
The Tax Court found no evidence of any business purpose for the LLCs: No change in her wealth or composition of the estate would generate a nontax reason for asset management, and the assets transferred weren’t working assets requiring active management and were all very different, with no obvious synergies from pooling them together in a single entity. Without a business purpose, the Tax Court concluded that the transfers to the LLCs weren’t a bona fide sale for full consideration.
The Fifth Circuit agreed. On appeal, the estate presented three nontax reasons for creating FLP:
1. To resolve succession issues with Anne’s power of POA. The estate conceded that Anne named her two sisters as successor agents, but it argued that the plan of succession was unworkable because neither sister felt comfortable handling Anne’s financial affairs. However, neither Anne nor her sisters expressed any concern at that time about their ability to handle her affairs if needed, and the creation of the FLP wouldn’t have resolved this purported problem anyway.
2. To consolidate and streamline the management of her assets. However, none of those assets were interests in any business requiring active management, and Anne’s Wells Fargo brokerage account was professionally managed by Wells Fargo and, later, by UBS.
3. To protect against elder abuse. The estate claimed there were known risks of elder abuse, but didn’t explain why Anne waited several years after the elder abuse occurred to create the FLP. If fraud and elder abuse were true nontax motivations for creating the FLP, Anne would likely have formed the partnership years earlier when the incidents occurred.
Finally, the fact that Anne died 10 days after the assets were transferred to the FLP casts significant doubt on the nephew’s avowal that he was motivated to undertake the FLP transactions for any reason other than to reduce estate tax (by obtaining a discount on the partnership interest).
• Tax Court denies taxpayer’s request for partial summary judgment based on Internal Revenue Service’ failure to provide estate valuation statement—In Estate of Kurt A. Amplatz v. Comm’r, T.C. Memo. 2026-35 (April 23, 2026), Kurt A. Amplatz formed KA Medical, LLC, a medical device company, and three trusts: the Funding Trust, the Medical Trust and the Revocable Trust. The Medical Trust contributed $500,000 for 500,000 membership units in KA Medical, and the Funding Trust loaned approximately $19 million to KA Medical for research and development in exchange for promissory notes. Between 2015 and 2018, KA Medical generated no revenue, and no principal or interest payments were made on the promissory notes. The trusts were all included in Kurt’s estate for estate tax purposes.
Kurt died on Nov. 6, 2019. Eight months later, in July 2020, KA Medical company received a nonbinding letter of intent from a buyer to purchase the company for $15 million. However, the estate tax return reported the value of its membership units in KA Medical at zero and the promissory notes at
$1 million, using the alternate valuation date of May 6, 2020, and relying on an appraisal from Value Consulting Group dated July 20, 2020. In
November 2020, the estate sold all membership units in KA Medical to the buyer for $15 million.
On audit, the Internal Revenue Service valued KA Medical at $15,145,000, while alternately valuing the promissory notes at either zero (treated as equity) or $17,686,508. The IRS issued a notice of deficiency determining an estate tax deficiency of $5,686,714 and assessed accuracy-related penalties under IRC Section 6662 totaling $2,423,200.
The estate filed a motion for partial summary judgment seeking relief on two primary grounds. First, the estate requested that the court preclude the IRS from asserting its valuation of KA Medical and the promissory notes because the IRS failed to comply with the mandatory written statement requirements of IRC Section 7517 in response to the estate’s request. Section 7517(a) requires the IRS, on written request, to furnish a written statement explaining the basis on which a valuation was determined within 45 days. The statement must explain the valuation basis, set forth any computation used and contain a copy of any expert appraisal made by or for the Secretary.
The estate submitted a formal Section 7517 request, but the IRS didn’t issue a direct response and instead issued a notice of deficiency within the 45-day window. Relying on Estate of Rickman v. Comm’r, T.C. Memo. 1995-545, the court found that “[b]y its plain text, section 7517 does not suggest any consequence for noncompliance.” Because the statute lacks an enforcement mechanism, the court denied the estate’s request to invalidate the IRS’ valuation.
Second, the estate argued it shouldn’t be liable for the Section 6662 accuracy-related penalties because it acted with reasonable cause and in good faith under IRC Section 6664(c) by relying on an independent appraisal. To avoid accuracy-related penalties under Section 6662, a taxpayer must demonstrate reasonable cause and good faith. The court reiterated that “‘Reasonable cause requires that the taxpayer have exercised ordinary business care and prudence as to the disputed item which may be satisfied by good faith reliance on a competent, independent professional,’” citing Neonatology Assocs., P.A. v. Comm’r, 115 T.C. 43, 98 (2000).
However, the IRS questioned whether the estate fully disclosed to the appraiser the purchase negotiations taking place near the valuation date. Because establishing reasonable cause requires a review of all facts and circumstances, the court ruled that “the Estate’s ability to satisfy its requirements here presents a triable issue,” precluding summary judgment.
• IRS sets safe harbor rules for contributions to Trump accounts to qualify for gift tax exclusion— In Revenue Procedure 2026-25 (June 29, 2026), the Treasury set forth safe harbor rules for contributions to Trump accounts established under IRC Section 530A to qualify for the gift tax annual exclusion. A Trump account is a type of individual retirement account for the exclusive benefit of an eligible individual under age 18. Trump accounts may receive contributions from nonprofits, governments, employers and individuals, subject to an annual contribution limit of $5,000, adjusted for inflation after 2027.
The gift tax annual exclusion excludes up to $19,000 (currently) of gifts to each donee from the amount of a donor’s taxable gifts each year, provided that those gifts aren’t of a future interest in property.
The gift tax return must be filed on or before April 15 of the calendar year after the gift (plus extension). If the donor’s total gifts to each recipient (other than gifts of future interests in property) during the calendar year are valued at or below the annual per donee gift tax exclusion, those gifts don’t require the filing of a gift tax return. However, gifts of future interests in property must be reported on a gift tax return because they aren’t eligible for the annual exclusion.
Section 5 of the revenue procedure states that if each of the requirements specified in Section 4.02 is met for a calendar year in which a taxpayer makes contributions to one or more Trump accounts, each Trump account contribution made by the taxpayer during that calendar year will be treated as a completed gift to the account beneficiary that isn’t a future interest in property and to which the annual exclusion applies for purposes of gift tax, generation-skipping transfer (GST) tax and gift tax reporting. The requirements are:
(1) The taxpayer is an individual;
(2) The only taxable gifts made by the taxpayer during the calendar year are cash contributions (in the form of cash, check, money order or electronic funds transfer) to one or more Trump accounts, each made before the calendar year in which the account beneficiary attains age 18;
(3) The taxpayer’s total gifts during the calendar year to each individual who’s an account beneficiary, including contributions to that account beneficiary’s Trump account, don’t exceed the annual exclusion amount under Section 2503(b) ($19,000 for 2026);
(4) Such contributions to Trump accounts made during the calendar year don’t generate for that calendar year either a gift or GST tax liability, after application of the taxpayer’s remaining applicable credit amount against the gift tax or remaining GST exemption; and
(5) Disregarding the Trump account contributions described in (2), no gift tax return is required to be filed, and no gift tax return is otherwise filed, for that calendar year by or on behalf of the taxpayer, whether for GST tax, portability or other purposes.
According to footnote 5 of the revenue procedure, requirement (5) includes the situation in which a gift tax return is required to allocate GST tax exemption, such as a late allocation of GST tax exemption to a prior transfer or an allocation at the close of an estate tax inclusion period or to make certain GST elections. A gift tax return may also be required as a result of the audit of an estate tax return. In these situations, gifts to Trump accounts don’t qualify for the safe harbor.
The Rev. Proc. contains this example:
In calendar year 2026 individual donor (Taxpayer) contributes $5,000 cash to each of three Trump accounts established for account beneficiaries A, B, and C, and makes an additional gift to C of $13,000 cash. Taxpayer makes no other gifts during the calendar year and is not required to, and does not, file a gift tax return for the calendar year for any other purpose. The $15,000 in contributions to Trump accounts do not generate a gift or GST tax liability, after taking into consideration the Taxpayer’s remaining lifetime applicable exclusion amount or remaining GST exemption. Under these facts, the requirements of section 4.02 of this revenue procedure are met and Taxpayer’s 2026 Trump account contributions will be treated as completed gifts to A, B, and C that are not future interests in property.
If instead Taxpayer’s cash gift to C in 2026 is $14,500, the requirement in section 4.02(3) of this revenue procedure is not met because Taxpayer’s total gifts to C during calendar year 2026 exceed the annual per-donee gift tax exclusion under section 2503(b) of $19,000. Accordingly, Taxpayer must file a gift tax return for calendar year 2026 reporting all 2026 gifts, and must report the Trump account contributions to A, B, and C as gifts of future interests.
So, if a gift tax return is otherwise required to be filed (including if the total gifts to a Trump account beneficiary exceed the annual exclusion), then no gifts to Trump accounts that year will qualify for the annual exclusion.
Endnotes
1. Strangi v. Commissioner, 417 F.3d 468 (5th Cir. 2005).
2. Estate of Bongard v. Comm’r, 124 T.C. 95 (2005).
